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Inflation Protection From Oil and Gas Infrastructure

Hard assets can be a great hedge against rising prices

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Mar 24, 2022
Summary
  • Infrastructure assets can hedge against rising prices.
  • Oil and gas assets should benefit from rising demand.
  • The dual tailwinds make the sector the perfect value hunting ground.
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Unfortunately, there is no sure-fire way to protect against the scourge of inflation.

As investors, all we can try and do is protect ourselves the best we can against this troubling economic headwind.

One of the best ways of protecting ourselves against this headwind is to invest in our personal careers. The best way to overcome inflationary forces is to increase earnings power, which has nothing to do with investing.

But there are some ways to protect against inflation pressures in one's portfolio.

Tangible assets

One of the best ways is to invest in hard and tangible assets such as infrastructure. Infrastructure assets tend to provide a gate hedge against inflation for two reasons.

First of all, contracts tied to these assets tend to have annual inflation uplift. This means income on the assets will increase in line with inflation, which is not necessarily guaranteed in other industries.

The second reason hard and infrastructure assets tend to be good inflation hedges is that as prices rise, the cost of replacing these assets will also increase. Therefore, the book value or replacement value of the asset will provide a hedge against inflation. It won't be a perfect hedge, but it will provide some sort of protection.

Considering these factors, I have been looking for value in the infrastructure sector recently. Specifically, I have been focusing on the oil and gas infrastructure sector in light of the current energy crisis.

Rising prices should ultimately lead to more production, which would provide a double tailwind for infrastructure operators such as pipelines, which would benefit from both increased revenue from existing and new contracts.

Oil and gas infrastructure value

One company in the space that could be a way to play this theme is PBF Logistics LP (

PBFX, Financial). This company was formed by the refiner PBF Energy. It owns and leases crude oil and refined petroleum products terminals, pipelines, storage facilities and similar logistics assets.

At the time of writing, the stock was trading with a 17% distribution yield. It was also trading at a price-earnings ratio of 5.9.

As the company has reinvested its profits back into growth over the past six years, book value per share has risen from 50 cents to $4. It is trading at 3.5 times book value, which looks expensive, but book value growth offsets that premium in my view. The stock is trading at an enterprise value/Ebitda ratio of 6.2 and a price-to-free cash flow ratio of 4.8.

Energy Transfer LP (

ET, Financial) could be another option. At the time of writing, this stock was trading with a price-earnings ratio of 5.5, a distribution yield of 6.1%, a price-to-free cash flow ratio of 3.7 and EV/Ebitda ratio of 7.6. I think all of these numbers look cheap.

The company's operations include natural gas midstream and intrastate transportation and storage and marketing activities. The company's net asset base has expanded at a compound annual rate of 7.5% per annum since 2016.

Dorian LPG Ltd. (

LPG, Financial) is engaged in liquefied petroleum gas transportation. The group owns and operates very large gas carriers in the LPG shipping industry. Usually, I would stay away from shipping companies. However, considering the growing demand for LPG and liquefied natural gas around the world, I think this could be a growth industry. The stock is selling at a price-earnings ratio of 0.6, a price-to-free cash flow ratio of 3.7 and a EV/Ebitda ratio of 6.

All of these companies appear cheap compared to the value of their assets today, exposure to key growth trends and as inflation hedges. That said, this is not an exhaustive analysis of these companies; it is only a starting point for further research.

Disclosures

I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours. Click for the complete disclosure
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