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About the Industry
The Zacks Oil & Gas US Integrated industry comprises companies primarily involved in upstream and midstream energy businesses. The upstream operations entail 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
Soft Oil Price to Hurt Integrated Players: Increasing inventories across the world are hurting the price of crude oil. In its latest short-term energy outlook, the U.S Energy Information Administration projects the West Texas Intermediate spot average price for this year at $62.33 per barrel, suggesting a plunge from $76.60 in the prior year. A softer crude pricing environment will likely hurt the upstream business of the integrated companies.
Slowdown in Production Growth to Hurt Upstream Business: There has been a slowdown in oil production growth in the upstream business of integrated energy companies in the United States due to shareholder demands for a greater focus on returning capital rather than investing in production expansion. As production growth slows, output decreases, which can lead to reduced revenues. Since upstream operations depend heavily on volume to generate income, any stagnation in production growth has a direct and negative impact on their bottom line.
Growing Demand for Renewables a Concern: Governments, investors and stakeholders are placing growing emphasis on addressing climate change, leading to an increased demand for renewable energy. Consequently, the demand for products reliant on oil, natural gas and natural gas liquids is expected to decline, with solar and wind energy gaining prominence in the energy landscape. The integrated energy firms are adversely impacted by these trends as they are primarily engaged in the production and transportation of fossil fuels, such as oil, and selling refined petroleum products.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil & Gas US Integrated industry is a 15-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #204, which places it in the bottom 17% 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 plunged 12.9% over this period compared with the broader sector’s marginal gain of 0.3% and the S&P 500’s surge of 12.9%.
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 4.79X, lower than the S&P 500’s 17.49X. It is, however, marginally higher than the sector’s trailing 12-month EV/EBITDA of 4.78X.
Over the past five years, the industry has traded as high as 14.40X and as low as 3.36X, with a median of 5.10X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 US Integrated Oil Stocks to Keep a Close Eye on
ConocoPhillips
COP has achieved a promising production outlook by leveraging its extensive drilling inventory and diversified upstream assets. Compared to composite stocks belonging to the industry, the leading upstream energy company has considerably lower exposure to debt capital. This reflects that the company, currently carrying a Zacks Rank #3 (Hold), is better positioned to rely on its strong balance sheet to withstand any adverse business scenario.
Price and Consensus: COP
Occidental Petroleum
Occidental Petroleum, with a Zacks Rank of 3, is a leading energy company with a significant footprint in prolific shale plays in the United States, comprising the Permian and DJ basins, and offshore Gulf of America. OXY’s reserve replacement in 2024 was 230%, meaning the company added more oil and natural gas than it utilized last year.
Price and Consensus: OXY
National Fuel Gas
National Fuel Gas is not only involved in developing its huge core resources in the prolific Marcellus and Utica shale plays but also in the expansion of its pipeline networks. NFG also has a huge utility customer base. With a solid track record of dividend payments for as long as 123 years, #3 Ranked National Fuel Gas is highly committed to returning capital to shareholders. You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: NFG
Epsilon Energy
Being an on-shore independent natural gas and oil company, Epsilon Energy is well placed to capitalize on the mounting clean energy demand. Its upstream operations are spread across the prolific Marcellus Shale and Permian basin. Having a 35% interest in the Auburn Gas Gathering System, EPSN generates stable cash flows. The company, with a Zacks Rank of 3, is debt-free and has $45 million available on its undrawn revolving credit facility.
Price and Consensus: EPSN
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
This article originally published on Zacks Investment Research (zacks.com).
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