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4 Oil Pipeline Stocks to Gain on Recovering Midstream Asset Demand

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The midstream energy business is less exposed to coronavirus-induced oil and gas price volatility, brighteningupthe outlook for the Zacks Oil and Gas - Pipeline MLP industry. Demand for the partnerships’ pipeline assets is recovering since production volumes of commodities are rising with upstream companies gradually returning to shale plays.

The partnerships are generating stable fee-based revenues from their long-term contracts with shippers. Having a huge backlog of growth projects, midstream players secure additional cashflows, depicting a stable and low-risk business model. Some of the frontrunners in the industry are Enterprise Products Partners LP (EPD - Free Report) , Energy Transfer LP (ET - Free Report) , Shell Midstream Partners LP (SHLX - Free Report) and Summit Midstream Partners LP (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. Apart from transporting the commodities, the partnerships have huge storage capacities that are being utilized for storing oil, natural gas and petrochemical products.  The partnerships are thus providing midstream services to both producers and consumers of the commodities. From all those transportation and storage assets, the partnerships generate stable fee-based revenues. The services provided by the partnerships entail the gathering and processing of commodities as well. The integrated midstream energy players also generate cashflows from ownership interests in fractionators and condensate distillation facilities.

What's Shaping the Future of the Oil & Gas Pipeline MLP Industry?

Recovering Pipeline Demand: Oil and gas prices have bounced back from the pandemic-low, providing explorers and producers the incentive to gradually return to shale resources. This is being reflected in the increase in rig count over the weeks. With higher upstream activities, demand for transporting and storage assets of the commodities has recovered.

Steady Fee-Based Revenues: Transportation and storage assets are usually booked by shippers for a long term. Thus, midstream operations have comparatively lower exposure to oil and gas price volatilities, and minimal volume risks. The business model of the partnerships therefore has low risk exposure, thereby generating predictable and stable fee-based revenues.

Project Backlogs: The partnerships have huge backlog of growth projects that are scheduled to come into service in the coming years. Once the projects become operational, the partnerships will start generating additional cashflows and fee-based revenues.

Energy Evolution: In the long term, countries across the world will continue to get power from fuels comprising lower emission natural gas, NGLs, and high-quality crude with low sulfur content. With interests in transporting, terminalling and storage assets for the low-emission commodities, the partnerships are contributing to the energy evolution.

Zacks Industry Rank Indicates Bright Outlook

The Zacks Oil and Gas - Pipeline MLP industry is a 13-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #88, which places it in the top 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 bullish 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 top 50% of the Zacks-ranked industries is a result of positive 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 Outperforms Sector, Lags S&P 500

The Zacks Oil and Gas - Pipeline MLP industry has outperformed the broader Zacks Oil - Energy sector but lags the Zacks S&P 500 composite over the past year. The industry has gained 34.2% in the past year as compared to the rise of 26.6% and 38% of the broader sector and the S&P 500, respectively.

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 8.20X, lower than the S&P 500’s 18.21X. It is, however, significantly above the sector’s trailing-12-month EV/EBITDA of 5.44X.

Over the past five years, the industry has traded as high as 14.98X, as low as 6.64X, with a median of 12.42X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

4 Oil & Gas Pipeline MLPs Moving Ahead of the Pack

Enterprise Products Partners LP: The partnership is a leading North American midstream infrastructure provider, generating 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 the highest credit ratings in the midstream space, it can lean on its strong balance sheet to survive the pandemic. Units of this midstream player, carrying a Zacks Rank #3 (Hold), have gained 20.8% so far this year, backed by its low-risk business model. Major capital growth projects worth $3.4 billion, currently under construction, have also contributed to this price performance. The Zacks Consensus Estimate for its current-year sales indicates a 23.2% year-over-year increase.

Price and Consensus: EPD

Energy Transfer LP: The partnership has a huge network of midstream properties that comprise intrastate and interstate natural gas transportation and storage assets. The partnership’s midstream business includes transportation and terminalling assets for crude oil, natural gas liquids (NGL) and refined product. The interstate pipelines of the partnership, which spread over roughly 19,000 miles, have a throughput capacity of 21 billion cubic feet per day (Bcf/D). Energy Transfer boasted that 95% of its revenues, which are derived from interstate pipelines, are based on fixed reservation fees. This signifies the stability in business and ensures handsome future distributions. Currently, the partnership’s distribution yield is 6.3% versus the energy sector’s 3.7%. In fact, in the past year, the distribution yield of the stock, sporting a Zacks Rank #1 (Strong Buy), has consistently been higher than the energy sector. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: ET

 

Shell Midstream Partners LP: The partnership has a huge network of pipelines that transport oil from onshore and offshore resources to the Gulf Coast and Midwest refining markets. The midstream assets also deliver refined products to major demand hubs. The partnership, carrying a Zacks Rank #2 (Buy), has a strong balance sheet that can help it sail through the uncertain macro environment. The partnership has available liquidity of $1.2 billion and is planning for an annualized cost reduction of $30 to $40 million.

Price and Consensus: SHLX

 

Summit Midstream Partners, LP: The value-oriented limited partnership has operating interests in midstream assets that are located in the prolific unconventional resource basins in the United States. The partnership, with a Zacks Rank of 2, recently announced that it continues to generate strong free cashflows that will help it to lower its outstanding net debt by nearly $82 million by the end of the June quarter.

Price and Consensus: SMLP