The Zacks Oil and Gas - Refining & Marketing MLP industry is navigating a challenging phase, with refining margins softening significantly from their 2022 highs. Narrower crack spreads, elevated inventories and global demand uncertainties weigh on profitability, particularly as Russia redirects exports to India and China, easing supply constraints. Moreover, the sector’s dependence on upstream activity introduces cyclical risks, as downturns in production growth often reduce midstream demand and erode earnings. Yet, amidst these headwinds, these partnerships remain a beacon of stability. With steady, fee-based revenues from pipelines and storage facilities, to go with often-attractive payouts, some of them offer appealing options for investors seeking resilience. For those interested, we highlight Targa Resources TRGP, Western Midstream Partners, LP WES and Sunoco LP SUN.
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
Softer Refining Margins Challenge Profitability: Refining margins have retreated from their 2022 peaks as crack spreads narrow amid lower refined product prices relative to crude oil. Elevated inventories and uncertain demand add pressure, while Russia’s redirected exports to India and China have mitigated global supply constraints. This shifting dynamic has reduced refinery margins, posing challenges to downstream companies’ earnings and dampening their profitability outlook.
Reliable Returns in a Volatile Market: In today’s unpredictable oil market, MLPs stand out as a stable investment choice. Focused on pipelines and storage facilities, MLPs generate steady, fee-based revenues through long-term contracts, while most pay an attractive dividend. These agreements shield them from direct commodity price swings, ensuring consistent cash flow. Many contracts operate on a take-or-pay model, guaranteeing income even when transportation volumes decline, making MLPs a dependable option for lower-risk returns.
Cyclical Risks of Upstream Dependency: The Oil and Gas - Refining & Marketing MLP Industry’s growth is closely tied to the cyclical nature of the upstream energy sector, which impacts midstream activity when production slows. A downturn in commodity prices could weaken production growth, reducing demand for their services. Historical patterns show that periods of overperformance are often followed by significant corrections, potentially wiping out years of earnings growth. This cyclical dependency creates uncertainty for long-term growth and investor returns.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas – Refining & Marketing MLP is a six-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 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.
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 70.6% over this period in contrast to the broader sector’s increase of 10.2%. Meanwhile, the S&P 500 has gone up 32.4%.
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 11.67X, significantly lower than the S&P 500’s 18.75X. It is, however, well above the sector’s trailing 12-month EV/EBITDA of 3.70X.
Over the past five years, the industry has traded as high as 11.97X and as low as 5.78X, with a median of 9.02X, as the chart below shows.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Stocks in Focus
Targa Resources: It 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 also provides services associated with natural gas liquids, including liquefied petroleum gas exporters, and crude oil.
The 2024 Zacks Consensus Estimate for Houston, TX-based Targa Resources indicates 71.6% earnings per share growth over 2023. The firm, which expects a 33% year-over-year increase to its 2025 common dividend, has a VGM Score of B. Valued at around $44.6 billion, this Zacks Rank #2 (Buy) stock has surged 128.7% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: TRGP
Western Midstream Partners: WES is engaged in gathering, processing, compressing, treating, and transporting natural gas, condensate, natural gas liquids, and crude oil. Western Midstream Partners’ top-class asset portfolio, financial strength and ability to generate stable cash flows should boost unitholder returns.
The 2024 Zacks Consensus Estimate for The Woodlands, TX-based firm indicates 55.8% year-over-year earnings per share growth. Western Midstream partners pays out 87.50 cents quarterly distribution ($3.50 per unit annually), which gives it an 8.6% yield at the current unit price. Valued at around $15.5 billion, the Zacks Rank #3 (Hold) WES has gained some 36.1% in a year.
Price and Consensus: WES
Sunoco LP: It participates in the transportation and supply phase of the U.S. petroleum market across a number of states. Sunoco 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 6.2% yield at the current unit price.
The 2024 Zacks Consensus Estimate for Sunoco indicates 129% earnings per share growth over 2023. SUN has a market capitalization of $8.6 billion. Boasting a Value Score of B, this Zacks Rank #3 partnership has gained 6.1% in a year.
Price and Consensus: SUN
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