2 Energy MLPs Set for Earnings Beat amid Low Oil & Gas Prices - Analyst Blog

2 Energy MLPs Set for Earnings Beat amid Low Oil & Gas Prices

The thriving or suffering of midstream energy players depend on crude oil and natural gas production. The higher the output, the more will be the business related to storage and transportation of oil and gas. And since the prices of these commodities are the impetus to production for upstream energy firms, the fate of a midstream business rests on the market rates of oil and gas.

A thorough understanding of the crude and natural gas pricing environment is warranted for any thesis on oil and gas production pipeline master limited partnerships (MLPs). The same holds true for their bottom-line projections ahead of an earnings season.

Q3 Crude Pricing Environment

During the last two months of third quarter 2014, West Texas Intermediate (WTI) crude traded significantly below the psychological threshold of $100 per barrel. Oversupply of the commodity along with weak global economic data was responsible for the rout. Strong U.S dollar also amplified the supply concern. Let's have a deeper look on the quarter's demand and supply scenario:

Lower Demand: Owing to weak global economic data, the European and Chinese refiners considerably lowered their demand for oil. On top of that, a strong U.S. dollar, following upbeat employment data, added to the concern as Asian and the European importers found crude quite expensive.

Oversupply: While looking at the supply side, we figured that domestic crude oil production was at the highest level since 1987. Crude inventories ballooned to 370 million barrels, thereby created a supply glut. (Read: What's Keeping Oil Prices Below $100 a Barrel? )

Q3 Natural Gas Pricing Scenario

From a peak of about $13.5 per million British thermal units (MMBtu) in 2008, natural gas traded below $4 per MMBtu throughout the entire third quarter, representing a decline of more than 70% over six years. Abundant supply of natural gas owing to shale revolution is primarily responsible for such a low price.

The Shale Revolution: With the advent of hydraulic fracturing (or fracking) - a method used to extract natural gas by blasting underground rock formations with a mixture of water, sand and chemicals - shale gas production is now booming in the U.S. Coupled with sophisticated horizontal drilling equipment that can drill and extract gas from shale formations, the new technology is being hailed as a breakthrough in U.S. energy supplies, playing a key role in boosting domestic natural gas reserves.

A weak third-quarter pricing environment is less likely to have offered explorers an incentive to produce oil or gas. As production is the key determinant of an oil and gas midstream business, an adverse effect is expected to be reflected in their financials for the quarter.

The Way to Pick Right Stocks

Picking the best stocks from the MLPs engaged in midstream operations especially during the unfavourable business scenario is not a simple task. Our proprietary methodology, however, makes the job fairly simple. You could narrow down the list of choices by looking at stocks that have the combination of a favorable Zacks Rank - Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) - and a positive Earnings ESP .

Earnings ESP is our proprietary methodology for determining stocks with the best chance to surprise with their next earnings announcement. It shows the percentage difference between the Most Accurate estimate and the Zacks Consensus Estimate.

Our research shows that for stocks with this combination, the chance of a positive earnings surprise is as high as 70%.

Here are two MLPs that are poised to beat estimates according to our methodology:

Kinder Morgan Energy Partners LP ( KMP ) is the largest independent owner and operator of petroleum product pipelines in the U.S. Its pipelines transport natural gas, refined petroleum products, crude oil, carbon dioxide and other products, while its terminals store petroleum products and chemicals and handle bulk materials such as coal and petroleum coke. It owns or operates more than 28,000 miles of pipeline and approximately 180 terminals.

Kinder Morgan Energy has an Earnings ESP of +1.61% and a Zacks Rank #3. The Zacks Consensus Estimate for the to-be-reported quarter is pegged at 62

cents per unit.

The partnership is set to report its third-quarter results on Oct15.

El Paso Pipeline Partners LP ( EPB ) is the owner and operator of natural gas transportation and storage facilities in the U.S. The partnership's interstate pipeline systems, which spread over roughly 13,000 miles, serve Rocky Mountain region, Midwest region, and the southeastern region.

El Paso Pipeline Partners' third-quarter prospects look bright as it has an earnings ESP of + 7.69% and a Zacks Rank #3. The Zacks Consensus Estimate is 39 cents per unit.

The partnership is expected to report its third-quarter results on Oct15.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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