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.
Here are the industry’s three major themes:
- The partnerships generate stable fee-based revenues from diversified networks of midstream infrastructure that is being utilized by shippers and customers under long-term contracts. Moreover, the partnerships have key capital projects under construction that will generate additional fee-based revenues.
- Despite conservative capital spending by U.S. explorers and producers, production volumes of oil and natural gas continue to increase, raising demand for transportation and storage assets. Since there aren’t sufficient pipeline networks to transport all produced volumes to key markets, the partnerships have been investing in pipeline assets to secure incremental cashflow for the future.
- Demand for NGL is on the rise since the commodity is being used for producing advanced materials that are being employed for the manufacturing of lighter aeroplanes and cars. Since the partnerships connect NGL consumers and producers through midstream energy assets, the unitholders can expect significant cashflows from higher fee-based revenues.
Zacks Industry Rank Indicates Improving Outlook
The Zacks Oil and Gas - Pipeline MLP industry is a 16-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #52, which places it in the top 20% 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.
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 Outperforms Sector but Lags S&P 500
The Zacks Oil and Gas - Pipeline MLP industry has outperformed the broader Zacks Oil - Energy sector over the past year but has lagged the Zacks S&P 500 composite over the same period.
The industry has declined 11.6% in the past year against the S&P 500’s rise of 2.3% and broader sector’s fall of 16.8%.
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 companies, 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 11.98X, higher than the S&P 500’s 10.97X. It is also significantly above the sector’s trailing-12-month EV/EBITDA of 4.83X.
Over the past five years, the industry has traded as high as 19.04X, as low as 11.32X, with a median of 14.13X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Given the rising demand for plastics and synthetic rubbers for tires and others end products derived from NGLs, partnerships will continue to generate handsome cashflow from their natural gas processing plants and fractionators.
Moreover, owing to growing demand for light and low sulphur crude from refiners in domestic and international markets, the production of oil in the United States is likely to continue to rise, thereby boosting demand for the partnerships’ pipeline networks.
We are presenting two stocks with a Zacks Rank #1 (Strong Buy) and one with a Zacks Rank 2 (Buy) that are well positioned to grow. There are two other stocks with a Zacks Rank #3 (Hold) that investors may currently retain in their portfolio.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Enterprise Products Partners LP (EPD - Free Report) : Headquartered in Houston, TX, the partnership is a leading provider of midstream services in North America. Through 2019, the Zacks #1 Ranked stock is likely to see earnings growth of roughly 10%.
Price and Consensus: EPD
Oasis Midstream Partners LP (OMP - Free Report) : Based in Houston, TX, the partnership is engaged in gathering and processing services of natural gas in North America. The stock, with a Zacks Rank of 1, is likely to see earnings growth of more than 95% in 2019.
Price and Consensus: OMP
Plains All American Pipeline LP (PAA - Free Report) : Based in Houston, TX, the partnership offers services related to transportation and storage of oil, natural gas and other commodities. Through 2019, the #2 Ranked stock is likely to see earnings growth of 11.7%.
Price and Consensus: PAA
Magellan Midstream Partners LP (MMP - Free Report) : Headquartered in Tulsa, OK, the partnership is primarily involved in transporting oil and refined petroleum products. Over the past 60 days, the Zacks Rank #3 stock has seen positive earnings estimate revisions.
Price and Consensus: MMP
Buckeye Partners LP (BPL - Free Report) : Based in Houston, TX, the partnership is primarily engaged in transporting and storing liquid petroleum products. The stock, with a Zacks Rank of 3, is likely to see earnings growth of 693% in 2019.
Price and Consensus: BPL