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5 US Integrated Oil Stocks to Gain in a Challenging Industry

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Oil price volatility owing to coronavirus woes and inflation fears has been disrupting the upstream operations of U.S. integrated energy companies. With lower capital spending by explorers, production of oil and gas will likely be drop, leading to soft demand for pipeline assets. Also, rising raw material costs have been hurting the refining business, thereby making the outlook for the Zacks Oil & Gas US Integrated industry gloomy.

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) and PHX Minerals Inc (PHX - 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 gas prices. The produced commodity volumes are then transported through midstream assets, generating stable fee-based revenues. The integrated energy players in the United States also have access to downstream operations where the transported oil volumes are converted to finished products, comprising gasoline, natural gas liquids and diesel, through refining activities. 

What's Shaping the Future of the Oil & Gas US Integrated Industry?

Inflation Fears: The recent rise in prices is worrying investors, who are already keeping a close eye on inflation indicators. If the rise in prices is part of a longer-term trend, this might compel the Fed to raise interest, which could disrupt the economy’s growth. This could in turn hurt fuel demand, keeping oil volatile. Also, the coronavirus pandemic is still behind us, which continues to hurt upstream businesses.

Refining Cost Increases: The price of West Texas Intermediate (WTI) crude oil has improved drastically from the pandemic low mark hit last year. With rising oil prices, the cost of producing refined petrochemical products like gasoline has risen, thereby squeezing profits from refining operations. Also, with the coronavirus pandemic still wreaking havoc on the energy market, fuel demand is yet to reach the pre-pandemic mark.

Soft Fee-Based Revenues: After periods of low returns, energy investors are pressing oil exploration and production companies to focus more on returns than to produce commodities at a massive scale. This is going to hurt oil production volumes. With lower volumes being transported, fee-based revenues from the midstream business might also get affected.

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 10-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #131, which places it in the bottom 48% 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.

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 Outperforms Sector and S&P 500

The Zacks Oil & Gas US Integrated industry has surpassed the broader Zacks Oil - Energy sector as well as the Zacks S&P 500 composite over the past year.

The industry has risen 54.2% over this period as compared with the S&P 500’s improvement of 44% and the broader sector’s growth of 37.2%.

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 12.16X, lower than the S&P 500’s 17.01X. It is, however, higher than the sector’s trailing-12-month EV/EBITDA of 5.10X.

Over the past five years, the industry has traded as high as 21.78X, as low as 3.28X, with a median of 7.76X.

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

5 US Integrated Oil Stocks Trying to Fend Off Industry Challenges

Marathon Oil: Headquartered in Houston, TX, Marathon Oil is an explorer and producer with strong focus on the United States. The company’s differentiated business model has enabled it to generate significant free cash flows that will be used to lower debt burden. The company’s strong and sustainable business model has also enabled it to raise its quarterly base dividend. The stock, carrying a Zacks Rank #2 (Buy), has seen upward earnings estimate revisions for 2021 in the past seven days.

Price and Consensus: MRO

PHX Minerals: The company has continued to perform extremely well with strategies of divesting lower margin assets while investing in core mineral assets. The company is also focused on reducing debt load, thereby strengthening its financial position. For fiscal 2021, the #2 Ranked stock has witnessed upward earnings estimate revisions over the past 30 days. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: PHX

ConocoPhillips: The Houston, TX-based company is a leading oil producer, with a strong presence in Lower 48 major acreage areas that comprise prolific shale plays like Permian basin, Bakken and Eagle Ford. The company’s production profile looks bright since it has decades of low-cost premium drilling sites in those resources. One of the announcements that is pleasing investors is the company’s resumption of share repurchases at an annualized level of $1.5 billion. The stock, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 444.3% in 2021.

Price and Consensus: COP

Hess: Headquartered in New York, Hess is a leading upstream firm with footprint in Bakken, Gulf of Mexico and offshore Guyana. The company strongly believes that its position in Guyana is strong enough to generate growth in long-term cashflows. For 2021, the Zacks #3 Ranked stock has seen upward earnings estimate revisions in the past 30 days.

Price and Consensus: HES

Occidental Petroleum: 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 Notably, the stock has seen no estimate revision for its 2020 bottom line in the past seven days. The stock, with a Zacks Rank of 3, is likely to see earnings growth of 69.3% in 2021.

Price and Consensus: OXY

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