The coronavirus pandemic has disrupted the upstream, midstream and downstream energy operations in the United States. Social-distancing measures have dented the country’s fuel demand, thereby making the outlook for the Zacks Oil & Gas US Integrated industry gloomy.
However, with people gradually returning to work with the easing of lockdown measures, the prospects for integrated oil players in the United States have improved somewhat. Among the frontrunners in the industry that are trying to survive the challenging business scenario are ConocoPhillips (COP - Free Report) , Hess Corporation (HES - Free Report) , Occidental Petroleum Corporation (OXY - Free Report) and Marathon Oil Corporation (MRO - Free Report) .
About the Industry
The Zacks Oil & Gas US Integrated industry comprises companies that are mostly 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 pipelines networks and storage sites.
Overall, the upstream business is positively correlated to oil and natural gas prices. The produced commodity volumes are then transported through midstream assets, generating stable fee-based revenues.
What’s Shaping the Future of the Oil & Gas US Integrated Industry?
Low Oil Price: Although crude price has recovered partially in recent months, the commodity’s price has declined considerably since the beginning of 2020, when West Texas Intermediate (WTI) crude oil was trading above $60 per barrel. Coronavirus-dented crude price has forced most energy players to cut capital spending budget, triggering the need to curtail production volumes. Notably, the gradual curtailment in operations by explorers has become quite apparent as drillers have been removing rigs month after month from shale plays. Overall, the unfavorable pricing scenario of the commodity, unlikely to improve unless the world gets an effective coronavirus vaccine, will continue to affect the upstream business of integrated energy players.
Soft Gasoline Demand: Although low oil is a boon for refiners, relatively weak demand, as compared to pre-pandemic level, for refined petroleum products such as gasoline, diesel fuel and jet fuel, owing to the social-distancing measures due to the virus outbreak, will continue to negatively impact integrated energy firms’ downstream operations.
Surplus Transportation Capacity: The pandemic has led to surplus of long-term crude oil transportation capacity from Permian, the most prolific basin in the United States. This reflects low demand for midstream infrastructures, stemming from curtailed production volumes of oil and gas. Although the situation is unlikely to fully recover in the near term, integrated firms’ midstream businesses are however comparatively more stable than upstream and downstream operations. This is because the pipeline networks are usually booked by shippers for a long term, generating stable fee-based revenues for the companies. Generally, midstream operations are relatively stable for not being significantly exposed to volatility with respect to oil and gas prices.
Shift to Renewables: It has been a challenge for energy majors to provide sustainable energy to the entire world while reducing greenhouse gas emissions. In fact, European energy majors are actively focusing on clean energy and are setting ambitious goals to address the issue of climate change. With demand for fossil fuel gradually fading, U.S. integrated firms are likely to increase spending on renewable energy, making the outlook for oil and gas business gloomy.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil & Gas US Integrated industry is a nine-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #185, which places it in the bottom 26% 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 bearish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic on this group’s earnings growth potential. While the industry’s earnings estimates for 2020 have moved down 144.6% in the past year, the same for 2021 have slumped 108.3%.
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 and S&P 500
The Zacks Oil & Gas US Integrated industry has lagged the broader Zacks Oil - Energy sector as well as the Zacks S&P 500 composite over the past year.
The industry has lost 41.7% over this period as compared with the S&P 500’s improvement of 13.8% and the broader sector’s slump of 32.5%.
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.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 6.08X, lower than the S&P 500’s 12.50X. It is, however, higher than the sector’s trailing-12-month EV/EBITDA of 4.32X.
Over the past two years, the industry has traded as high as 7.97X, as low as 3.32X, with a median of 4.84X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 US Integrated Oil Stocks Trying to Fend Off Industry Challenges
Considering the downbeat industry scenario, it might be prudent for investors to maintain caution by either keeping on the sidelines for a while or holding on to these four fundamentally-sound Zacks Rank #3 (Hold) stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
ConocoPhillips: Based on production and proved reserves, the company is the largest explorer and producer in the world. Notably, the Houston, TX-based company foresees its recently shutdown production activities to get fully restored in September. Thus, with partially recovering oil prices over the past few months, restoration in production is likely to aid the company’s bottom line. Importantly, ConocoPhillips has seen no estimate revisions for its 2020 bottom line over the past seven days. Although the stock has declined 42.9% year to date, it has performed better than the industry’s 48.4% decline.
Price and Consensus: COP
Marathon Oil Corporation: Headquartered in Houston, TX, Marathon Oil is an explorer and producer with strong focus on the United States. To survive the pandemic, the company has taken the necessary step of suspending dividend payment. Moreover, the company can rely on its balance sheet, having lower debt exposure as compared to the industry, to combat low oil price. The balance sheet strength is reflected by the fact that the company can easily handle its $1 billion of debt, due through 2022, with its cash balance of $522 million and undrawn credit facility of $3 billion. Notably, the stock has seen upward estimate revisions of its 2020 bottom line in the past 30 days.
Price and Consensus: MRO
Occidental Petroleum Corporation: Headquartered in Houston, TX, Occidental Petroleum is an oil and natural gas explorer with presence in the midstream energy business. Apart from additional cost-saving measures, the company has been capturing acquisition cost synergies, aiding its bottom line. Moreover, to lower debt load, the company has made progress in divesting assets. Notably, the stock has seen no estimate revision for its 2020 bottom line in the past seven days.
Price and Consensus: OXY
Hess Corporation: Headquartered in New York, Hess is a leading upstream firm with footprint in Bakken, Gulf of Mexico and offshore Guyana. The company has revised upward its 2020 production guidance from Bakken shale play to approximately 185,000 BoE/D from the earlier 175,000 BoE/D. Thus, the recovering crude prices along with higher production from the prolific Bakken are likely to aid the company’s bottom line. Notably, the stock has seen no estimate revision for its 2020 bottom line in the past seven days. Moreover, despite a 31.2% year-to-date decline in stock price, the company has outperformed its industry.
Price and Consensus: HES