Slowing inflation is surely bringing some respite to U.S. consumers as they are left with more money to spend. The main reason behind the inflation falling to a two-and-a-half year low is the 8.1 percent drop in gas prices during April. Due to booming domestic unconventional hydrocarbons production, our dependence on foreign oil has decreased massively and oil prices are in no hurry to run up from here. This does not benefit oil producers and distributors as their margins are squeezed. However, buying oil and gas pipeline stocks such as Oiltanking Partners LP (NYSE:OILT), Atlas Pipeline Partners LP (NYSE:APL), and Boardwalk Pipeline Partners LP (NYSE:BWP) is a way to play this decline. These companies largely focus on the volumes they handle. Now it is no secret that low gas prices will prompt people to drive more and undertake coast to coast drives more frequently. This scenario calls for transportation volumes to go up, directly benefiting pipeline companies.
Oiltanking Partners LP (OILT) Offers
Oiltanking Partners LP (NYSE:OILT) offers storage and transportation services to oil companies through its assets located along the U.S. Gulf Coast on the Houston, Texas Ship Channel and in Beaumont, Texas. Over the years, the company has grown its revenues and profits at a steady rate. This trend was visible in the latest quarterly results as well, as it reported revenues of $40.2 million and earnings per share stood at $0.48, both up from prior year quarter’s $34.3 million and $0.4 respectively. Therefore it’s no wonder that net profit margin improved by 3.7 percent to a high of 50.2 percent for the period. This is one of the highest net profit margins in the industry and partially explains why the stock is valued at a relatively high valuation of price equity ratio of 37. At its current market price of $50, the stock offers a dividend yield of 3 percent, although analysts at Raymond James expect the stock to touch $54.
Talk of inflation has been swirling for some time amid all the stimulus that's been pouring into the market and the soaring debt levels in the U.S. The Federal Reserve has said that any inflation that does occur will be temporary, but one hedge fund macro trader says there are plenty of reasons not to Read More
Most Undervalued of the Lot
Investors can find a reasonably priced stock in Atlas Pipeline Partners LP (NYSE:APL), which is another solid play in this space. A flurry of positive earnings in recent quarters has caused the stock to go up nearly 30 percent over the last six months but it still trades at forward price earnings of 16.6 while price by sales and price by book value ratios of 2.2 and 1.7 respectively further highlight its attractiveness. At the same time, it has completed acquisition of Teak Midstream, a private midstream company in the prolific Eagle Ford shale. The acquisition will go a long way in reducing Atlas Pipeline’s commodity sensitivity as nearly 80 percent cash flow of Teak Midstream is in fixed-fee format. The acquisition was largely funded by the proceeds of a recent offering of common shares and convertible preferred units. Atlas Pipeline has a reasonable debt equity ratio of 0.88.
Boardwalk Pipeline Partners LP (NYSE:BWP) is another midstream player with strong fundamentals. The company owns and operates three interstate natural gas pipeline systems. Boardwalk’s price target was recently increased to $31 by Deutsche Bank following strong set of numbers in the first quarter 2013 which saw revenues jumping nearly 5 percent to $328.5 million while profits increased 9.5 percent to $101.4 million. This translates into a net profit margin of 30.9 percent which is pretty solid and shows an improvement over the margin of 29.6 percent in the first quarter of 2012. The stock is currently available at slightly below the $31 mark, at a price equity ratio of 24.3 and offers excellent dividend yield of 6.9 percent. It may not be a good time to buy this stock after the recent run up, but a technical correction can make it attractive.
On the whole, these stocks represent companies with healthy profits and growing revenues. More importantly, all these partnerships offer good dividend yields which are likely to be maintained as profits grow.