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3 Strong Buys From the Refining & Marketing MLP Industry
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Despite market volatility, the Zacks Oil and Gas - Refining & Marketing MLP industry remains robust due to favorable fundamentals, especially strong fuel demand. Certain stocks in this sector, such as Sunoco LP (SUN - Free Report) , CrossAmerica Partners LP (CAPL - Free Report) , and NGL Energy Partners LP (NGL - Free Report) , are poised for better-than-average performance and share appreciation. These companies demonstrate attributes to combat value destruction from inflation, and their defensive nature and fee-based business models make them well-suited for an unpredictable market, particularly during periods of rising consumer prices.
Industry Overview
Master limited partnerships (or MLPs) differ from regular stocks since interests in them are referred to as units, and unitholders (not shareholders) are partners in the business. Importantly, these low-risk hybrid entities bring together the tax benefits of a limited partnership with the liquidity of publicly traded securities that earn a stable income. The assets owned by these partnerships are typically oil and natural gas pipelines and storage/infrastructure facilities. The Zacks Oil and Gas - Refining & Marketing MLP industry is a sub-sector of this business model. These firms operate refined product terminals, storage facilities and transportation services. They are involved in selling refined petroleum products (including heating oil, gasoline, residual oil, jet fuel, etc.) and a plethora of non-energy materials (like asphalt, road salt, clay and gypsum).
3 Trends Defining Oil and Gas - Refining & Marketing MLP Industry's Future
Sustainable Cash Flows: Considering the volatility in oil right now — especially the jitters associated with a looming economic slowdown (posing a risk to consumption) — a safer way of playing the sector would be to utilize MLPs, which offer considerable returns at a significantly lower risk. The assets that these partnerships own — oil and natural gas pipelines and storage facilities — typically bring in stable fee-based revenues under long-term contracts and have limited, if any, direct commodity-price exposure. In the longer term, these agreements result in steady cash flow through the boom-and-bust cycle. Even within fee-based contracts, a significant portion is of a take-or-pay type, meaning that the MLPs get paid irrespective of the volume of commodities that get transported.
Offsetting Inflation Impact Through Distribution Growth: The major refining and marketing midstream players — being largely insulated from fluctuations in commodity prices — maintained their distribution levels through the crisis-stricken 2020. Now, adjusting costs with the prevailing business activity, the partnerships have focused on free cash flow (post-distribution payment) generation to lower debt and strengthen their financial position. The growing free cash flows could be used to boost investor returns through buybacks and distribution hikes. Finally, distribution growth can also help investors offset some of the value destruction of the prevailing high inflationary environment.
Moderation in Refining Margins: Refining margins, though still robust, have significantly moderated from the remarkable levels of 2022. Crack spreads, representing the difference between refined products and crude oil prices, have also witnessed a decline. The potential impact of a recession could further squeeze profitability. Despite price caps and sanctions, Russia's oil exports finding new markets in India and China have prevented the expected tightening of product supplies. This trend suggests a recent dip in global refinery margins, impacting the profits of downstream companies.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas – Refining & Marketing MLP is a seven-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #12, which places it in the top 5% 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 upbeat 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.
Considering the encouraging dynamics of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector But Lags S&P 500
The Zacks Oil and Gas – Refining & Marketing MLP industry has fared better than the broader Zacks Oil - Energy Sector over the past year but has underperformed the Zacks S&P 500 composite over the same period.
The industry has gone up 20.3% since January 2023 compared with the broader sector’s increase of 2.7% and the S&P 500’s rise of 23.8%.
One-Year Price Performance
Industry's Current Valuation
Since midstream-focused oil and gas partnerships use fixed-rate debt for most 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 companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA) ratio, the industry is currently trading at 9.10X, lower than the S&P 500’s 13.78X. It is, however, well above the sector’s trailing 12-month EV/EBITDA of 3.70X.
Over the past five years, the industry has traded as high as 14.93X, as low as 5.76X, with a median of 8.95X, as the chart below shows.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Oil and Gas - Refining & Marketing MLP Stocks to Snap Up
Sunoco LP: Sunoco participates in the transportation and supply phase of the U.S. petroleum market across a number of states. It also focuses on motor fuel distribution to convenience stores, independent dealers and commercial customers. SUN pays out 84.20 cents quarterly distribution ($3.368 per unit annually), which gives it a 5.8% yield at the current unit price.
Over the past 60 days, Sunoco saw the Zacks Consensus Estimate for 2023 move up 21.8%. The 2023 Zacks Consensus Estimate for SUN indicates 10.9% year-over-year earnings per share growth. Valued at around $5.7 billion, this Zacks Rank #1 (Strong Buy) has gained 34% in a year.
CrossAmerica Partners LP: Wholesale distributor of motor fuels CrossAmerica Partners’ variable rate margins helped it offset the loss in volumes during the pandemic. Further, CAPL’s recent acquisitions of retail and wholesale assets provide it with a wider reach and scale.
Over the past 60 days, Allentown, PA-based CrossAmerica Partners saw the Zacks Consensus Estimate for 2023 move up 25%. The firm, which pays out 52.50 cents quarterly distribution to yield nearly 9%, beat the Zacks Consensus Estimate for earnings thrice in the trailing four quarters and missed in the other. Valued at around $890.8 million, this Zacks Rank #1 stock has gone up 18.4% in a year.
Price and Consensus: CAPL
NGL Energy Partners LP: It is an MLP that owns water disposal wells, the Grand Mesa oil pipeline, and a wholesale propane/butane business. NGL Energy Partners has done a fairly admirable job of reducing costs. Its cash capital expenditure continues to fall as it keeps spending levels in check. Apart from significant capital cuts, the partnership should realize sizable savings from headcount reduction and automation.
The fiscal 2024 Zacks Consensus Estimate for NGL Energy Partners indicates 155.6% earnings per unit growth over fiscal 2023. The midstream operator, which carries a Zacks Rank of 1, has a Value Score of A. NGL Energy Partners’ current market cap is roughly $725.6 million, while the stock has skyrocketed 319.5% in a year.
Price and Consensus: NGL
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3 Strong Buys From the Refining & Marketing MLP Industry
Despite market volatility, the Zacks Oil and Gas - Refining & Marketing MLP industry remains robust due to favorable fundamentals, especially strong fuel demand. Certain stocks in this sector, such as Sunoco LP (SUN - Free Report) , CrossAmerica Partners LP (CAPL - Free Report) , and NGL Energy Partners LP (NGL - Free Report) , are poised for better-than-average performance and share appreciation. These companies demonstrate attributes to combat value destruction from inflation, and their defensive nature and fee-based business models make them well-suited for an unpredictable market, particularly during periods of rising consumer prices.
Industry Overview
Master limited partnerships (or MLPs) differ from regular stocks since interests in them are referred to as units, and unitholders (not shareholders) are partners in the business. Importantly, these low-risk hybrid entities bring together the tax benefits of a limited partnership with the liquidity of publicly traded securities that earn a stable income. The assets owned by these partnerships are typically oil and natural gas pipelines and storage/infrastructure facilities. The Zacks Oil and Gas - Refining & Marketing MLP industry is a sub-sector of this business model. These firms operate refined product terminals, storage facilities and transportation services. They are involved in selling refined petroleum products (including heating oil, gasoline, residual oil, jet fuel, etc.) and a plethora of non-energy materials (like asphalt, road salt, clay and gypsum).
3 Trends Defining Oil and Gas - Refining & Marketing MLP Industry's Future
Sustainable Cash Flows: Considering the volatility in oil right now — especially the jitters associated with a looming economic slowdown (posing a risk to consumption) — a safer way of playing the sector would be to utilize MLPs, which offer considerable returns at a significantly lower risk. The assets that these partnerships own — oil and natural gas pipelines and storage facilities — typically bring in stable fee-based revenues under long-term contracts and have limited, if any, direct commodity-price exposure. In the longer term, these agreements result in steady cash flow through the boom-and-bust cycle. Even within fee-based contracts, a significant portion is of a take-or-pay type, meaning that the MLPs get paid irrespective of the volume of commodities that get transported.
Offsetting Inflation Impact Through Distribution Growth: The major refining and marketing midstream players — being largely insulated from fluctuations in commodity prices — maintained their distribution levels through the crisis-stricken 2020. Now, adjusting costs with the prevailing business activity, the partnerships have focused on free cash flow (post-distribution payment) generation to lower debt and strengthen their financial position. The growing free cash flows could be used to boost investor returns through buybacks and distribution hikes. Finally, distribution growth can also help investors offset some of the value destruction of the prevailing high inflationary environment.
Moderation in Refining Margins: Refining margins, though still robust, have significantly moderated from the remarkable levels of 2022. Crack spreads, representing the difference between refined products and crude oil prices, have also witnessed a decline. The potential impact of a recession could further squeeze profitability. Despite price caps and sanctions, Russia's oil exports finding new markets in India and China have prevented the expected tightening of product supplies. This trend suggests a recent dip in global refinery margins, impacting the profits of downstream companies.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas – Refining & Marketing MLP is a seven-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #12, which places it in the top 5% 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 upbeat 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.
Considering the encouraging dynamics of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector But Lags S&P 500
The Zacks Oil and Gas – Refining & Marketing MLP industry has fared better than the broader Zacks Oil - Energy Sector over the past year but has underperformed the Zacks S&P 500 composite over the same period.
The industry has gone up 20.3% since January 2023 compared with the broader sector’s increase of 2.7% and the S&P 500’s rise of 23.8%.
One-Year Price Performance
Industry's Current Valuation
Since midstream-focused oil and gas partnerships use fixed-rate debt for most 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 companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA) ratio, the industry is currently trading at 9.10X, lower than the S&P 500’s 13.78X. It is, however, well above the sector’s trailing 12-month EV/EBITDA of 3.70X.
Over the past five years, the industry has traded as high as 14.93X, as low as 5.76X, with a median of 8.95X, as the chart below shows.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Oil and Gas - Refining & Marketing MLP Stocks to Snap Up
Sunoco LP: Sunoco participates in the transportation and supply phase of the U.S. petroleum market across a number of states. It also focuses on motor fuel distribution to convenience stores, independent dealers and commercial customers. SUN pays out 84.20 cents quarterly distribution ($3.368 per unit annually), which gives it a 5.8% yield at the current unit price.
Over the past 60 days, Sunoco saw the Zacks Consensus Estimate for 2023 move up 21.8%. The 2023 Zacks Consensus Estimate for SUN indicates 10.9% year-over-year earnings per share growth. Valued at around $5.7 billion, this Zacks Rank #1 (Strong Buy) has gained 34% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: SUN
CrossAmerica Partners LP: Wholesale distributor of motor fuels CrossAmerica Partners’ variable rate margins helped it offset the loss in volumes during the pandemic. Further, CAPL’s recent acquisitions of retail and wholesale assets provide it with a wider reach and scale.
Over the past 60 days, Allentown, PA-based CrossAmerica Partners saw the Zacks Consensus Estimate for 2023 move up 25%. The firm, which pays out 52.50 cents quarterly distribution to yield nearly 9%, beat the Zacks Consensus Estimate for earnings thrice in the trailing four quarters and missed in the other. Valued at around $890.8 million, this Zacks Rank #1 stock has gone up 18.4% in a year.
Price and Consensus: CAPL
NGL Energy Partners LP: It is an MLP that owns water disposal wells, the Grand Mesa oil pipeline, and a wholesale propane/butane business. NGL Energy Partners has done a fairly admirable job of reducing costs. Its cash capital expenditure continues to fall as it keeps spending levels in check. Apart from significant capital cuts, the partnership should realize sizable savings from headcount reduction and automation.
The fiscal 2024 Zacks Consensus Estimate for NGL Energy Partners indicates 155.6% earnings per unit growth over fiscal 2023. The midstream operator, which carries a Zacks Rank of 1, has a Value Score of A. NGL Energy Partners’ current market cap is roughly $725.6 million, while the stock has skyrocketed 319.5% in a year.
Price and Consensus: NGL