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4 Oil Pipeline Stocks Set to Gain Despite Industry Headwinds
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Although the midstream energy business has lower exposure to coronavirus-induced oil and gas prices, the rapidly spreading infectious variants of the virus have made the outlook for the Zacks Oil and Gas - Production & Pipelines industry gloomy. Uncertainty is still prevailing in the energy business, resulting in little incentives for upstream players to ramp up production volumes. This is making demand for midstream assets extremely soft.
Despite the uncertainties, pipeline players are better off than upstream and downstream firms since the companies are generating stable fee-based revenues from their long-term contracts with shippers. Enbridge Inc. (ENB - Free Report) , Kinder Morgan, Inc. (KMI - Free Report) , Holly Energy Partners, L.P. and Transportadora de Gas del Sur S.A. (TGS - Free Report) are among the frontrunners in the industry that are trying to survive the challenging business scenario.
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 processing and storing natural gas. The companies have interests in natural gas distribution utilities and thereby serve millions of retail customers across North America. Some of the companies are ramping up investments in renewable energy and power transmission businesses. The firms have invested 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 generating stable fee-based revenues from transportation assets.
What's Shaping the Future of Oil & Gas - Production and Pipelines Industry?
Soft Pipeline Demand: The coronavirus pandemic is far from over, with people still getting infected with new highly infectious variants. Thus, global demand for fuel is yet to recover fully, thereby providing little incentive to upstream players to ramp up production volumes. This is hurting demand for pipeline and storage assets.
Explorers’ Focus on Shareholder Returns: After years of low returns, investors are pressing explorers and producers to focus more on shareholders’ returns rather than investing massively on production ramp-up. Thus, lower oil and gas production volumes will in turn result in soft demand for midstream infrastructure assets, thereby hurting transportation and storage companies’ bottom line.
Midstream Businesses Settle for Fee Cut: To survive the pandemic-induced soft demand for pipeline networks, several energy players with midstream presence are likely to have no option but to offer discounts to shippers. This is expected to lower the companies’ fee-based revenues.
Shift to Renewables: Energy majors will increasingly face challenges to provide sustainable energy to the entire 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 trend will lower demand for midstream firms’ pipeline and storage networks for oil and natural gas since the commodities were formed from buried remains of plants and animals.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Oil and Gas - Production & Pipelines is a 12-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #190, 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 gloomy 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 negative earnings outlook for the constituent stocks in aggregate. Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector & S&P 500
The Zacks Oil and Gas - Production & Pipelines has lagged both the broader Zacks Oil - Energy Sector and the Zacks S&P 500 composite over the past year.
The industry has risen 21% over this period versus the 26.6% and 29.6% improvement of the broader sector and the S&P 500, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of 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 12.34X, lower than the S&P 500’s 16.07X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 4.87X.
Over the past five years, the industry has traded as high as 18.71X, as low as 8.52X and at a median of 13.45X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oil & Gas Pipeline Stocks Trying to Survive the Industry Challenges
Kinder Morgan: With operating interests in oil and gas pipeline networks, spreading across 83,000 miles, Kinder Morgan is a leading energy infrastructure company in North America. The company generates the majority of earnings from take-or-pay contracts, thereby generating stable fee-based revenues.
The midstream player, currently carrying a Zacks Rank #2 (Buy), has gained 18.1% so far this year and is poised to grow more backed by its business model, which is relatively resilient to volume and commodity price risks.
Price and Consensus: KMI
Transportadora de Gas del Sur SA: This company has a solid business model backed by its massive network of natural gas pipelines, spreading across more than 5,700 miles. In Argentina, the midstream player is responsible for transporting 60% of natural gas that is consumed by people residing in the country.
The Zacks #2 Ranked company has witnessed upward earnings estimate revisions for 2021 in the past 30 days and gained more than 11% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: TGS
Enbridge: This company is a leading North American midstream energy player, having the longest crude oil pipeline network. Enbridge estimates C$10-billion growth capital projects to be placed into service in 2021. From 2021 to 2023, the midstream player expects C$17 billion in growth capital projects to be executed.
The company expects the project executions to drive 5-7% distributable cash flow per share growth through 2023. The stock, carrying a Zacks Rank #3 (Hold) at present, is likely to see earnings growth of 21.6% in 2021.
Price and Consensus: ENB
Holly Energy Partners, L.P: The stock is well poised to generate stable fee-based revenues from its huge network of crude oil and petroleum product transportation, terminalling and storage assets. Persistent improvement in the demand for crude oil and refined products in the markets served by Holly Energy Partners will continue to back the partnership’s midstream operations. This Zacks #3 Ranked stock is likely to see earnings growth of 38.5% in 2021.
Price and Consensus: HEP
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4 Oil Pipeline Stocks Set to Gain Despite Industry Headwinds
Although the midstream energy business has lower exposure to coronavirus-induced oil and gas prices, the rapidly spreading infectious variants of the virus have made the outlook for the Zacks Oil and Gas - Production & Pipelines industry gloomy. Uncertainty is still prevailing in the energy business, resulting in little incentives for upstream players to ramp up production volumes. This is making demand for midstream assets extremely soft.
Despite the uncertainties, pipeline players are better off than upstream and downstream firms since the companies are generating stable fee-based revenues from their long-term contracts with shippers. Enbridge Inc. (ENB - Free Report) , Kinder Morgan, Inc. (KMI - Free Report) , Holly Energy Partners, L.P. and Transportadora de Gas del Sur S.A. (TGS - Free Report) are among the frontrunners in the industry that are trying to survive the challenging business scenario.
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 processing and storing natural gas. The companies have interests in natural gas distribution utilities and thereby serve millions of retail customers across North America. Some of the companies are ramping up investments in renewable energy and power transmission businesses. The firms have invested 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 generating stable fee-based revenues from transportation assets.
What's Shaping the Future of Oil & Gas - Production and Pipelines Industry?
Soft Pipeline Demand: The coronavirus pandemic is far from over, with people still getting infected with new highly infectious variants. Thus, global demand for fuel is yet to recover fully, thereby providing little incentive to upstream players to ramp up production volumes. This is hurting demand for pipeline and storage assets.
Explorers’ Focus on Shareholder Returns: After years of low returns, investors are pressing explorers and producers to focus more on shareholders’ returns rather than investing massively on production ramp-up. Thus, lower oil and gas production volumes will in turn result in soft demand for midstream infrastructure assets, thereby hurting transportation and storage companies’ bottom line.
Midstream Businesses Settle for Fee Cut: To survive the pandemic-induced soft demand for pipeline networks, several energy players with midstream presence are likely to have no option but to offer discounts to shippers. This is expected to lower the companies’ fee-based revenues.
Shift to Renewables: Energy majors will increasingly face challenges to provide sustainable energy to the entire 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 trend will lower demand for midstream firms’ pipeline and storage networks for oil and natural gas since the commodities were formed from buried remains of plants and animals.
Zacks Industry Rank Indicates Dim Prospects
The Zacks Oil and Gas - Production & Pipelines is a 12-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #190, 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 gloomy 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 negative earnings outlook for the constituent stocks in aggregate. Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock-market performance and valuation picture.
Industry Lags Sector & S&P 500
The Zacks Oil and Gas - Production & Pipelines has lagged both the broader Zacks Oil - Energy Sector and the Zacks S&P 500 composite over the past year.
The industry has risen 21% over this period versus the 26.6% and 29.6% improvement of the broader sector and the S&P 500, respectively.
One-Year Price Performance
Industry's Current Valuation
On the basis of 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 12.34X, lower than the S&P 500’s 16.07X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 4.87X.
Over the past five years, the industry has traded as high as 18.71X, as low as 8.52X and at a median of 13.45X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Oil & Gas Pipeline Stocks Trying to Survive the Industry Challenges
Kinder Morgan: With operating interests in oil and gas pipeline networks, spreading across 83,000 miles, Kinder Morgan is a leading energy infrastructure company in North America. The company generates the majority of earnings from take-or-pay contracts, thereby generating stable fee-based revenues.
The midstream player, currently carrying a Zacks Rank #2 (Buy), has gained 18.1% so far this year and is poised to grow more backed by its business model, which is relatively resilient to volume and commodity price risks.
Price and Consensus: KMI
Transportadora de Gas del Sur SA: This company has a solid business model backed by its massive network of natural gas pipelines, spreading across more than 5,700 miles. In Argentina, the midstream player is responsible for transporting 60% of natural gas that is consumed by people residing in the country.
The Zacks #2 Ranked company has witnessed upward earnings estimate revisions for 2021 in the past 30 days and gained more than 11% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: TGS
Enbridge: This company is a leading North American midstream energy player, having the longest crude oil pipeline network. Enbridge estimates C$10-billion growth capital projects to be placed into service in 2021. From 2021 to 2023, the midstream player expects C$17 billion in growth capital projects to be executed.
The company expects the project executions to drive 5-7% distributable cash flow per share growth through 2023. The stock, carrying a Zacks Rank #3 (Hold) at present, is likely to see earnings growth of 21.6% in 2021.
Price and Consensus: ENB
Holly Energy Partners, L.P: The stock is well poised to generate stable fee-based revenues from its huge network of crude oil and petroleum product transportation, terminalling and storage assets. Persistent improvement in the demand for crude oil and refined products in the markets served by Holly Energy Partners will continue to back the partnership’s midstream operations. This Zacks #3 Ranked stock is likely to see earnings growth of 38.5% in 2021.
Price and Consensus: HEP