Although the midstream energy business is less exposed to coronavirus-induced oil and gas price volatility, the outbreak has dulled the Zacks
Oil and Gas - Production & Pipelines industry outlook. With uncertainty prevailing in the energy businesses, demand for midstream assets is soft since upstream players are getting little incentive to ramp up production. Despite the uncertainties, pipeline players are better off than upstream and downstream firms since the companies are 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 Enbridge Inc ( ENB Quick Quote ENB - Free Report) , Kinder Morgan, Inc. ( KMI Quick Quote KMI - Free Report) , The Williams Companies, Inc. ( WMB Quick Quote WMB - Free Report) and Holly Energy Partners, L.P. ( HEP Quick Quote HEP - Free Report) . About the Industry
The Zacks Oil and Gas - Production & Pipelines industry comprises companies that own and operate midstream energy infrastructure assets. The properties consist of extensive pipeline networks that transport crude oil, liquids and natural gas. The midstream energy players are also involved in processing and storing natural gas. Moreover, the companies have interests in natural gas distribution utilities and thereby serve millions of retail customers across North America.
What’s Shaping the Future of Oil & Gas - Production and Pipelines Industry? : The coronavirus pandemic is far from over with people getting infected with the new highly infectious variants. Thus, global demand for fuel is yet to recover fully, thereby providing little incentive to upstream players to ramp up production volumes. This is hurting demand for pipeline and storage assets. Soft Pipeline Demand To survive the pandemic-induced soft demand for pipeline networks, several energy players with midstream presence are likely to have no option but to offer discounts to shippers. This is likely to lower the companies’ fee-based revenues. 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 midstream firms’ 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 - Production & Pipelines is a 13-stock group within the broader Zacks
Oil - Energy sector. The industry currently carries a Zacks Industry Rank #165, which places it in the bottom 35% 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 gloomy 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 stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture. Industry Lags Sector & S&P 500
The Zacks Oil and Gas - Production & Pipelines has lagged both the broader Zacks Oil - Energy Sector and Zacks S&P 500 composite over the past year.
The industry has risen 32.9% over this period versus the 34.8% and 50% improvement of the broader sector and S&P 500, respectively. One-Year Price Performance Industry’s Current Valuation
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing oil and gas production & pipeline stocks, the industry is currently trading at 11.52X, lower than the S&P 500’s 18.73X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 5.96X.
Over the past five years, the industry has traded as high as 18.71X, as low as 8.52X, with a median of 13.45X. Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio 4 Oil & Gas Pipeline Stocks 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 firms. You can see
. the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here Enbridge: The company is a leading North American midstream energy player, having the longest crude oil pipeline network. Enbridge has estimated roughly $10-billion growth capital projects to be placed into service in 2021. Moreover, from 2021 to 2023, the midstream player expects $17 billion in growth capital projects to be executed. Notably, the company expects the project executions to drive 4% to 5% distributable cash flow per share growth through 2023. The stock, carrying a Zacks Rank #3, is likely to see earnings growth of 13.3% in 2021. Price and Consensus: ENB Kinder Morgan: With operating interests in oil and gas pipeline networks, spreading across 83,000 miles, Kinder Morgan is a leading energy infrastructure company in North America. The #3 Ranked midstream energy giant significantly raised 2021 net income expectation to the range of $2.7-$2.9 billion. Moreover, the company projects handsome distributable cash flow for this year within $5.1-$5.3 billion. Price and Consensus: KMI The Williams Companies: In North America, Williams is a leading energy infrastructure company. Being involved in gathering, processing and transporting natural gas, the company is well positioned to capitalize on the mounting demand for the commodity in the United States. The Zacks #3 Ranked stock is likely to see earnings growth of 2% in 2021. Price and Consensus: WMB Holly Energy Partners, L.P: The stock is well poised to generate stable fee-based revenues from its huge network of crude oil transportation, terminalling and storage assets. The Zacks #2 Ranked stock is likely to see earnings growth of 26.1% and 2.5% in 2021 and 2022, respectively. Price and Consensus: HEP