For Immediate Release
Chicago, IL – March 13, 2018 – Today, Zacks Equity Research discusses the Industry: Oil & Gas, Part 3, including NuStar Energy L.P. (NS - Free Report) , Plains All American Pipeline, L.P. (PAA - Free Report) , NGL Energy Partners L.P. (NGL - Free Report) , Archrock Partners L.P. and Boardwalk Pipeline Partners L.P. (BWP - Free Report) .
Industry: Oil & Gas, Part 3
The oil market, notwithstanding its recent rise, could be undermined by soaring U.S. production. Volume from U.S. oil fields (inclusive of shale) has risen 22% since mid-2016 to 10.3 million barrels per day – the most since the EIA started maintaining weekly data in 1983. In early February, oil production broke through the 10 million barrels a day threshold for the first time in nearly 50 years and has maintained the record levels thereafter.
While there is renewed optimism among U.S. oil companies amid the $60-plus WTI prices, crude’s recent gains could become self-defeating as elevated realizations have already induced producers – especially U.S. shale drillers – to ramp up activity. Together with the scheduled conclusion of OPEC/non-OPEC production cuts in December this year and we are looking at another selloff in oil prices.
A rise in the oil drilling rig count points to a further increase in domestic output. An early gauge of future activity, rigs drilling for oil in America totaled 800 in the week to Mar 2, as per the latest weekly report by Baker Hughes, a GE Company. That's much higher than the year-ago tally of 609, indicating a drilling resurgence in tandem with the oil revival – a big concern for investors.
Meanwhile, natural gas continues to struggle as well, with production forecasted to rise to an all-time high of 81.70 billion cubic feet per day (Bcf/d) in 2018. That would easily top this year’s demand projection of 78.19 Bcf/d.
Despite an extended stretch of record low temperatures in the U.S. from late December into January, the heating fuel could not move meaningfully higher. Things took a turn for the worse with the February weather turning out to be disappointing amid sustained strong output. Now, with the 2017-2018 winter heating season on its last leg, natural gas prices over the coming weeks are unlikely to go above $3 per million Btu.
Overall, the tough market conditions for oil and gas have prompted money managers to raise red flags for certain types of energy stocks.
MLPs Don’t Sit Well with Investors
Master limited partnerships (or MLPs) are essentially infrastructure holdings of energy companies that feed off the broader sector. But these midstream operators are not direct oil and gas plays as they derive a major portion of their revenues from fee-based contracts depending on volume and are largely insensitive to commodity price fluctuations.
But so far, this year, it's not been smooth sailing for them. We note that the benchmark Alerian MLP Index has logged a return of -6% year to date. Apart from sliding oil and gas prices, the crash has been triggered by a host of downward guidance revisions and tepid distribution outlook.
Of late, capital market access has remained tough and credit metrics stretched, making it difficult for the oil and gas transporters to execute on their growth projects. As a result, the distribution outlook became uncertain with a number of MLPs left with no choice but to defer their payout increases or in certain cases, even trim them. And with most investors owning MLPs for the benefit of generous, periodical distributions, many have understandably abandoned the sector.
A recent case in point is NuStar Energy L.P., which lost more than 20% after announcing plans to reduce its quarterly distribution as part of a merger decision with its general partner. Meanwhile certain partnerships such as Zacks Rank #4 (Sell) Plains All American Pipeline, L.P. and NGL Energy Partners L.P. have issued lackluster forward guidance amid volume and pricing pressures, indicating uncertain future cash flows.
(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.)
We expect the commodity price-associated volatility for the MLPs to persist for some time and advise investors to steer clear of this asset class. In particular, bottom-rankers including Archrock Partners L.P. and Boardwalk Pipeline Partners L.P. are risky bets that are best avoided at the moment.
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