Can These 3 U.S. Integrated Energy Stocks Overcome Industry Headwinds?

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 with 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

Higher Crude Prices Raise Feedstock Costs:  West Texas Intermediate (WTI) crude is trading at more than $85 per barrel, according to data from oilprice.com, owing to the ongoing tensions in the Middle East. Also, in its latest short-term energy outlook, the U.S. Energy Information Administration mentioned its expectation for the WTI oil price this year at $80.88 per barrel, higher than $65.40 last year. The high crude pricing environment is hurting the refining business of the integrated energy players as the input costs to produce final products like gasoline have increased drastically.

Slowdown in Production Growth: Energy companies in the United States are increasingly focusing on returning capital to shareholders rather than allocating additional funds to production, which aligns with investors’ demands. This conservative capital spending is slowing down the integrated companies’ oil and gas production growth from their upstream operations.

Increasing Focus on Renewables: The world is gradually shifting to cleaner fuels 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 #205, 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 Sector, Outperforms S&P 500

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

The industry has rallied 23.7% over this period compared with the broader sector’s surge of 29.4% and the S&P 500’s rise of 21.4%.

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 8.83X, lower than the S&P 500’s 22X. It is also lower than the sector’s trailing 12-month EV/EBITDA of 8.98X.

Over the past five years, the industry has traded as high as 29.27X and as low as 4.24X, with a median of 7.95X.

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

3 U.S. Integrated Oil & Gas Stocks to Keep a Close Eye On

Occidental

In the United States, Occidental, carrying a Zacks Rank #3 (Hold), is a major producer of oil and natural gas. In the domestic market, OXY has been experiencing efficiency improvements, including higher production volumes, while improving capital efficiency and lowering operating costs. To create long-term value for shareholders, Occidental has a strong focus on redirecting capital toward higher-return oil and gas projects.

Price and Consensus: OXY

ConocoPhillips

With operations in resources with low breakeven costs, ConocoPhillips is likely to capitalize on the high crude pricing environment. COP has operations in the Lower 48, which comprise the 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 now be highly profitable for #3 Ranked COP.

Price and Consensus: COP

                 

National Fuel Gas

National Fuel Gas is well-poised to navigate a volatile energy business environment, owing to its integrated business model encompassing upstream, midstream and downstream activities. Zacks Rank #3 NFG is likely 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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This article originally published on Zacks Investment Research (zacks.com).

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