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3 Oil & Gas Pipeline Stocks Benefiting From Industry Prosperity

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Oil prices remain highly favorable for exploration and production activities. Increased upstream activities are likely to boost demand for pipeline and storage assets, enhancing the outlook for the Zacks Oil and Gas - Pipeline MLP industry.

These partnerships generate stable, fee-based revenues from long-term contracts with shippers. With a substantial backlog of growth projects, midstream players ensure additional cash flows, showcasing a stable and low-risk business model. Leading companies in the industry include Enterprise Products Partners LP (EPD - Free Report) , Energy Transfer LP (ET - Free Report) , and Plains All American Pipeline LP (PAA - Free Report) .

About the Industry

The Zacks Oil and Gas - Pipeline MLP industry comprises master limited partnerships (or MLPs) that primarily transport 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 capacities to store oil, natural gas and petrochemical products.  The partnerships are thus providing midstream services to producers and consumers of the commodities. The partnerships generate stable fee-based revenues from all these transportation and storage assets. The services provided by the MLPs entail the gathering and processing of commodities. 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?

Pipeline Demand to Improve: Oil price has again touched the $80 per barrel mark. Favorable oil prices will probably aid explorers and producers in ramping up upstream activities, which might improve demand for crude transportation pipelines of the midstream players.

Stable Fee-Based Revenues: Most pipeline and storage assets are being booked by shippers for the long term, making midstream businesses less vulnerable to volatility in commodity prices. Backed by long-term contracts, the MLPs belonging to the industry also have a minimal oil and gas volume risk. Owing to these factors, pipeline players will continue generating stable fee-based revenues.

Impressive Project Backlog: Many partnerships in the industry have a considerable backlog of growth projects worth billions of dollars. The projects will come online in a few years, securing additional cashflows for the pipeline players.

Attractive Distribution Yield: Oil and gas pipeline stocks pay attractive distribution yields. Compared to the overall energy sector, partnerships belonging to the industry have rewarded unitholders with significantly higher distribution yields over the past few years, providing reassurance that the midstream business is relatively more stable than upstream and downstream operations.

Zacks Industry Rank Indicates Bright Outlook

The Zacks Oil and Gas - Pipeline MLP industry is a six-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #64, which places it in the top 26% 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 bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 forms a positive earnings outlook for the constituent stocks in aggregate. Before we present a few stocks that you may want to consider, let’s look at the industry’s recent stock market performance and its valuation picture.

Industry Outperforms Sector & S&P 500

The Zacks Oil and Gas - Pipeline MLP industry has outperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 Composite over the past year. The industry has rallied 27.1% in the past year compared with a rise of 10.4% of the broader sector and a 26.2% improvement of the S&P 500.

One-Year Price Performance

Industry's Current Valuation

Since midstream-focused oil and gas partnerships use fixed-rate debt for the 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 11.33X, lower than the S&P 500’s 19.81X. It is, however, significantly above the sector’s trailing 12-month EV/EBITDA of 2.96X.

Over the past five years, the industry has traded as high as 12.50X and as low as 6.69X, with a median of 9.83X.

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

3 Oil & Gas Pipeline MLPs Leading the Pack

Enterprise Products Partners 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 spread across more than 50,000 miles. Since Enterprise Products’ credit ratings are among the highest in the midstream space, it can lean on its strong balance sheet to survive market turmoils.

Enterprise Products, carrying a Zacks Rank #2 (Buy), has witnessed upward earnings estimate revisions for 2024 in the past seven days and is being backed by its low-risk business model. Major capital growth projects worth billions currently under construction are expected to contribute to additional cash flows.

Price and Consensus: EPD

Energy Transfer has a stable business model with its huge pipeline network of natural gas, oil and refined petroleum products across 125,000 miles. The partnership has midstream assets in all the key basins in the United States, thereby generating stable fee-based revenues.

Energy Transfer, carrying a Zacks Rank #3 (Hold), has offered a higher dividend yield than the composite stocks belonging to the industry over the past year. For this year, the partnership has witnessed upward earnings estimate revisions over the past seven days.

Price and Consensus: ET

Plains All American Pipeline also enjoys stable fee-based revenues banking on its oil and natural gas pipeline network and storage assets. In the past year, the Zacks #3 Ranked stock has gained 7.59%, outpacing the industry’s 6.94% increase.  You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: PAA

See More Zacks Research for These Tickers

Normally $25 each - click below to receive one report FREE:

Plains All American Pipeline, L.P. (PAA) - free report >>

Enterprise Products Partners L.P. (EPD) - free report >>

Energy Transfer LP (ET) - free report >>

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