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Although the midstream energy business is less exposed to coronavirus-induced oil and gas price volatility, the outlook for the Zacks Oil and Gas - Pipeline MLP industry is still subject to heightened levels of uncertainties. Lower production volumes of the commodities owing to curtailed upstream activities have dented demand for the partnership’s midstream assets.

Despite the uncertainties, the pipeline players are better off than upstream and downstream firms since the partnerships are generating stable fee-based revenues from their long-term contracts with shippers. Among the frontrunners in the industry that are trying to survive the challenging business scenario are Enterprise Products Partners L.P. (EPD Quick Quote EPD - Free Report), Energy Transfer LP (ET Quick Quote ET - Free Report), Plains All American Pipeline, L.P. (PAA Quick Quote PAA - Free Report) and NuStar Energy LP (NS Quick Quote NS - Free Report).

About the Industry

The Zacks Oil and Gas - Pipeline MLP industry comprises master limited partnerships (or MLPs) which are primarily engaged in transporting oil, natural gas, refined petroleum products, and natural gas liquids (NGL) to consumers in North America. The services provided by the partnerships entail the gathering and processing of commodities as well.

It is to be noted that MLPs are different from companies as interests in MLPs are considered units (not shares) and unitholders are partners in the business.

What’s Shaping the Future of the Oil & Gas Pipeline MLP Industry?

Soft Pipeline Demand: The coronavirus pandemic continues to affect the global fuel demand although vaccines are rolling out at a massive scale. With new waves of the virus sweeping across the world, the outlook for global fuel demand is still uncertain. To sail through the uncertainties, explorers and producers are spending conservatively, which will likely lead to lower production of oil as compared to pre-pandemic levels. This in turn has reduced demand for pipeline and storage assets since the volumes of crude that are now needed to be transported by shippers have reduced considerably, making the outlook for the partnerships’ midstream business gloomy.

Lower Fee-Based Revenues: To survive the pandemic-induced soft demand for pipeline networks, several energy players with midstream presence will likely be left with no option but to offer discounts to shippers. This will lower the midstream energy partnership’s 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 the partnerships’ 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 Gloomy Outlook

The Zacks Oil and Gas - Pipeline MLP industry is a 14-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #228, which places it in the bottom 10% 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 bearish 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 is a result of a negative earnings outlook for the constituent stocks in aggregate. Before we present a few oil and gas pipeline MLPs that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.

Industry Outperforms Sector & S&P 500

The Zacks Oil and Gas - Pipeline MLP industry has outperformed the broader Zacks Oil - Energy sector and Zacks S&P 500 composite over the past year. The industry has gained 68.6% in the past year as compared to the rises of 63.8% and 61.7% of the broader sector and the S&P 500, respectively.

One-Year Price Performance

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 non-cash expenses.

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 8.76X, lower than the S&P 500’s 17.39X. It is, however, significantly above the sector’s trailing-12-month EV/EBITDA of 5.97X.

Over the past five years, the industry has traded as high as 14.98X, as low as 6.64X, with a median of 13.07X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

4 Oil & Gas Pipeline MLPs Trying to Survive the Industry Challenges

Considering the downbeat industry scenario, it might be prudent for investors to maintain caution by either keeping on the sidelines for a while or keeping an eye on these four fundamentally-sound oil and gas pipeline MLPs. All the stocks carry a Zacks Rank #3 (Hold). 

Enterprise Products Partners LP: The partnership is a leading North American midstream infrastructure provider, generating stable fee-based revenues from its network of NGL, crude oil, natural gas, petrochemicals, and refined products pipelines, spreading across roughly 50,000 miles. Since the partnership has the highest credit ratings in the midstream space, it can lean on its strong balance sheet to survive the pandemic. Over the past 60 days, Enterprise has witnessed upward earnings estimate revisions for 2021 and 2022, respectively.

Price and Consensus: EPD

Plains All American Pipeline LP: The partnership generates stable fee-based revenues from its vast network of oil and gas pipeline and storage assets. The partnership is well-positioned to survive the pandemic since its balance sheet has lower debt exposure than the composite stocks belonging to the industry. The stock is likely to see earnings growth of 137.1% in 2021.

Price and Consensus: PAA

Energy Transfer LP: The partnership, with a vast network of intrastate and interstate transportation and storage assets, is well-positioned to fund its midstream growth projects. The stock is likely to see earnings growth of more than 525% in 2021.

Price and Consensus: ET

NuStar Energy LP: In the United States, the partnership is among the largest independent liquids terminal and pipeline operators, thereby generating steady fee-based revenues. Notably, the partnership expects to generate sufficient liquidity so that it will be capable of accommodating bond maturities in 2021 and 2022, respectively. Notably, NuStar has witnessed upward earnings estimate revisions for 2021 and 2022, respectively, in the past 60 days.

Price and Consensus: NS