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About the Industry
The Zacks Oil and Gas - US E&P industry consists of companies primarily based in the domestic market, focused on the exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate, etc. The economics of oil and gas supply and demand are the fundamental drivers of this industry. In particular, a producer’s cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies' results are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns, causing them to alter their production growth rates. The E&P operators are also exposed to exploration risks where drilling results are comparatively uncertain.
4 Key Trends to Watch in the Oil and Gas - US E&P Industry
Less Tension Means Lower Oil Prices: Recent global events are also adversely impacting oil prices. We have seen signs of easing tensions, like talks between Israel and Iran and less aggressive talk about U.S. sanctions. These developments have pulled oil prices lower because they reduce the "war premium" – that extra cost built into oil prices due to fears of conflict disrupting supplies. While tensions certainly haven't disappeared completely, the market is starting to focus more on the basic facts of supply and demand, which are currently pointing to lower prices. With WTI crude trading around $65, oil companies that drill for oil are feeling the pressure. This is especially true for those who need higher prices to make new investments worthwhile. If global political risks continue to calm down, oil prices could fall even further, even without any sudden drops in demand.
A Long-Term Foundation for Oil Prices: OPEC, a major group of oil-producing countries, sees a bright future for oil demand. They believe that by 2050, the world will need a whopping 123 million barrels of oil every single day! The cartel points to a growing global population, rising incomes in developing countries (which means more people buying cars and consuming energy), and the increasing use of oil in making plastics and other chemicals. This optimistic outlook suggests that a massive $18.2 trillion needs to be invested in oil and gas to meet this future demand. OPEC firmly states that oil demand will not "peak," meaning it won't hit a high point and then start declining. This view suggests that oil prices might have a steady "floor" of around $65-$70 per barrel.
Storage Surplus and Output Growth Could Cap Natural Gas Gains: Even though natural gas prices have recently gotten a boost, thanks to hot weather and a rise in natural gas exports, there is a big hurdle ahead. The U.S. is currently producing a lot of gas, hitting a record in July. This production is actually growing faster than what we need. With gas storage tanks already holding 6% more gas than the average for this time of year, prices might not climb much higher. Unless we see a steady, strong increase in exports, this imbalance between too much supply and slowing demand could keep prices in check as we head into late summer.
Electric Cars and Green Policies Taking Hold: The IEA forecasts a major slowdown in how fast global oil demand grows after 2026. This is driven by several factors: more and more people are buying EVs, freight trucks are increasingly running on cleaner fuels like LNG, and the power industry is moving away from fossil fuels. Because of these shifts, the IEA believes that overall oil demand could hit its highest point (peak) as early as 2030. For oil prices, this creates a lot of uncertainty in the long run. As the demand for gasoline and diesel either stops growing or even shrinks, especially in wealthier countries, investors might start to question whether it's wise to fund new, long-term oil projects. This fundamental shift makes oil companies that rely on high prices and constant growth particularly vulnerable to losing investor interest.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas - US E&P industry is a 35-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #186, which places it in the bottom 24% of 245 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates challenging near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group’s earnings growth potential. As a matter of fact, the industry’s earnings estimates for 2025 have gone down 41.6% in the past year.
Despite the dull near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms S&P 500 & Sector
The Zacks Oil and Gas - US E&P industry has fared worse than the Zacks S&P 500 composite and the broader Zacks Oil – Energy sector over the past year.
The industry has moved down 20.3% over this period compared with the broader sector’s decrease of 2%. Meanwhile, the S&P 500 has gained 12.1%.
Industry's Current Valuation
Since oil and gas companies are debt-laden, it makes sense to value them based on the EV/EBITDA (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) ratio. This is because the valuation metric takes into account not just equity but also the level of debt. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of noncash expenses.
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 11.28X, significantly lower than the S&P 500’s 17.71X. It is, however, well above the sector’s trailing 12-month EV/EBITDA of 4.86X.
Over the past five years, the industry has traded as high as 15.45X, as low as 3.56X, with a median of 6.08X.
4 Stocks to Consider
W&T Offshore: Headquartered in Houston, TX, W&T Offshore is a leading oil and natural gas explorer with operations primarily focused on resources located off the coast of the Gulf of America. This has enabled the company to develop significant technical expertise in the major prolific oceanic rift basin. WTI’s assets offer low decline rates, strong permeability and significant untapped reserves. The Zacks Rank #2 (Buy) firm, which has generated positive cash flows for 28 consecutive quarters, is focused on strategically allocating capital toward organic projects, thereby boosting its production outlook.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
W&T Offshore has a market capitalization of nearly $270 million. The company beat the Zacks Consensus Estimate for earnings in two of the last three quarters, met it once and missed in the other. WTI carries a Value Score of B.
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This article originally published on Zacks Investment Research (zacks.com).
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