Although the midstream energy business is less exposed to oil and gas price volatility, the Zacks Oil and Gas - Production & Pipelines industry’s outlook is still subjected to uncertainties. Due to conservative capital spending by upstream players and possibilities of soft fuel demand, production volumes could get dented, hurting demand for partnerships’ midstream assets.
Despite the uncertainties, pipeline players are better off than upstream and downstream firms since the partnerships generate stable fee-based revenues from their long-term contracts with shippers. The industry frontrunners include Kinder Morgan, Inc. KMI, The Williams Companies Inc WMB and MPLX LP MPLX.
About the Industry
The Zacks Oil and Gas - Production & Pipelines industry comprises companies that own and operate midstream energy infrastructure assets. The properties consist of extensive pipeline networks that transport crude oil, liquids and natural gas. The midstream energy players are also involved in the processing and storing natural gas. The companies have interests in natural gas distribution utilities, serving millions of retail customers across North America. Some companies are ramping up investments in renewable energy and power transmission businesses. The firms invested in wind farms, solar energy operations, geothermal projects and hydroelectric facilities. Thus, with a diversified portfolio of renewable energy projects, the firms have room to generate extra cash flows in addition to stable fee-based revenues from the transportation assets.
What's Shaping the Future of Oil & Gas - Production and Pipelines Industry?
Soft Pipeline Demand: Inflationary environment is probably spurring a slowdown in the U.S. economy, which could hurt fuel demand. The uncertainty in fuel demand is likely to affect the production of the commodity, which in turn will lower the demand for oil pipeline assets of the partnerships.
Lower Fee-Based Revenues: Soft demand for midstream assets might ultimately lead to lower fee-based revenues for the master limited partnerships. 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.
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 of commodities, thereby denting pipeline and storage assets.
Zacks Industry Rank Indicates Bleak Prospects
The Zacks Oil and Gas - Production & Pipelines is a 13-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #202, which places it in the bottom 20% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates gloomy 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.
Despite the cloudy prospects, we present a few stocks that investors can retain or keep an eye on, given their solid potential. But before that, let’s take a look at the industry’s recent stock market performance and its current valuation.
Industry Lags Sector & S&P 500
The Zacks Oil and Gas - Production & Pipelines industry has lagged the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.
The industry has fallen 9.7% over this period against the 5.8% rise of the S&P 500 and 7.8% decline of the broader sector.
One-Year Price Performance
Industry's Current Valuation
Based on the trailing 12-month enterprise value-to EBITDA (EV/EBITDA), which is a commonly used multiple for valuing oil and gas production & pipeline stocks, the industry is currently trading at 11.91X, lower than the S&P 500’s 12.71X. It is also above the sector’s trailing-12-month EV/EBITDA of 2.76X.
Over the past five years, the industry has traded as high as 15.89X, as low as 8.81X and at a median of 13.07X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 Oil & Gas Pipeline Stocks to Keep a Close Eye On
MPLX LP: MPLX generates stable cashflows and has lower exposure to commodity price volatility since it is the operator of midstream energy infrastructure and logistics assets. It also generates cashflows from a relatively stable fuels distribution business.
Over the past seven days, MPLX has witnessed upward earnings estimate revisions for 2023. The partnership, currently carrying a Zacks Rank #3 (Hold), has attractive organic growth capital projects and is pursuing low-carbon opportunities. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: MPLX
Kinder Morgan: With its operating interests in oil and gas pipeline networks spread across 83,000 miles, Kinder Morgan is a leading energy infrastructure company in North America. It derives most of its earnings from take-or-pay contracts, generating stable fee-based revenues.
Kinder Morgan, with a Zacks Rank of 3, is poised to grow more on the back of its business model, which is relatively resilient to volume and commodity price risks.
Price and Consensus: KMI
The Williams Companies Inc: The Williams Companies is well-poised to capitalize on the mounting demand for clean energy since it is engaged in transporting, storing, gathering and processing natural gas and natural gas liquids.
With its pipeline networks spread across more than 30,000 miles, The Williams Companies connects premium basins in the United States to the key market. With a Zacks Rank of 3 at present, WMB’s assets can meet 30% of the nation’s natural gas consumption, utilized for heating purposes and clean-energy generation.
Price and Consensus: WMB
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