The partnerships belonging to the industry are also benefiting from stable fee-based revenues, as most contracts are for the long term. Key players in this industry include Enterprise Products Partners LP EPD, Energy Transfer LP ET and ONEOK Inc. OKE.
About the Industry
The Zacks Oil and Gas - Pipeline MLP industry comprises master limited partnerships (or MLPs) that primarily transport 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 thus provide midstream services to producers and consumers of the commodities. The firms generate stable fee-based revenues from all these transportation and storage assets. The services provided by the MLPs 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 Oil & Gas - Pipeline MLP Industry?
Stable Cash Flow Generation: The midstream assets are usually booked by shippers for the long term, generating stable cash flows. The long-term contracts are mostly take-or-pay contracts, meaning shippers have to pay a minimum amount even if they don’t utilize the midstream assets. Thus, cash flow generation is highly predictable, suggesting that the business model is not very vulnerable to volatility in oil and natural gas prices.
Rising Demand From Data Centers: The natural gas transportation companies and partnerships, belonging to the industry, are well-positioned to gain from the growing clean energy demand from data centers. This is because employing their pipeline networks, the midstream players can transport natural gas to gas-fired power plants, which will provide electricity to the data centers.
Growth Capital Pipeline: Companies and partnerships in the industry are expected to generate incremental cash flow from billions of dollars in key capital projects that are either in service or set to come online.
Zacks Industry Rank Indicates Solid Opportunities
The Zacks Oil and Gas - Pipeline MLP industry is a seven-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #53, which places it in the top 21% 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 bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the top 50% of the Zacks-ranked industries forms a favorable earnings outlook for the constituent stocks in aggregate. Before we present a few stocks that you may want to consider, let’s look at the industry’s recent stock market performance and its valuation picture.
Industry Underperforms Sector, S&P 500
The Zacks Oil and Gas - Pipeline MLP industry has underperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 Composite over the past year. The industry has rallied 16.9% in the past year compared with the broader sector’s 30.8% surge and the S&P 500's 20.5% rise.
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.
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 12.14X, lower than the S&P 500’s 18.50X. It is, however, significantly above the sector’s trailing 12-month EV/EBITDA of 6.87X.
Over the past five years, the industry has traded as high as 12.59X and as low as 8.27X, with a median of 10.73X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Pipeline MLPs to Gain
Enterprise Products Partners is a leading midstream player and therefore has a resilient business model. EPD has a pipeline network that spans more than 50,000 miles, transporting oil, natural gas, refined products and other commodities. The partnership generates stable fee-based revenues from the midstream assets as the assets are booked by shippers for the long term.
Due to the resilience of its business model, the partnership, currently carrying a Zacks Rank #3 (Hold), has been able to return capital to unitholders on an ongoing basis. Since its IPO, Enterprise Products has returned billions of dollars to unitholders through both repurchases and distributions. EPD has increased distributions for 27 consecutive years. Thus, the partnership has successfully kept cash flow steady at all business cycles.
Price and Consensus: EPD
Energy Transfer has a stable business model with its huge pipeline network of natural gas, oil and refined petroleum products across 140,000 miles. The partnership has midstream assets in all the key basins in the United States, generating stable fee-based revenues.
Energy Transfer, sporting a Zacks Rank #1 (Strong Buy), has offered a higher dividend yield than the composite stocks belonging to the industry over the past three consecutive years. For this year, the partnership is likely to see earnings growth of 18.2%.
Price and Consensus: ET
ONEOK Inc also enjoys stable fee-based revenues, banking on its vast pipeline network spanning 60,000 miles, transporting natural gas, natural gas liquids, crude oil and refined products. This shows the player’s resilient business model. Currently, OKE carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: OKE
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Enterprise Products Partners L.P. (EPD): Free Stock Analysis Report
ONEOK, Inc. (OKE): Free Stock Analysis Report
Energy Transfer LP (ET): Free Stock Analysis Report
This article originally published on Zacks Investment Research (zacks.com).