The coronavirus pandemic has disrupted the upstream, midstream and downstream energy operations across the world. Social-distancing measures have dented fuel demand across nations, making the outlook for the Zacks Oil and Gas Integrated International industry gloomy.
However, with people gradually returning to work with the easing of lockdown measures, the prospects for international integrated energy players across the world have improved somewhat. Among the frontrunners in the industry that are trying to survive the challenging business scenario are Exxon Mobil Corporation (XOM - Free Report) , Chevron Corporation (CVX - Free Report) , Royal Dutch Shell (RDS.A - Free Report) and TOTAL SE (TOT - Free Report) .
About the Industry
The Zacks Oil and Gas Integrated International industry covers companies that are primarily involved in upstream, midstream and downstream businesses.
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.
The midstream operations of integrated 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 also involve chemical businesses that manufacture raw material used for making plastics.
What’s Shaping the Future of the Oil & Gas Integrated International 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 both the domestic and international resources. 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 international integrated energy players.
Midstream Businesses Settle for Fee Cut: Lower crude production has in turn hurt demand for midstream infrastructure, including pipeline networks and storage assets. Thus, several energy firms with midstream presence have no option but to offer discounts to shippers to survive the pandemic. As reported by Bloomberg, from roughly $3 per barrel at 2020-beginning, the premium for transporting crude to the Gulf Coast export hubs has plunged to below $1 per barrel. In fact, the lower premium, since the pandemic has severely hit demand for midstream assets, is not sufficient enough to meet transport fees for energy firms operating pipelines in the prolific Permian basin.
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 international integrated energy firms’ downstream operations.
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 setting ambitious goals to address the issue of climate change. With demand for fossil fuel gradually fading, international integrated firms are likely to further increase spending on renewable energy, making the outlook for oil and gas business gloomy.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil - Energy sector. It carries a Zacks Industry Rank #237, which places it at the bottom 6% 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 gloomy 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. Before we present a few international integrated energy stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Lags Sector and S&P 500
The Zacks Oil and Gas Integrated International 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 47.7% over this period as compared with the S&P 500’s improvement of 16.7% and the broader sector’s slump of 40.4%.
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 not just equity into account 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 3.35X, lower than the S&P 500’s 14.96X. It is also below the sector’s trailing-12-month EV/EBITDA of 4.00X.
Over the past five years, the industry has traded as high as 9.88X, as low as 2.85X, with a median of 6.04X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 Integrated International Stocks Trying to Survive the 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.
Exxon Mobil Corporation: The company is among the largest integrated energy companies in the world. The energy major can rely on its strong balance sheet to survive the pandemic. The company is likely to see earnings growth of 341.2% in 2021, since global fuel demand is expected to recover significantly next year as the world will probably get effective coronavirus drugs and vaccines by the first half of 2021. Moreover, in the next five years, the stock is likely to see earnings growth of 8.7%, outperforming the industry’s 4.3%.
Price and Consensus: XOM
Chevron Corporation: The firm is also a leading integrated energy player, with operations spreading across the world. Apart from a strong balance sheet, Chevron has solid capital discipline that will help it tide over the pandemic. Notably, the energy major’s conservative capital spending, especially during the pandemic, will probably help the company generate considerable cashflow. In the next five years, the stock is likely to see earnings growth of 5%, outpacing the industry mark.
Price and Consensus: CVX
Royal Dutch Shell: Apart from a strong presence in oil and gas business, the integrated energy major is trying to capitalize on the expanding renewable energy space. The energy major has grand plans of becoming a net-zero emission company by 2050 or before. In the past 60 days, the stock has seen upward earnings estimate revision for 2020 and 2021, respectively.
Price and Consensus: RDS.A
TOTAL SE: In the global liquefied natural gas business, the integrated energy major is the second-largest firm. Also, the company is capitalizing on the mounting demand for renewable energy and has set an ambitious target of becoming a net-zero emission company by 2050 or earlier. Notably, over the past 60 days, the stock has seen upward earnings estimate revision for 2020.
Price and Consensus: TOT