Oil & Gas - Pipeline MLP Outlook: Near-Term Prospects Bleak
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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). The services provided by the partnerships also entail the gathering and processing of commodities.
It is to be noted that MLPs are different from companies as interests in MLPs are considered units (not shares) and unitholders are partners in the business.
Here are the industry’s three major themes:
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Oil price is unlikely to recover before May, when waivers of sanctions on Iranian oil imports issued by the United States to several countries are slated to expire. However, the global economy, which is slowing at an accelerating rate, could offset the pricing recovery. This volatility in crude prices is likely to convince U.S. shale drillers to curtail spending, which in turn will slow domestic oil production growth through 2019, per oilfield service giant Schlumberger Limited (SLB). Slowing shale oil production volumes could affect demand for pipeline and storage properties.
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In 2018, West Texas crude producers could not transport sufficient oil volumes to the Gulf Coast areas — where majority of refineries in the United States are located — because of a pipeline bottleneck problem. Notably, the constraint in transportation capacities is unlikely to get solved before late-2019, when new pipeline projects will start getting operational. Hence, with insufficient pipeline networks, the partnerships are losing opportunities to transport more crude volumes, in turn affecting cash flow.
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To address the bottleneck problem, more transportation networks will be reportedly built in the coming years than required. This is likely to lower the rates charged by the partnerships from the shippers or producers for transporting commodities. Like oil, natural gas producers are facing constraints in transportation networks. Moreover, a slowdown in global economic growth may hurt clean energy needs and in turn lower demand for midstream assets transporting natural gas.
Zacks Industry Rank Indicates Rough Times Ahead
The Zacks Oil and Gas - Pipeline MLP industry is a 17-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #220, which places it at the bottom 15% 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 bleak 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 cloudy earnings prospects for the constituent partnerships in aggregate. Looking at the aggregate earnings estimate revision, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since May 31, 2018, the industry’s earnings estimates for the current year have moved roughly 3.4% down.
Despite the bleak near-term industry prospects, we present a few stocks that are witnessing positive earnings estimate revisions or are expected to see year-over-year earnings growth. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Lags S&P 500, Outperforms Sector
The Zacks Oil and Gas - Pipeline MLP industry has lagged the Zacks S&P 500 composite over the past year. However, the industry has outperformed the broader Zacks Oil - Energy Sector over the same time frame.
The industry has declined 8.7% over this period compared to the S&P 500’s fall of 6.5% and broader sector’s decline of 15%.