The oil and gas market has experienced a turbulent period over the last six months. Oil prices have plunged despite continuous production cuts by OPEC. At the time of writing, Brent Crude oil traded at about $37 per barrel while the U.S. Light Crude oil price oscillated around $35.
The decline in oil prices affects all players in the supply chain, and midstream companies have not been spared. Some of them are trading at incredible valuation multiples, which make them interesting from a value perspective. However, it is also good to note that low prices can be perilous value traps, which investors need to be aware of.
Here are three midstream oil stocks that could be relatively undervalued or potential value traps.
Magellan Midstream Partners
Shares of Tulsa, Oklahoma-based Magellan Midstream Partners LP (MMP, Financial) are down more than 43% this year. The company announced its most recent quarterly results on Friday before the market opened, topping analysts' earnings and revenue projections.
There was no significant movement in the stock after the earnings announcement.
Shares of the company now trade at a trailing price-earnings ratio of 8.27, which technically undervalued the stock based on the Peter Lynch earnings line.
However, with a forward 12-month price-earnings ratio of 8.31, the stock could be overvalued. When we factor in the expected earnings growth for the next five years, the company's PEG ratio of more than 1,150 suggests that this could be a value trap. The company's top line and bottom line decreased in the most recent quarter compared to the same period a year ago.
Phillips 66 Partners
Shares of Phillip 66 Partners L.P. (PSXP, Financial) trade at an incredible trailing price-earnings ratio of 5.07. The company's stock is down more than 60% this year following Friday's post-earnings slide of 3.85%. This implies that Phillip 66 Partners could be massively undervalued based on the Peter Lynch earnings line.
The company's third-quarter loss of 1 cent per share was better than the expected loss of 79 cents per share. However, the top line of $16.3 billion missed expectations of $17.2 billion. The company's forward price-earnings ratio of 6.42 indicates the stock could be overvalued in the short term. The PEG ratio of 2.68 suggests that it might not be a value trap. However, the upside potential based on its current trailing price-earnings ratio could be massively overstated.
Shell Midstream Partners
Shares of Shell Midstream Partners L.P. (SHLX, Financial) fell more than 5% on Friday following the announcement of its most recent quarterly results. The company's market value is now down nearly 60% this year after a sustained period of decline.
In the unaudited third-quarter results released on Friday morning, Shell Midstream posted net income attributable to partners of $135 million, down from $141 million reported in the same period a year ago.
The company's current price per share values the stock at 5.97 in the price-earnings ratio, which again suggests a potential case of undervaluation. Its forward price-earnings ratio of 5.38 indicates that the stock could be modestly undervalued in the short term.
Disclosure: No positions in the stocks mentioned.
Read more here:
- Digital Turbine: When Does the Correction End?
- Alphabet and Facebook Beat Expectations
- Alliance Data Systems Shares Surge on Impressive Results
Not a Premium Member of GuruFocus? Sign up for a free 7-day trial here.