WTI oil is edging ever closer toward the psychologically important $50-a-barrel level, as investors welcome the prospect of a post-vaccine world, recovering from the COVID-induced demand slump in 2021.
With restrictions on mobility crippling crude consumption amid a deluge of supply, prices fell below $30, $20, $10 and even went negative for a while. However, the commodity appears to have turned a corner as it embarks on a slow but steady recovery path. Currently at around $48 per barrel, WTI oil prices are at multi-month highs as the rollout of vaccines is set to support a return in the fuel’s demand sooner than expected. Even the OPEC+ cartel seems to have done a good job at curtailing production. At the same time, industry watchers are not expecting 2021 to be a banner year for oil. Global demand is still likely to be below pre-pandemic levels, while soaring new coronavirus infections in many countries, prolonged weakness in air travel and the re-imposition of lockdowns might hamper the fragile demand recovery any time. In fact, the EIA expects U.S. crude prices to average $45.78 a barrel next year — albeit slightly weaker than present levels. Ditch the Oil-Related Uncertainty in Favor of MLPs
Considering the uncertainty in oil right now, a safer way of playing the sector would be to utilize Master Limited Partnerships (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 cycles. 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.
Investors are typically attracted to the MLPs thanks to their reliable distribution and defensive characteristics. The major midstream players — being largely insulated to fluctuations in commodity prices — have managed to maintain their distribution levels thus far. Further, their relatively steady coverage and improving oil price visibility should represent a more predictable midstream payout scenario in the near future. Meanwhile, as a response to the energy downturn, a number of these entities have been highly effective in managing their cash outflows. Adjusting costs with reduced business activity, the partnerships have concentrated on the generation of free cash flow (post distribution payment) to lower debt and strengthen their financial position. Last but not the least, the successful deployment of vaccines and the accompanying improvement in the macro environment (and oil demand) have further lifted midstream investor hopes for 2021. 4 MLPs to Invest In
In other words, while coronavirus-related uncertainty and concerns continue to weigh on the broader energy sector, the defensive nature of the oil pipeline space and its fee-based business model is expected to hold up relatively well in 2021. Given such a scenario, we have shortlisted four MLP stocks that can return well on investment as well as offer a safe and attractive payout.
Sprague Resources LP ( SRLP Quick Quote SRLP - Free Report) : Sprague Resources, engaged in the purchase, storage, distribution and sale of refined petroleum products and natural gas, carries a Zacks Rank #1 (Strong Buy) and has expected earnings growth of 9% for next year. You can see . the complete list of today’s Zacks #1 Rank stocks here The midstream operator pays out a quarterly distribution of 66.75 cents per unit. At the current price of $19.13, this gives Sprague Resources an annualized distribution yield of 14%. CrossAmerica Partners LP ( CAPL Quick Quote CAPL - Free Report) : Wholesale distributor of motor fuels CrossAmerica Partners’ variable rate margins have helped it to offset the loss in volumes. Further, the partnership’s recent acquisitions of retail and wholesale assets provide it with a wider reach and scale. The 2020 Zacks Consensus Estimate for CrossAmerica Partners indicates 464.7% earnings per unit growth over 2019. The midstream operator carries a Zacks Rank #2 (Buy) and pays out a quarterly distribution of 52.50 cents per unit. At the current price of $17.44, this gives CrossAmerica Partners an annualized distribution yield of 12%. Western Midstream Partners, LP ( WES Quick Quote WES - Free Report) : The partnership is engaged in gathering, processing, compressing, treating, and transporting natural gas, condensate, natural gas liquids, and crude oil. Its top-class asset portfolio, financial strength and ability to generate stable cash flows should boost unitholder returns. Western Midstream Partners has an expected earnings growth of 100.4% for 2021. The midstream operator carries a Zacks Rank #2 and pays out a quarterly distribution of 31.10 cents per unit. At the current price of $14.51, this gives Western Midstream Partners an annualized distribution yield of nearly 9%. Global Partners LP ( GLP Quick Quote GLP - Free Report) : It is a vertically integrated energy partnership focused on the distribution of gasoline, distillates, residual oil and renewable fuels, apart from owning several refined-petroleum-product terminals. Unlike most energy operators, which have maintained their payout, Global Partners is among a minority that has continued to increase its distributions in 2020. The #2 Ranked stock’s estimated distribution yield (at 50 cents per quarter) is more than 11%. Global Partners registered a distribution coverage ratio of 2.4X last quarter, implying a sufficiently covered payout with room for growth. The 2020 Zacks Consensus Estimate for Global Partners indicates 150.5% earnings per unit growth over 2019. Zacks Top 10 Stocks for 2021
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