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 Promising Outlook
The Zacks Oil and Gas - Pipeline MLP industry is a 15-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #85, which places it in the top 33% 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.
Taking into consideration the increasingly bullish outlook 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 recent stock-market performance and valuation picture first.
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 17.3% in the past year against the S&P 500’s rise of 7.2% and the broader sector’s fall of 26%.
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 9.18X, lower than the S&P 500’s 12.00X. It is, however, significantly above the sector’s trailing-12-month EV/EBITDA of 4.67X.
Over the past five years, the industry has traded as high as 18.25X, as low as 9.18X, with a median of 13.46X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Although the partnerships rely on significant debt capital to maintain existing midstream infrastructures and finance growth projects, more than 90% of their debt portfolio carries a fixed interest rate, which reduces threats stemming from interest rate volatility. Also, while the partnerships are extending the average maturities of debt portfolio, the average cost of debts has been falling considerably, reflecting strengthening debt profile.
We are presenting one stock with a Zacks Rank #1 (Strong Buy) and two 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.
TC PipeLines LP (TCP - Free Report) : The partnership generates stable fee-based revenues from its low-risk energy infrastructure pipeline networks. Notably, over the past 30 days, the #1 Ranked stock has witnessed positive earnings estimate revisions for 2020.
Price and Consensus: TCP
BP Midstream Partners LP (BPMP - Free Report) : The partnership is primarily involved in acquiring and operating pipeline networks and associated midstream assets that generates stable cashflows. In the next five years, the #2 Ranked stock is likely to see earnings growth of 10%, higher than the industry’s 4.5%.
Price and Consensus: BPMP
NuStar Energy LP (NS - Free Report) : The partnership is among the largest operators of pipeline and liquid terminals in the nation. Notably, the stock with Zacks Rank of 2 is likely to earnings growth of more than 200% in 2020.
Price and Consensus: NS
Enterprise Products Partners LP (EPD - Free Report) : The partnership is a leading provider of midstream services in North America. Through 2020 and 2021, the Zacks #3 Ranked stock is likely to see earnings growth of 1% and 4%, respectively.
Price and Consensus: EPD
Oasis Midstream Partners LP (OMP - Free Report) : The partnership is engaged in gathering and processing services of natural gas in North America. The stock, with a Zacks Rank of 3, is likely to see earnings growth of roughly 9% in 2020.
Price and Consensus: OMP