Oil and gas pipeline operators have billions of dollars in critical capital projects that can generate incremental cash flow. Additionally, growing clean energy demand from data centers is brightening the outlook for natural gas transportation companies, strengthening the outlook for the Zacks Oil & Gas – Production and Pipeline industry.
Companies in this industry also benefit from stable fee income, as most contracts are long-term. Key players in the industry include Enbridge Environment Agency,Kinder Morgan KMI and williams & co. World Meteorological Service.
About the industry
The Zacks Oil & Gas – Production & Pipelines industry consists of companies that own and operate midstream energy infrastructure assets. These assets include an extensive network of pipelines transporting crude oil, liquids and natural gas. Midstream energy companies are also involved in the processing and storage of natural gas. These companies are interested in natural gas distribution utilities that serve millions of retail customers in North America. Some companies are increasing investments in renewable energy and transmission operations. These companies invest in wind farms, solar operations, geothermal projects and hydroelectric facilities. Therefore, with a diversified portfolio of renewable energy projects, the company has scope to generate additional cash flow, in addition to stable toll revenue from transportation assets.
What is shaping the future of the oil and gas – production and pipeline industry?
Stable cash flow generation: Midstream assets are typically booked by shippers for the long term, generating stable cash flow. Long-term contracts are mostly take-or-pay contracts, meaning the shipper must pay a minimum amount even if the midstream asset is not used. As a result, cash flow generation is highly predictable, suggesting the business model is less susceptible to oil and gas price fluctuations.
Growing demands on data centers: The industry’s natural gas transportation companies are well-positioned to benefit from growing demand for clean energy from data centers. That’s because midstream companies can use their pipeline networks to transport natural gas to gas-fired power plants to power data centers.
Growth Capital Pipeline: Companies in the industry are expected to generate incremental cash flow from billions of dollars of critical capital projects that are already online or about to come online.
The Zacks Industry Rank Suggests a Bright Future
Zacks Oil & Gas – Production & Pipelines is a 10-stock group within the broader Zacks Oil – Energy industry. This industry currently has a Zacks Industry Rank of #87, putting it in the top 36% of more than 250 Zacks industries.
This group’s Zacks Industry Rank is the average of the Zacks Ranks of all member stocks, indicating favorable near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% of the Zacks-ranked industries by a factor of more than 2 to 1.
With the outlook still positive, we’ve come up with some stocks that investors can keep or keep an eye on because of their solid potential. But before that, let’s take a look at the industry’s recent stock market performance and current valuation.
The Zacks Oil & Gas – Production & Pipelines industry has outperformed the Zacks S&P 500 Composite Index but has lagged the broader Zacks Oil – Energy industry over the past year.
The industry has gained 22.2% during that time, while the S&P 500 has gained 20.6% and the overall industry has gained 31.9%.
One year cost performance
Current valuation of the industry
Based on trailing 12-month enterprise value to EBITDA (EV/EBITDA), a common multiple used to value oil and gas production and pipeline inventories, the industry currently trades at 14.66x, below the S&P 500’s 17.91x. However, it is higher than the industry’s trailing 12-month EV/EBITDA of 6.45x.
Over the past five years, this industry has traded at a high of 14.85x, a low of 11.19x, and a median of 12.87x.
Trailing 12-month enterprise value to EBITDA (EV/EBITDA) ratio
3 oil and gas pipeline stocks poised for gains
Kinder Morgan: The company is a North American midstream energy giant with stable fee income. Global demand for liquefied natural gas (LNG) continues to grow, and KMI has strong growth potential. That’s because Kinder Morgan, a Zacks Rank #3 (Hold), is responsible for transporting nearly 40% of the natural gas supplied to U.S. LNG export facilities.
Price & Consensus: KMI
Enbridge: The midstream giant’s business model is very insensitive to oil and gas price fluctuations, making its cash flow generation highly predictable. ENB, which has a Zacks Rank 3, says a significant portion of its core business revenue comes from long-term contracts with guaranteed minimum payments or a midstream network with regulated cash flow.
Unlike upstream energy companies, Enbridge’s business is largely insulated from price fluctuations. As a result, cash flows from ENB’s midstream activities are highly predictable.
Price and Consensus: ENB
williams & co.: The company is also a leading midstream player well-positioned to capitalize on growing demand for clean energy. This is because WMB owns a vast natural gas transportation pipeline network and transports approximately 33% of the total natural gas in the United States.
Williams Companies, which currently has a Zacks Rank of 3, also serves the growing power needs of expanding data centers. you can see The complete list of today’s Zacks #1 Rank (Strong Buy) stocks is here.
Price & Consensus: WMB
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