Although the midstream energy business is less exposed to oil and gas price volatility, the Zacks Oil and Gas - Pipeline MLP industry’s outlook is still subjected to uncertainties. Due to conservative capital spending by upstream players and possibilities for soft fuel demand, production volumes could get dented, hurting demand for partnerships’ midstream assets.
Despite the uncertainties, pipeline players are better off than upstream and downstream firms since the partnerships generate stable fee-based revenues from their long-term contracts with shippers. The industry frontrunners include Enterprise Products Partners LP EPD, Magellan Midstream Partners LP MMP and NuStar Energy LP NS.
About the Industry
The Zacks Oil and Gas - Pipeline MLP industry comprises master limited partnerships (or MLPs) that are primarily engaged in transporting oil, natural gas, refined petroleum products and natural gas liquids (NGL) to consumers in North America. Apart from transporting the commodities, the partnerships have huge capacities to store oil, natural gas and petrochemical products. The partnerships are thus providing midstream services to both producers and consumers of the commodities. The players generate stable fee-based revenues from all those transportation and storage assets. The services provided by the partnerships entail the gathering and processing of commodities. The integrated midstream energy players also generate cashflows from ownership interests in fractionators and condensate distillation facilities.
What's Shaping the Future of the Oil & Gas Pipeline MLP Industry?
Soft Pipeline Demand: Inflationary environment is probably spurring a slowdown in the U.S. economy, which could hurt fuel demand. The uncertainty in fuel demand is likely to affect the production of the commodity, which in turn will lower the demand for oil pipeline assets of the partnerships.
Lower Fee-Based Revenues: Soft demand for midstream assets will possibly ultimately lead to lower fee-based revenues for the master limited partnerships. Also, to sail through soft demand for pipeline networks, several energy players with midstream presence will likely be left with no option but to offer discounts to shippers.
Shift to Renewables: Energy majors will increasingly face challenges in providing sustainable energy to the world while reducing greenhouse gas emissions. Thus, to address the issue of climate change, there will be a gradual shift from fossil fuel to renewable energy. This will lower the demand for the partnerships’ pipeline and storage networks for oil and natural gas.
Explorers’ Conservative Capital Spending: Oil and gas exploration and production companies are facing heightened pressure from investors to focus on stockholders’ returns rather than production. This is hindering the production of commodities, thereby denting pipeline and storage assets.
Zacks Industry Rank Indicates Gloomy Outlook
The Zacks Oil and Gas - Pipeline MLP industry is a nine-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #190, which places it in the bottom 24% 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 bearish 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.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of the negative earnings outlook for the constituent stocks in aggregate. Before we present a few oil and gas pipeline MLPs that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas - Pipeline MLP industry has outperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year. The industry has gained 1% in the past year against a decline of 6.2% of the broader sector and 1.1% of the S&P 500.
One-Year Price Performance
Industry's Current Valuation
Since midstream-focused oil and gas partnerships use fixed-rate debt for the 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 stocks, 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 10.07X, lower than the S&P 500’s 12.57X. It is, however, significantly above the sector’s trailing-12-month EV/EBITDA of 2.76X.
Over the past five years, the industry has traded as high as 15.93X and as low as 6.87X, with a median of 10.18X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Pipeline MLPs Trying to Survive the Industry Challenges
Enterprise Products Partners LP: Enterprise Products is a leading North American midstream infrastructure provider, generating stable fee-based revenues from its network of NGL, crude oil, natural gas, petrochemicals and refined products pipelines, spreading across roughly 50,000 miles. Since Enterprise Products has among the highest credit ratings in the midstream space, it can lean on its strong balance sheet to survive any economic turmoils.
Enterprise Products, carrying a Zacks Rank #3 (Hold), has witnessed upward earnings estimate revisions for 2023 in the past 30 days. Major capital growth projects worth $6.1 billion, currently under construction, have brightened its outlook.
Price and Consensus: EPD
NuStar Energy LP: NuStar Energy is a well-known player in the midstream space for being the nation’s leading operator of pipeline network and liquids terminals. This depicts the stock’s stable business model for having significantly lower exposure to commodity price volatility. In the past year, the Zacks #3 Ranked stock has gained 3.9%, outpacing the industry’s 1.1% increase. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: NS
Magellan Midstream Partners LP: Magellan Midstream has extensive petroleum midstream infrastructures that will be needed in the United States for decades to come. The business model of the company is resilient to commodity price fluctuations and derives stable fee-based revenues.
The cash distribution picture looks bright, with Magellan Midstream depicting a story of 21 years of annual distribution growth. With an investment-grade credit rating, it has a strong balance sheet. The #3 Ranked stock has an excellent management team focusing consistently on creating long-term wealth for shareholders.
Price and Consensus: MMP
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