![]() ![]() This will not only affect refining profitability but also result in increased price volatility. In particular, with new travel restrictions across Europe and the United States, the already dire jet fuel (a derivative of distillates) market is unlikely to rebound anytime soon. Further, the reimposition of government measures to fight the spread of the pandemic’s second wave could cause another consumption slowdown. Therefore, fuel margins (or crack spreads) remain depressed. Energy Department's latest inventory release, gasoline and distillate inventories are 3% and 17% above their respective five-year averages for this time of year, signaling plenty of oil products available in the market. Virus Resurgence Hampers Demand Recovery: Per the U.S. Adjusting costs with reduced business activity, the partnerships have concentrated on the generation of free cash flow (post distribution payment) to lower debt and strengthen their financial position. Meanwhile, as a response to the energy downturn, a number of these entities have been highly effective in managing their cash outflows. Further, their relatively steady coverage and improving oil price visibility should represent a more predictable midstream payout scenario in the near future. The major refining and marketing midstream players - being largely insulated to fluctuations in commodity prices - have managed to maintain their distribution levels thus far. Though some of the production shut-ins have returned in response to gradually tightening fundamentals, the rapidly rising new coronavirus cases around the world - leading to reimposition of lockdowns - mean a renewed threat to oil demand and midstream volumes.ĭistributions Remain Reasonably Safe: Investors are typically attracted to the MLPs thanks to their reliable distributions and defensive characteristics. With exploration and production operators pulling back activities and curtailing production in response to sharply lower commodity pricing and demand, the MLPs are facing volume contraction through their facilities, contributing to lower profits. ![]() Lower Volumes Flowing Through Pipelines: While MLPs (or the energy infrastructure providers, also called the midstream group) have a lower correlation to oil and gas prices compared to their other energy peers, this sector hasn’t been immune to the coronavirus-induced downturn. Even within fee-based contracts, a significant portion is of a take-or-pay type, meaning that the MLPs get paid irrespective of the volume of commodities that get transported. In the longer term, these agreements result in steady cash flow through the boom and bust cycle. The assets that these partnerships own - oil and natural gas pipelines and storage facilities - typically bring in stable fee-based revenues under long-term contracts and have limited, if any, direct commodity-price exposure. Pipeline Stocks Provide a Defensive Option: Considering the uncertainty in oil right now, a safer way of playing the sector would be to utilize MLPs, which offer considerable returns at a significantly lower risk. ![]() 4 Trends Defining the Oil and Gas - Refining & Marketing MLP Industry’s Future They are involved in selling refined products (including heating oil, gasoline, residual oil, jet fuel etc.) and a plethora of non-energy materials (like asphalt, road salt, clay and gypsum). These firms operate refined products' terminals, storage facilities and transportation services. The Zacks Oil and Gas - Refining & Marketing MLP industry is a sub-sector of this business model. The assets that these partnerships own are typically oil and natural gas pipelines and storage facilities. Importantly, these hybrid entities bring together the tax benefits of a limited partnership with the liquidity of publicly traded securities. Master limited partnerships (or MLPs) differ from regular stocks since interests in them are referred to as units, and unitholders (not shareholders) are partners in the business. (SPH) and CrossAmerica Partners LP (CAPL) are expected to benefit. With the commodity markets now showing signs of stability and volumes through pipelines slowly rising back, industry players like Western Midstream Partners, LP: (WES), Sunoco LP (SUN), Suburban Propane Partners, L.P. While coronavirus-related uncertainty and concerns continue to weigh on the Zacks Oil and Gas - Refining & Marketing MLP industry, the defensive nature of the space and its fee-based business model has held up relatively well even in a falling price environment. ![]()
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