Although the midstream energy business is less exposed to coronavirus-induced oil and gas price volatility, the outbreak has dimmed the Zacks
Oil and Gas - Pipeline MLP industry outlook. Lower production volumes of the commodities owing to curtailed upstream activities have dented demand for the partnership’s midstream assets. Despite the uncertainties, the pipeline players are better off than upstream and downstream firms since the partnerships are being generating stable fee-based revenues from their long-term contracts with shippers. Among the frontrunners in the industry that are trying to survive the challenging business scenario are Enterprise Products Partners L.P. ( EPD Quick Quote EPD - Free Report) , Energy Transfer LP ( ET Quick Quote ET - Free Report) , Plains All American Pipeline, L.P. ( PAA Quick Quote PAA - Free Report) and Summit Midstream Partners, LP ( SMLP Quick Quote SMLP - Free Report) . About the Industry
The Zacks Oil and Gas - Pipeline MLP industry comprises master limited partnerships (or MLPs) which are primarily engaged in transporting oil, natural gas, refined petroleum products and natural gas liquids (NGL) to consumers in North America. The services provided by the partnerships entail the gathering and processing of commodities as well.
It is to be noted that MLPs are different from companies as interests in MLPs are considered units (not shares) and unitholders are partners in the business. What’s Shaping the Future of the Oil & Gas Pipeline MLP Industry? The coronavirus pandemic has dented global energy demand and led oil price to fall significantly since the beginning of 2020. To combat the crude price plunge, explorers and producers have curtailed capital budgets. The curtailment in upstream activities has drastically lowered crude production volumes as compared to pre-pandemic levels. This in turn has reduced demand for pipeline and storage assets since the volumes of crude that are now needed to be transported by shippers have reduced considerably, making the outlook for the partnerships’ midstream business gloomy. Soft Pipeline Demand: To survive the pandemic-induced soft demand for pipeline networks, several energy players with midstream presence have no option but to offer discounts to shippers. Importantly, the premium for transporting crude to the Gulf Coast export hubs has plunged significantly since 2020-beginning. The lower premium is not sufficient enough to meet transport fees for energy players operating pipelines in the prolific Permian basin. Midstream Businesses Settle for Fee Cut: Energy majors will increasingly face challenges to provide sustainable energy to the entire world while reducing greenhouse gas emissions. Thus, to address the issue of climate change, there will be a gradual shift from fossil fuel to renewable energy. This trend will lower demand for the partnerships’ pipeline and storage networks for oil and natural gas since the commodities were formed from buried remains of plants and animals. Shift to Renewables: Zacks Industry Rank Indicates Gloomy Outlook
The Zacks Oil and Gas - Pipeline MLP industry is a 15-stock group within the broader Zacks
Oil - Energy sector. The industry currently carries a Zacks Industry Rank #210, which places it in the bottom 16% of more than 250 Zacks industries. The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bearish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1. The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent stocks in aggregate. Before we present a few oil and gas pipeline MLPs that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation. Industry Lags Sector & S&P 500
The Zacks Oil and Gas - Pipeline MLP industry has underperformed the broader Zacks Oil - Energy sector and Zacks S&P 500 composite over the past year. The industry has declined 41.5% in the past year against the broader sector’s fall of 36% and S&P 500’s rise of 15.2%.
One-Year Price Performance Industry’s Current Valuation
Since midstream-focused oil and gas partnerships use fixed rate debt for majority of their borrowings, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive stocks, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of noncash expenses.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 7.75X, lower than the S&P 500’s 15.67X. It is, however, significantly above the sector’s trailing-12-month EV/EBITDA of 4.47X. Over the past five years, the industry has traded as high as 15.06X, as low as 6.64X, with a median of 13.11X. Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio 4 Oil & Gas Pipeline MLPs Trying to Survive the Industry Challenges
Considering the downbeat industry scenario, it might be prudent for investors to maintain caution by either keeping on the sidelines for a while or keeping an eye on these four fundamentally-sound oil and gas pipeline MLPs. One of the stocks carries a Zacks Rank #2 (Buy), while the remaining three carry a Zacks Rank #3 (Hold). You can see
. the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Enterprise Products Partners LP: The partnership is a leading North American midstream infrastructure provider generates stable fee-based revenues from its network of NGL, crude oil, natural gas, petrochemicals and refined products pipelines, spreading across roughly 50,000 miles. Since the partnership has highest credit ratings in the midstream space, it can lean on its strong balance sheet to survive the pandemic. Over the past 60 days, Enterprise has witnessed upward earnings estimate revisions for 2020. Price and Consensus: EPD Plains All American Pipeline LP: The partnership generates stable fee-based revenues from its vast network of oil and gas pipeline and storage assets. The partnership is well positioned to survive the pandemic since its balance sheet has lower debt exposure than the composite stocks belonging to the industry. The stock is likely to see earnings growth of 137.1% in 2021. Price and Consensus: PAA Summit Midstream Partners, LP: The coronavirus pandemic is unlikely to hurt the partnership’s operations severely since majority of its revenues are being generated from long-term fee-based gathering agreements. The partnership has witnessed upward earnings estimate revisions for 2020 earnings in the past 30 days. Price and Consensus: SMLP Energy Transfer LP: The partnership, with a vast network of intrastate and interstate transportation and storage assets, is well positioned to fund its midstream growth projects. The stock is likely see earnings growth of more than 876% in 2021. Price and Consensus: ET