The Zacks Oil and Gas – Refining & Marketing MLP industry faces notable challenges as gasoline demand continues its downward trajectory, falling around 5% nationally in Q3 2024. With fuel efficiency improvements, rising EV adoption, and changing consumer habits, retail fuel sales remain stagnant, pressuring long-term growth. At the same time, rising interest rates are increasing debt costs, making expansion and shareholder returns more difficult. Higher borrowing expenses could limit investment in infrastructure and acquisitions, slowing overall industry momentum. However, not all MLPs are equally affected. Companies with stable, fee-based revenue models, like Targa Resources TRGP, Global Partners LP GLP, and CrossAmerica Partners LP CAPL remain well-positioned. Their diversified operations, long-term contracts and infrastructure assets provide resilience against market volatility.
Industry Overview
Master limited partnerships (or MLPs) differ from regular stocks since interests in them are referred to as units, and unitholders (not shareholders) are partners in the business. Importantly, these low-risk hybrid entities bring together the tax benefits of a limited partnership with the liquidity of publicly traded securities that earn a stable income. The assets owned by these partnerships are typically oil and natural gas pipelines and storage/infrastructure facilities. The Zacks Oil and Gas – Refining & Marketing MLP industry is a sub-sector of this business model. These firms operate refined product terminals, storage facilities and transportation services. They are involved in selling refined petroleum products (including heating oil, gasoline, residual oil, jet fuel, etc.) and a plethora of non-energy materials (like asphalt, road salt, clay and gypsum).
3 Trends Defining Oil and Gas – Refining & Marketing MLP Industry’s Future
Declining Fuel Demand Poses a Long-Term Challenge: The fuel industry is grappling with a continued decline in gasoline demand, which dropped roughly 5% nationally in Q3 2024. This trend, driven by higher fuel efficiency, electric vehicle adoption, and shifting consumer habits, threatens long-term growth for fuel retailers. Even same-store retail volume has remained essentially flat, highlighting the struggle to maintain sales in a weakening demand environment.
Steady Income Amid Oil Market Uncertainty: In an unpredictable oil market, Master Limited Partnerships (MLPs) offer a reliable investment avenue. Specializing in pipelines and storage infrastructure, MLPs generate stable, fee-based revenue through long-term contracts. Their cash flows remain resilient, as many agreements follow a take-or-pay structure, ensuring income even when transportation volumes drop. With limited exposure to commodity price fluctuations and attractive dividend payouts, MLPs present a lower-risk option for investors seeking steady returns.
Interest Rate Pressures and Higher Debt Costs: Rising interest rates are making debt more expensive, impacting companies with high capital expenditure needs like the ‘Oil and Gas – Refining & Marketing MLP’ operators. As borrowing costs rise, profitability could be squeezed, limiting the ability to fund growth initiatives or shareholder returns. Additionally, if capital markets tighten, securing financing for future projects could become more expensive, potentially slowing growth and impacting shareholder returns.
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