Chicago, IL – December 5, 2024 – Today, Zacks Equity Research discusses Enterprise Products Partners LP EPD, Energy Transfer LP ET and Plains All American Pipeline LP PAA.
While the midstream energy sector is less affected by oil and gas price swings, the Zacks Oil and Gas - Production & Pipelines industry still faces uncertainties. Conservative capital spending by upstream companies is slowing oil and gas production growth, which could reduce demand for midstream assets.
Despite these challenges, pipeline operators are in a stronger position than upstream and downstream firms. They benefit from steady, fee-based revenues through long-term contracts with shippers. Key industry leaders include Enterprise Products Partners LP, Energy Transfer LP and Plains All American Pipeline LP.
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 partnerships 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 the Oil & Gas Pipeline MLP Industry?
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 growth of commodities, denting demand for pipeline and storage assets of the master limited partnerships.
Lower Fee-Based Revenues: Soft demand for midstream assets might ultimately lead to lower fee-based revenues for the MLPs. Also, to sail through soft demand for pipeline networks, several energy players with midstream presence will likely have 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.
Zacks Industry Rank Indicates Gloomy Outlook
The Zacks Oil and Gas - Pipeline MLP industry is a six-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #187, which places it in the bottom 25% 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 dull 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 bottom 50% of the Zacks-ranked industries forms a negative earnings outlook for the constituent stocks in aggregate. Before we present a few stocks you may want to consider, let’s look at the industry’s recent stock market performance and valuation picture.
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 rallied 44.5% in the past year, surpassing a gain of 15.5% of the broader sector and a rise of 34.6% of the S&P 500.
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), the industry is currently trading at 12.35X, lower than the S&P 500’s 18.82X. It is, however, significantly above the sector’s trailing 12-month EV/EBITDA of 3.68X.
Over the past five years, the industry has traded as high as 12.58X and as low as 6.69X, with a median of 9.83X.
3 Oil & Gas Pipeline MLPs to Keep a Close Eye On
Enterprise Products, a top-tier North American midstream service provider, boasts a vast and diversified asset portfolio. This includes more than 50,000 miles of pipelines and a storage capacity of 300 million barrels. These assets are utilized by shippers on long-term contracts to transport and store natural gas liquids, crude oil, refined products and petrochemicals. The partnership, carrying a Zacks Rank #3 (Hold), also has 14 billion cubic feet of natural gas storage capacity, securing stable fee-based revenues.
Additionally, EPD is set to generate additional fee-based earnings with $6.9 billion worth of major capital projects currently in service or under construction. These project backlogs will not only ensure stable cashflows but also generate handsome unitholder returns.
Energy Transfer has a stable business model with its huge pipeline network of natural gas, oil and refined petroleum products across 125,000 miles. The partnership has midstream assets in all the key basins in the United States, generating stable fee-based revenues.
Energy Transfer, carrying a Zacks Rank #3, has consistently offered a higher distribution yield than the composite stocks belonging to the industry over the past year. For this year, the partnership is likely to see earnings growth of 21.1%.
Plains All American Pipeline also enjoys stable fee-based revenues banking on its oil and natural gas pipeline network and storage assets. In the past seven days, the Zacks #3 Ranked stock has not witnessed earnings estimate revisions for 2024. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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