Oil prices are highly favorable for exploration and production operations, paving the way for further rig additions to shale plays. Having a strong presence in upstream, midstream and downstream operations, the integrated energy company’s businesses are diversified and, therefore, relatively less volatile. Thus, Zacks Oil and Gas Integrated International’s industry outlook is bright.
Most of the players in the industry are also at the forefront of energy transitions. They allocate more money for renewables, thereby generating additional cashflows. Exxon Mobil Corporation XOM,Chevron Corporation CVX, Shell plc SHEL and BP plc BP is well positioned to take advantage of the generally favorable business environment.
About the Industry
The Zacks Oil and Gas Integrated International industry covers companies primarily involved in upstream, midstream and downstream operations. These companies have upstream businesses in the United States (including prolific shale plays and deepwater Gulf of Mexico), Asia, South America, Africa, Australia and Europe. Energy companies’ midstream operations require the transportation of oil, natural gas liquids and petroleum products. Under downstream businesses, companies buy crude oil to produce refined petroleum products. The companies’ downstream activities include chemical businesses that produce raw materials for the manufacture of plastics. Aggregate players are increasingly focusing on renewables, leading to an energy transition. Companies aim to lower emissions from operations and reduce the carbon intensity of products sold.
4 Trends Shaping the Future of the Oil & Gas Integrated International Industry
Oil Prices Are Healthy: Oil prices are currently trading above the $85-per-barrel mark, supported by positive events such as a weak dollar and record US crude exports. Thus, a favorable commodity pricing scenario will continue to help the upstream business of international integrated energy players.
Strong Midstream Demand: With upstream energy companies likely to add more rigs, oil and gas production is expected to increase further. This is likely to boost demand for pipeline and storage assets as more goods will need to be transported and stored. The midstream business has lower exposure to commodity price volatility because shippers typically book pipeline assets for the long term, thereby generating stable fee-based revenues.
Business Diversification: International integrated energy companies are gradually investing in the renewable business. Thus, by diversifying operations, companies can capitalize on the increasing demand for cleaner energy.
Strong Refinement Basics: A significant recovery in demand for end products amid global refining capacity shortages makes the prospects of the refining business bright. Thus, integrated players belonging to the industry are likely to generate good cashflows from refining operations.
The Zacks Industry Rank indicates an Encouraging Outlook
The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil – Energy sector. It holds a Zacks Industry Rank #57, placing it in the top 23% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is generally the average of the Zacks Ranks of all member stocks, indicates impressive near-term prospects. Our research shows that the top 50% of Zacks Rank industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of Zacks-ranked industries is the result of a positive earnings outlook for the companies as a whole. Before we present some international integrated energy stocks that you may want to consider or keep an eye on, let’s take a look at the industry’s recent stock market performance and current valuation.
The Industry outperforms the Sector and the S&P 500
The Zacks Oil and Gas Integrated International industry has outperformed the broader Zacks Oil – Energy sector and the Zacks S&P 500 composite over the past year.
The industry gained 36.7% during this period compared to the S&P 500’s decline of 17.2% and the broader sector’s growth of 23.6%.
One Year Price Performance
Current Industry Valuation
Since oil and gas companies are loaded with debt, it makes sense to value them based on the Enterprise Value/Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA) ratio. This is because the assessment scale takes into account not only the equity but also the level of debt.
On a trailing-12-month EV/EBITDA basis, the industry currently trades at 3.48X, lower than the S&P 500’s 11.84X. This is also lower than the sector’s trailing-12-month EV/EBITDA of 3.61X.
Over the past five years, the industry has traded as high as 7.47X, as low as 2.76X, with a median of 4.96X.
Trailing 12-Month EV/EBITDA Ratio
4 Aggregate International Stocks Ahead of the Pack
BP: The British energy giant is getting good profits from refining and marketing operations, thanks to a recovery in demand. On the dividend front, the company expects that if oil prices trade around $60 a barrel, it will raise its dividend per ordinary share by about 4% annually through 2025. Investors applauded BP because it also expects to reward shareholders with stock buybacks. The company, which currently holds a Zacks Rank #3 (Hold), is also committed to reducing its net debt load.
Price and Consensus: BP
Chevron: Chevron is also a leading integrated energy player with operations around the world. Apart from a strong balance sheet, it has a strong capital discipline that will help offset volatile commodity prices. The energy major’s conservative capital spending is likely to help the company generate significant cash flow, even in an unstable business scenario. The main driver of growth for Chevron, at least in the near term, is low-cost Permian projects. The #3 Rank stock has seen changes in earnings estimates for 2022 over the past seven days.
Price and Consensus: CVX
shells: As the leading player in liquefied natural gas globally, Shell’s business prospects look bright. On the energy transition front, it plays an important role, setting an ambitious goal of becoming a net-zero-emissions energy business by 2050 or before. For 2022, SHEL, which has a Zacks Rank #2 (Buy), is likely to see earnings growth of 118.6%. You see the complete list of Zacks #1 Rank (Strong Buy) stocks today here.
Price and Agreement: SHEL
ExxonMobil: ExxonMobil is among the largest integrated energy companies in the world. The main energy can rely on its strong balance to withstand any business turbulence. ExxonMobil is banking on low-cost project pipelines centered around the Permian — the most prolific basin in the United States — and Guyana’s offshore resources. The stock, which currently has a Zacks Rank of 2, has seen upward estimate changes for 2022 earnings over the past seven days.
Price and Agreement: XOM
Want the latest recommendations from Zacks Investment Research? Now, you can download 7 Best Stocks for Next 30 Days. Click to get this free report
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
BP plc (BP) : Free Stock Analysis Report
Chevron Corporation (CVX) : Free Stock Analysis Report
Shell PLC Unsponsored ADR (SHEL) : Free Stock Analysis Report
To read this article on Zacks.com click here.
Zacks Investment Research