What happened
November was a big month for most oil stocks. Crude prices rebounded sharply, rallying from $35 a barrel to $45 a barrel in the U.S., thanks to a string of positive data on coronavirus vaccine candidates. That news gave investors confidence that we're nearing the end of the COVID-19 pandemic, suggesting 2021 should be a much better year for the economy and oil demand.
Among the many beneficiaries of last month's oil market rally were pipeline companies. Several notable ones gained more than 15%, according to data provided by S&P Global Market Intelligence, including Enterprise Products Partners (EPD -1.86%), ONEOK (OKE -1.08%), and Magellan Midstream Partners (MMP).
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So what
The COVID-19 outbreak, and the subsequent downturn in the oil market, has had some impact on all three pipeline operators. It caused fewer volumes to flow through their various midstream systems. While the companies had contracts to cushion the blow, each now expects their cash flow to fall below initial expectations for this year. That led them to make several changes to shore up their financial situations.
For example, Enterprise Products Partners ended its streak of increasing its distribution each quarter and cut capital spending, including canceling an oil pipeline project. Meanwhile, Magellan Midstream also pressed pause on distribution growth, though it maintained its spending plan since it was already near the tail end of its expansion program. Finally, ONEOK maintained its payout while quickly suspending construction on several expansion projects sanctioned at the beginning of the year.
Those moves enabled these pipeline companies to weather the uncertainty and volatility in the oil market. It also allowed them to focus on shoring up their financial profiles to prevent doing any damage to their balance sheets. As a result, all three are in a stronger position now that oil market conditions are starting to rebound.
That improvement seems likely to continue in the coming quarters, thanks to the positive data on vaccines. As countries roll them out to their populations, it should enable them to ease travel restrictions, fueling more oil demand. That should boost the volumes flowing through midstream systems and the cash flows produced by these pipeline companies. That's evident in the outlook pipeline companies issued in recent weeks. For example, ONEOK noted on its third-quarter call that "we expect to achieve double-digit earnings growth in 2021 compared with our new and updated 2020 outlook."
As things currently stand, all three pipeline companies are on track to produce enough funds to cover their high-yielding distributions and capital spending with room to spare in 2021. That will allow them to further shore up their balance sheets and could enable some to return more cash to investors in the coming year.
Now what
After a brutal year, there's a light at the end of the tunnel. It seems like better days are ahead for pipeline companies. That suggests their dividends, which boast yields ranging from 8.6% at Enterprise Products Partners to 9.2% at ONEOK and Magellan Midstream, should survive. As a result, income investors can pick up some generous income streams with upside potential if the oil market continues rebounding.
