In recent quarters, fuel margins for companies in the Zacks Oil and Gas - Refining & Marketing MLP industry have generally declined, falling well below the exceptional profitability achieved in 2022. While robust consumption and light product inventories should continue to support the sector, most operators see a subdued margin environment for the rest of 2024. Additionally, rising costs due to persistent inflation are eroding profits. Nevertheless, the defensive nature of these stocks and their fee-based business models, along with features to mitigate inflationary impacts, still offer some protection in an unpredictable market. For those interested in the space, we have earmarked three stocks — Targa Resources TRGP, Sunoco LP SUN and NGL Energy Partners LP NGL.
Industry Overview
Master limited partnerships (or MLPs) differ from regular stocks since interests in them are referred to as units, and unitholders (not shareholders) are partners in the business. Importantly, these low-risk hybrid entities bring together the tax benefits of a limited partnership with the liquidity of publicly traded securities that earn a stable income. The assets owned by these partnerships are typically oil and natural gas pipelines and storage/infrastructure facilities. The Zacks Oil and Gas - Refining & Marketing MLP industry is a sub-sector of this business model. These firms operate refined product terminals, storage facilities and transportation services. They are involved in selling refined petroleum products (including heating oil, gasoline, residual oil, jet fuel, etc.) and a plethora of non-energy materials (like asphalt, road salt, clay and gypsum).
3 Trends Defining Oil and Gas - Refining & Marketing MLP Industry's Future
Moderation in Refining Margins: While refining margins remain robust, they have notably softened compared to the exceptional levels of 2022. Crack spreads, which reflect the difference between refined product and crude oil prices, have also decreased. Elevated inventories and demand uncertainties could further dent profitability. Despite price controls and sanctions, Russia's redirection of oil exports to India and China has impeded the expected tightening of product supplies. This trend suggests a recent downturn in global refinery margins, impacting the earnings of downstream firms.
Sustainable Cash Flows: In the current volatile oil market, marked by demand fluctuations and geopolitical tensions, investors may find master limited partnerships (MLPs) a prudent choice. MLPs provide attractive returns with significantly reduced risk exposure. Their assets, such as oil and natural gas pipelines and storage facilities, generate stable fee-based revenues through long-term contracts, thereby minimizing direct commodity price risks. These contracts ensure consistent cash flow over the long run, regardless of market cycles. Additionally, many agreements operate on a take-or-pay basis, ensuring that MLPs receive payment regardless of commodity transportation volumes.
Supply-Chain Disruptions: Despite the relatively bullish energy landscape and improved demand environment, the industry has not been immune to supply-chain disruptions and cost inflation. Macro issues like higher transportation expenses, driver scarcity and labor shortages have limited MLPs’ (or the energy infrastructure providers, also called the midstream group) ability to ship packaged volumes to their customers. What’s worse is that these headwinds across the system and the subsequent hit to profitability (due to difficulty in passing through the increased costs to clients) are expected to continue in the near future.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Refining & Marketing MLP is a seven-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #227, which places it in the bottom 9% of around 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates fairly dull 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 a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group’s earnings growth potential. While the industry’s earnings estimate for 2024 has gone down 3.1% in the past year, the same for 2025 has fallen 11.7% over the said timeframe.
Despite the dim near-term prospects 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 shareholder returns and current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas – Refining & Marketing MLP industry has fared better than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has gained 56.8% over this period compared with the broader sector’s increase of 12.9%. Meanwhile, the S&P 500 has gone up 19%.
One-Year Price Performance
Industry's Current Valuation
Since midstream-focused oil and gas partnerships use fixed-rate debt for most 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 non-cash expenses.
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA) ratio, the industry is currently trading at 19.38X, lower than the S&P 500’s 14.12X. It is, however, well above the sector’s trailing 12-month EV/EBITDA of 2.97X.
Over the past five years, the industry has traded as high as 14.42X and as low as 5.76X, with a median of 8.96X, as the chart below shows.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Stocks in Focus
Targa Resources is a leading provider of integrated midstream services in North America. The Houston, TX-based operator primarily derives its revenues from gathering, compressing, treating, processing and selling natural gas. Targa Resources, with a Zacks Rank of 3, also provides services associated with natural gas liquids (“NGL”), including those to liquefied petroleum gas (“LPG”) exporters, and crude oil.
The Zacks Consensus Estimate for Houston, TX-based Targa Resources indicates 44% earnings per share growth over 2023. The firm, which pays out 75 cents quarterly dividend to yield nearly 6%, has a VGM Score of B. Valued at around $26.9 billion, this Zacks Rank #3 (Hold) stock has surged 71.3% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: TRGP
Sunoco LP participates in the transportation and supply phase of the U.S. petroleum market across a number of states. It also focuses on motor fuel distribution to convenience stores, independent dealers and commercial customers. SUN pays out 87.56 cents quarterly distribution ($3.5024 per unit annually), which gives it a 6.8% yield at the current unit price.
Over the last 60 days, the Zacks Consensus Estimate for Sunoco’s 2024 earnings has moved up 24.4%. The 2024 Zacks Consensus Estimate for SUN indicates 99.7% year-over-year earnings per share growth. Valued at around $5.3 billion, this Zacks #3 Ranked partnership has gained 22.3% in a year.
Price and Consensus: SUN
NGL Energy Partners LP is an MLP that owns water disposal wells, the Grand Mesa oil pipeline and a wholesale propane/butane business. In particular, NGL Energy Partners’ one-of-a-kind water business is supported by long-term, fixed-fee contracts. The highly differentiated assets make it difficult to replicate the partnership’s infrastructure system and give it a competitive advantage.
The Zacks Consensus Estimate for NGL Energy Partners fiscal 2025 indicates 158.8% earnings per unit growth over fiscal 2024. The #3 Ranked midstream operator enjoys Value, Growth and Momentum scores of A each, helping it round out with a VGM Score of A. NGL Energy Partners’ current market cap is roughly $710.3 million, while the stock has added 22.3% in a year.
Price and Consensus: NGL
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