The Zacks Oil and Gas - Production & Pipelines industry consists of companies that own and operate extensive networks of pipeline assets to connect producers of oil, natural gas and natural gas liquids from the prolific North American resources to key markets. The firms also distribute natural gas to a growing base of industrial and residential customers through transmission pipelines.
Let’s take a look at the industry’s three major themes:
- The sophisticated midstream infrastructure of the industry players is used by shippers to transport crude oil, liquids and natural gas for a length of time. The long-term contracts fetch pipeline players steady fee-based revenues, representing a stable business model with significantly low exposure to the volatility of commodity prices.
- There is transportation capacity constraint in many North American plays that has boosted demand for fresh pipeline assets. To capitalize on the bottleneck problem, midstream energy firms are investing in pipeline networks to secure incremental cashflow. Moreover, with mounting need for clean energy generation, there is room for companies to generate additional earnings from their natural gas utility businesses.
- Demand for NGL is on the rise since the commodity is being used for producing advanced materials that are being utilized for manufacturing lighter aircraft and cars. Since the companies connect NGL consumers and producers through midstream energy properties, cashflow will get a boost from higher fee-based revenues.
Zacks Industry Rank Indicates Upbeat Prospects
The Zacks Oil and Gas - Production & Pipelines industry is a 15-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #110, which places it in the top 43% 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 impressive 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 or keep eyes on, 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 - Production & Pipelines industry has outpaced the broader Zacks Oil - Energy sector but has failed to surpass the Zacks S&P 500 composite over the past year.
The industry has risen 5% over this period against the broader sector’s decline of 14.4%. The S&P 500 composite has moved up 5.7%.
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 13.61X, higher than the S&P 500’s 11.19X. It is also above the sector’s trailing-12-month EV/EBITDA of 4.98X.
Over the past five years, the industry has traded as high as 26.24X, as low as 10.22X, with a median of 15.21X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
With the divestment of non-core assets, midstream energy firms are constantly streamlining their portfolio. Overall, the companies are well positioned to continue to reward stockholders, backed by their huge backlog of growth projects.
Here, we are presenting five stocks which are positioned to grow in the near term.
Headquartered in Houston, TX, Plains GP Holdings LP (PAGP - Free Report) operates diverse midstream infrastructure assets. The partnership, sporting a Zacks Rank #1 (Strong Buy), has witnessed positive earnings estimate revision for 2019 in the past 60 days.
Price and Consensus: PAGP
Enbridge Inc (ENB - Free Report) : The company, carrying a Zacks Rank #2 (Buy), is the operator of the longest pipeline network of crude in the world. For 2019, the Zacks Consensus Estimate for Enbridge’s earnings per share has been revised upward by more than 3%.
Price and Consensus: ENB
Kinder Morgan Inc (KMI - Free Report) : The company has the largest network of natural gas pipeline in North America that spreads across almost 70,000 miles. Through 2019, the company is likely to see earnings growth of 11.2%. The company, carrying a Zacks Rank #3 (Hold), has also witnessed positive earnings estimate revision for 2019 over the past 60 days.
Price and Consensus: KMI
Findlay, OH-based MPLX LP (MPLX - Free Report) is a master limited partnership (MLP) engaged in providing a wide range of midstream energy services, including fuel distribution solutions. The partnership, with Zacks Rank of 3, has not only witnessed positive earnings estimate revision for 2019 over the past 60 days, but is also expected to see earnings growth of nearly 10% for the current year.
Price and Consensus: MPLX
The Williams Companies Inc (WMB - Free Report) , headquartered in Tulsa, OK,is a leading midstream energy player. For 2019, the company is likely to see earnings growth of 23%. Moreover, over the past 60 days, Williams Companies has witnessed positive earnings estimate revision.
Price and Consensus: WMB