Oil price is still highly favorable for exploration and production operations, paving the way for further rig additions in shale plays. Having strong presence in upstream, midstream and downstream operations, integrated energy companies’ businesses are diversified and, therefore, relatively less volatile. Thus, the Zacks Oil and Gas Integrated International industry’s outlook is bright.
Most industry players are also leading energy transitions. They are allocating more money toward renewables, thereby will generate additional cashflows. Exxon Mobil Corporation (XOM – Free Report) ,Chevron Corporation (CVX – Free Report) , Shell plc (SHEL – Free Report) and BP plc (BP – Free Report) are well-positioned to make the most of the overall promising 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 the deepwater Gulf of Mexico), Asia, South America, Africa, Australia and Europe. Midstream operations of energy companies entail transporting oil, natural gas liquids and refined petroleum products. Under downstream businesses, the firms buy raw crude to produce refined petroleum products. The companies’ downstream activities involve chemical businesses that manufacture raw materials for making plastics. The integrated players are now gradually focusing on renewables, leading to the energy transition. The firms aim to lower emissions from operations and cut the carbon intensity of the products sold.
4 Trends Shaping the Future of the Oil & Gas Integrated International Industry
Oil Price Healthy: Oil price is currently trading above the $85-per-barrel mark, backed by positive events like a weak dollar and record U.S. crude exports. Thus, a favorable commodity pricing scenario will continue to aid the upstream business of international integrated energy players.
Sturdy Midstream Demand: With the possibility of upstream energy companies adding more rigs, oil and gas production is expected to increase further. This will likely boost the demand for pipeline and storage assets since more commodities will be needed to be transported and stored. The midstream business has lower exposure to commodity price volatility since shippers generally 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 will be able to capitalize on the mounting demand for cleaner energy.
Strong Refining Fundamentals: Significant recovery in demand for end products amid global shortages in refining capacity is making prospects of the refining business bright. Thus, the integrated players belonging to the industry are likely to generate handsome cashflows from refining operations.
Zacks Industry Rank Indicates Encouraging Outlook
The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil – Energy sector. It carries a Zacks Industry Rank #57, which places it in the top 23% of more than 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates impressive 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.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Before we present a few 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.
Industry Outperforms Sector and 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 has gained 36.7% over this period compared with the S&P 500’s decline of 17.2% and the broader sector’s growth of 23.6%.
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 Enterprise Value/Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA) ratio. This is because the valuation metric takes not just equity into account but also the level of debt.
On the basis of the trailing 12-month EV/EBITDA, the industry is currently trading at 3.48X, lower than the S&P 500’s 11.84X. It is also below 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 Integrated International Stocks Moving Ahead of the Pack
BP: The British energy giant has been generating handsome returns from refining and marketing operations, thanks to the recovery in demand. On the dividend front, the firm expects that if the oil price trades around $60 per barrel, it will be able to hike its dividend per ordinary share by around 4% annually through 2025. Investors applaud BP as it also expects to reward shareholders with stock buybacks. The company, currently carrying a Zacks Rank #3 (Hold), is also focused on the reduction of net debt load.
Price and Consensus: BP
Chevron: Chevron is also a leading integrated energy player with operations across the world. Apart from a strong balance sheet, it has a solid capital discipline that will help it tide over volatile commodity prices. The energy major’s conservative capital spending will probably help the company generate considerable cash flow, even in an unstable business scenario. The primary growth driver for Chevron, at least in the near term, is its low-cost Permian projects. The #3 Ranked stock has seen upward earnings estimate revisions for 2022 in the past seven days.
Price and Consensus: CVX
Shell: Being a leading player in liquefied natural gasacross the globe, Shell’s business prospects seem bright. In the energy transition front, it is playing a crucial role, setting an ambitious goal of becoming a net-zero-emissions energy business by 2050 or before. For 2022, SHEL, carrying a Zacks Rank #2 (Buy), is likely to see earnings growth of 118.6%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: SHEL
Exxon Mobil: ExxonMobil is among the largest integrated energy companies in the world. The energy major can rely on its strong balance sheet to withstand any business turmoil. ExxonMobil is banking on low-cost project pipelines centered around the Permian — the most prolific basin in the United States — and offshore Guyana resources. The stock, having a Zacks Rank of 2 at present, has seen upward estimate revisions for 2022 earnings in the past seven days.
Price and Consensus: XOM