3 US Integrated Energy Stocks to Gain Despite Industry Headwinds

The crude pricing environment will likely be weaker this year, which could potentially hurt the exploration and production activities of the integrated energy companies. Moreover, the expected slowdown of crude production growth is expected to limit earnings from upstream operations. On top of that, increasing renewables demand will further make the outlook of the Zacks Oil & Gas US Integrated industry gloomy.

However, ConocoPhillips COP, Occidental OXY and National Fuel Gas Company NFG are the energy companies that could sail through the challenging business scenario.

About the Industry

The Zacks Oil & Gas US Integrated industry comprises companies primarily involved in upstream and midstream energy businesses. The upstream operations involve oil and natural gas exploration and production in the prolific shale plays of the United States. The integrated energy companies are also engaged in midstream businesses through gathering and processing facilities, along with transportation pipeline networks and storage sites. Overall, the upstream business is positively correlated to oil and gas prices. The produced commodity volumes are transported through midstream assets, generating stable fee-based revenues. The integrated energy players in the United States also have access to downstream operations wherein the transported oil volumes are converted to finished products, comprising gasoline, natural gas liquids and diesel, through refining activities.

3 Trends Shaping the Future of the Industry

EIA Expects Oil Price to be Weaker:  The U.S. Energy Information Administration (“EIA”), in its latest short-term energy outlook, stated that the spot average price of West Texas Intermediate crude will be $64.16 per barrel this year, lower than the $76.60 per barrel recorded last year. EIA stated that rising worldwide oil inventory will hurt the commodity price. Lower oil price, thus, is unfavorable for the exploration and production activities of integrated energy players.

Production Growth Slowdown: Lower oil prices will likely hurt production growth. Also, energy companies in the United States are focusing more on returning capital to shareholders rather than allocating additional funds to production, which is in line with the investors’ demands. This is hurting the integrated companies’ top lines.

Increasing Focus on Renewables: The world is gradually shifting to cleaner fuel and renewable energy to combat climate change. Thus, with solar and wind energy gaining prominence, demand for fossil fuels and petroleum products is likely to decline gradually, although the timeline is uncertain. The trend is not favorable for integrated players’ upstream and downstream operations.

Zacks Industry Rank Indicates Bearish Outlook

The Zacks Oil & Gas US Integrated industry is a 13-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #173, which places it in the bottom 30% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates gloomy near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Lags S&P 500 & Sector

The Zacks Oil & Gas US Integrated industry has underperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.

The industry has declined 5% over this period compared with the broader sector’s gain of 9% and the S&P 500’s surge of 19.9%.

One-Year Price Performance

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.

Based on the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 4.64X, lower than the S&P 500’s 18.47X. It is also lower than the sector’s trailing 12-month EV/EBITDA of 5.15X.

Over the past five years, the industry has traded as high as 13.64X and as low as 3.05X, with a median of 4.64X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio

3 US Integrated Oil Stocks to Keep a Close Eye on

ConocoPhillips

With operations in resources with low breakeven costs, ConocoPhillips is likely to sail through the expected lower oil prices. COP has operations in the Lower 48, which comprise Permian, the most prolific basin in the United States. Other low-cost shale plays in the Lower 48 include Bakken and Eagle Ford. Thus, it is expected that upstream operations will be profitable for COP, carrying a Zacks Rank #3 (Hold), even if the oil price remains lower than the prior year.

Price and Consensus: COP

Occidental

In the United States, Occidental, with a Zacks Rank of 3, is among the key producers of oil and natural gas. Despite a weaker crude pricing environment this year compared to 2024, OXY generated more cash flows from operations in the first half, thanks to its efficient operations and cost control measures.

Price and Consensus: OXY

National Fuel Gas

National Fuel Gas is well poised to navigate the uncertain business environment, owing to its integrated business model, encompassing upstream, midstream and downstream activities. The #3 Ranked NFG is well-positioned to capitalize on clean energy demand, thanks to its presence in the natural gas-rich Appalachian basin. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: NFG

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ConocoPhillips (COP): Free Stock Analysis Report
 
Occidental Petroleum Corporation (OXY): Free Stock Analysis Report
 
National Fuel Gas Company (NFG): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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