Promising Near-Term Outlook for Oil & Gas Pipeline Industry – March 31, 2020
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. Moreover, the companies have interests in natural gas distribution utilities and thereby serve millions of retail customers across North America.
Let’s take a look at the industry’s three major themes:
- The businesses of midstream energy firms are generally not exposed to commodity price fluctuations. This is because most of the pipeline and storage networks are in long-term contracts with shippers, which provide the midstream companies with stable fee-based revenues.
- Encouraging U.S. demand for clean energy to curb greenhouse gas emission has given natural gas distribution business a palpable boost. Per EIA, in the United States, natural gas had accounted for 37% of total electricity generation in 2019, up from prior year’s 35%. The annual share will increase to 39% in 2020, according to EIA’s prediction.
- Oil price is now in the bearish territory since the coronavirus pandemic has dented global energy demand. Notably, it takes roughly six months for weak oil price to affect production volumes of the commodity, per the EIA model. Thus, although the annual average U.S. oil production volumes will be up marginally in 2020, the production volumes will decline in 2021. Hence, it is unlikely that there will be an immediate drastic drop in demand for oil pipeline networks.
Zacks Industry Rank Indicates Encouraging Prospects
The Zacks Oil and Gas – Production & Pipelines is a 14-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #97, which places it in the top 38% 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 impressive 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.
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 Outperforms Sector But Lags S&P 500
The Zacks Oil and Gas – Production & Pipelines has outpaced the broader Zacks Oil – Energy Sector but lagged the Zacks S&P 500 composite over the past year.
The industry fell 44.7% over this period as compared with the 54.2% and 11.8% declines of the broader sector and 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) ratio, which is a commonly used multiple for valuing oil and gas production & pipeline stocks, the industry is currently trading at 9.27X, lower than the S&P 500’s 9.40X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 3.5X.
Over the past five years, the industry has traded as high as 25.5X, as low as 8.41X, with a median of 13.93X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
Midstream energy firms, belonging to the industry, paid a total of $2.1 billion in dividends through 2019, representing an increase of 23.6% year over year. Backed by a huge backlog of midstream growth projects, the companies are well positioned to continue to reward stockholders.
Here, we are presenting four stocks which are positioned to grow in the near term.
Transportadora de Gas del Sur S.A. (TGS – Free Report) is a leading provider of services related to distribution and transportation of natural gas in Argentina. Over the past 30 days, the Zacks Rank #1 (Strong Buy) stock witnessed upward revisions for its Zacks Consensus Estimate for 2020 earnings.
Price and Consensus: TGS
DCP Midstream, LP (DCP – Free Report) is a leading operator of midstream infrastructure properties in America. The Zacks Rank #2 (Buy) stock has also witnessed upward revisions for its Zacks Consensus Estimate for 2020 earnings in the past 30 days.
Price and Consensus: DCP
Kinder Morgan, Inc. (KMI – Free Report) : The company has the largest network of natural gas pipeline in North America that spreads across almost 70,000 miles. Through 2020, the company is likely to see earnings growth of 5.3%. The company, carrying a Zacks Rank #3 (Hold), has also witnessed upward earnings estimate revisions for 2020 over the past 30 days.
Price and Consensus: KMI
Ultrapar Participacoes SA (UGP – Free Report) : Headquartered in Sao Paulo, Brazil, Ultrapar is a leading distributer of liquefied petroleum gas in the country. The Zacks #3 Ranked stock is likely to see earnings growth of 113.3% in 2020. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: UGP