The inherent structure of the midstream business model implies that the operations of oil and gas transportation pipelines and storage facilities are minimally affected by fluctuations in commodity prices. This positive dynamic is enhancing the prospects of the Zacks Oil and Gas - Production & Pipelines industry.
Pipeline companies are in a more advantageous position compared to upstream and downstream enterprises because they derive consistent, predictable revenue streams from their enduring contracts with shippers. Kinder Morgan, Inc. KMI, The Williams Companies Inc WMBand MPLX LP MPLX and Ultrapar Participa??es SA UGP are among the frontrunners in the industry.
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 of 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 invest in wind farms, solar energy operations, geothermal projects and hydroelectric facilities. Thus, with a diversified portfolio of renewable energy projects, the companies 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?
Pipeline Demand to Improve: Oil price is trading at more than $80 per barrel. Crude prices, which are highly favorable, may help explorers and producers ramp up upstream activities, leading to higher production. This, in turn, is improving the demand for crude transportation pipelines of the midstream players.
Stable Fee-Based Revenues: Most pipeline and storage assets are being booked by shippers for the long term, making midstream businesses less vulnerable to volatility in commodity prices. Backed by long-term contracts, the companies belonging to the industry also have a minimal oil and gas volume risk. Owing to these factors, pipeline players will continue to generate stable fee-based revenues.
Impressive Project Backlog: Many pipeline companies in the industry have a backlog of growth projects worth billions of dollars. The projects will come online in a few years, securing additional cashflows for the pipeline players.
Attractive Dividend Yield: Oil and gas pipeline stocks are paying attractive dividend yields. Compared to the overall energy sector, companies belonging to the industry have been rewarding shareholders with significantly higher dividend yields over the past few years, providing reassurance that the midstream business is relatively more stable than upstream and downstream operations.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Oil and Gas - Production & Pipelines is a nine-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #29, which places it in the top 12% 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 rosy 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 top 50% of the Zacks-ranked industries results from a positive earnings outlook for the constituent stocks in aggregate. Before we present a few stocks that you may want to consider, let’s look at the industry’s recent stock market performance and its valuation picture.
Industry Lags Sector & S&P 500
The Zacks Oil and Gas - Production & Pipelines industry has underperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.
The industry has soared 10.2% over this period compared with an improvement of 11.7% of the broader sector and 24.3% rise of the S&P 500.
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 12.05X, lower than the S&P 500’s 14.59X. It is, however, above the sector’s trailing 12-month EV/EBITDA of 3.01X.
Over the past five years, the industry has traded as high as 14.81X, as low as 8.67X and at a median of 12.40X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oil & Gas Pipeline Stocks Leading the Pack
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, a Zacks Rank #3 (Hold) company, 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
MPLX: 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 fuel distribution business.
Over the past seven days, MPLX has witnessed upward earnings estimate revisions for 2024 and 2025. The partnership, currently sporting a Zacks Rank #1 (Strong Buy), has attractive organic growth capital projects and is pursuing low-carbon opportunities. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: MPLX
Ultrapar Participa??es: The stock has a stable business model banking on its huge network of energy and infrastructure business in Brazil. Being a leading distributor of liquefied petroleum gas to residential, commercial, and industrial consumers, Ultrapar, with a Zacks Rank of 1 at present, may continue to generate stable cashflows.
Price and Consensus: UGP
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