Midstream energy players have significantly lower exposure to oil and gas price volatility, thereby brightening the Zacks Oil and Gas - Production & Pipelines industry outlook amid the coronavirus pandemic. Importantly, with stable fee-based revenues and secured dividend payments, backed by long-term pipeline contracts, the companies are safe bets for investors.

The stocks that are well placed to deliver solid cash flow are Enbridge Inc (ENB Quick Quote ENB - Free Report), Kinder Morgan, Inc (KMI Quick Quote KMI - Free Report), The Williams Companies, Inc (WMB Quick Quote WMB - Free Report), and DCP Midstream, LP (DCP Quick Quote DCP - Free Report).

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. Moreover, the companies have interests in natural gas distribution utilities and thereby serve millions of retail customers across North America.

What’s Shaping the Future of Oil & Gas - Production and Pipelines Industry?

Stable Fee-Based Revenues: With most pipeline and storage assets being contracted by the shippers for a long term, midstream energy players’ business model has lower exposure to coronavirus-induced commodity price volatility. With long-term contracts in place, the pipeline players are also exposed to low volume risks.

Huge Project Backlog: Midstream energy companies have billions of dollars worth project backlogs that promise additional fee-based revenues once the projects become operational in the coming two to three years.

Dividend Growth: The companies are well placed to increase cashflow and dividend payments in the coming years, backed by huge networks of pipeline and storage assets, and strong project backlogs. The resilience of the companies’ operations to the coronavirus pandemic recently led some midstream energy players’ board of directors to approve dividend hikes. Enbridge Inc. recently announced that its board of directors has approved an increase in quarterly dividend payment. Moreover, Kinder Morgan has revealed the board of directors’ intention to increase annual dividend for 2021 to $1.08 per share. This will mark a hike of 3% from 2020 dividend.

Improving Pipeline Demand: The price of crude oil is improving steadily. This is because the coronavirus vaccine will soon be rolled out in the United States in a massive scale, which can drastically boost fuel demand. Higher oil price will provide incentives to explorers and producers to gradually ramp up upstream activities. This in turn will boost demand for pipeline assets for transporting additional produced volumes of the commodity.

Zacks Industry Rank Indicates Encouraging 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 #66, which places it in the top 26% 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 has lost 16.3% over this period as compared with the 26.1% decline of the broader sector. Notably, the S&P 500 has gained 15% over the same time frame.

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 10.33X, lower than the S&P 500’s 16.33X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 4.99X.

Over the past five years, the industry has traded as high as 18.71X, as low as 8.49X, with a median of 13.46X.

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

4 Oil & Gas Pipeline Stocks Moving Ahead of the Pack

DCP Midstream, LP: The partnership is a leading natural gas processor in the domestic market. With a year-to-date excess free cash flow of $152 million and $1.3 billion in available liquidity, the stock is well suited for any energy investor’s portfolio. The stock, likely to see an earnings growth of 202% in 2021, sports a Zacks Rank #1 (Strong Buy).

Price and Consensus: DCP

Enbridge Inc: The company is a leading North American midstream energy player, having the longest crude oil pipeline network. Enbridge has C$10 billion worth of project backlogs that secure additional fee-based revenues.

In its recent financial guidance update, the midstream energy player mentioned its 2021 distributable cash flow (DCF) projection in the band of C$4.70-C$5.00 per share, reflecting an increase from the company’s 2020 DCF per share expectation at the midpoint of the C$4.50-C$4.80 range. The stock, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 8.3% in 2021.

Price and Consensus: ENB

Kinder Morgan, Inc: 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 #3 Ranked midstream energy giant announced that its projection for distributable cash flow (DCF) in excess of discretionary capital expenditures and dividend payments for 2021 stands at $1.2 billion, reflecting an uptick of more than $700 million from its 2020 guidance. Notably, the company, likely to see earnings growth of 3.9% in 2021, plans to allocate part of this excess coverage for reducing debt burden and repurchasing some shares, as a means of rewarding investors.

Price and Consensus: KMI

The Williams Companies, Inc: In North America, Williams is a leading energy infrastructure company. Being involved in gathering, processing, and transporting natural gas, the company is well-positioned to capitalize on the mounting demand for the commodity in the United States. The Zacks #3 Ranked stock is likely to see earnings growth of 8.1% and 8.5% in 2020 and 2021, respectively.  

Price and Consensus: WMB