We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
4 Stocks From the Tepid International Upstream Industry to Watch Out For
Read MoreHide Full Article
While the macro commodity outlook remains bullish, the Zacks Oil and Gas - Exploration and Production - International industry is still far from normal, with the state of Chinese economy being the latest source of concern. But a supportive landscape and robust income proposition should translate into improving earnings and cash flows for upstream firms like Vermilion Energy (VET - Free Report) , Cairn Energy (CRNCY - Free Report) , Tullow Oil (TUWOY - Free Report) , and VAALCO Energy (EGY - Free Report) .
Industry Overview
The Zacks Oil and Gas - International E&P industry consists of companies primarily operating outside the United States, focused on exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate, etc. The economics of oil and gas supply and demand is the fundamental driver of this industry. In particular, a producer’s cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies' are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns on drilling inventory and causes them to alter production growth rates. These operators are also exposed to exploration risks where drilling results are uncertain.
3 Key Investing Trends to Watch in the Oil and Gas - International E&P Industry
Bullish Commodity Outlook: Energy recovery is gaining steam at a faster-than-expected pace as investors welcome the reality of a post-vaccine world. Mobility restrictions have been rolled back and most parts of the economy have reopened. Also, adding to this bullish narrative are the OPEC+ production cut and supportive government policies. Consequently, the demand for oil and gas is flourishing. With Brent crude — the international benchmark — rallying to $75-a-barrel and natural gas surging to seven-year highs amid the macro tailwinds, the E&P companies will greatly benefit for obvious reasons. Importantly, commodity prices appear to have entered a protracted period of stability at levels where the operators can generate free cash flow through their drilling activities.
Worries Over the Health of China’s Economy: The energy market’s latest source of concern is the state of the Chinese property sector and its economy in general. A possible default of China Evergrande — a heavily indebted real estate giant that appears unlikely to settle its interest payments — could affect the world’s biggest oil importer’s overall health. This could peg back the Chinese economy, which could severely disrupt oil’s demand recovery from COVID-19.
Leaner Cost Structure: The energy companies have changed their approach to spending capital. Over the past few years, producers worked tirelessly to cut costs to a bare minimum and look for innovative ways to churn out more oil and gas. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service providers. Moreover, driven by operational efficiencies, most E&P operators have been able to reduce unit costs, while the coronavirus-induced collapse in crude forced them to adopt a more disciplined approach to spending capital. These actions might keep short-term production flat (or marginally up) but are expected to preserve cash flow, support balance sheet strength, and help the companies eventually emerge stronger.
Zacks Industry Rank Reflects Tepid Outlook
The Zacks Oil and Gas – International E&P industry is a nine-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #128, which places it in the bottom 49% 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 challenging 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.
Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas - International E&P industry has fared better than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has rocketed 129% over this period compared with the broader sector’s increase of 40.3%. Meanwhile, the S&P 500 has gained 33.2%.
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. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 6.86X, significantly lower than the S&P 500’s 15.59X. However, it is above the sector’s trailing-12-month EV/EBITDA of 4.84X.
Over the past five years, the industry has traded as high as 35.07X, as low as 2.19X, with a median of 10.75X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
4 Oil and Gas - International E&P Stocks to Focus On
Tullow Oil: Tullow Oil is a London-based hydrocarbon producer and explorer with its main focus on Africa. The company’s significant positions in discovered and emerging basins and focus on capital discipline should result in a noticeable improvement in profitability. In particular, the oil and gas finder’s operational excellence and technical expertise stand it in good stead.
The 2021 Zacks Consensus Estimate for Tullow Oil indicates 115.15% earnings per share growth over 2020. The company carries a Zacks Rank #2 (Buy). Year to date, Tullow Oil’s shares have gained 37%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: TUWOY
VAALCO Energy: Founded in 1985, VAALCO Energy’s productive capacity is based offshore of West Africa, where it focuses on growth through a combination of acquisitions and active drilling. The operator of Gabon offshore Etame license is known for its operational excellence and cost discipline, which are expected to generate significant free cash flows at current strip pricing.
The 2021 Zacks Consensus Estimate for #2 Ranked VAALCO Energy indicates 437.50% earnings per share growth over 2020. The company’s shares have gained 39% since the beginning of this year.
Price and Consensus: EGY
Vermilion Energy: Vermilion Energy is an oil and gas explorer with producing properties in Europe, North America, and Australia. The company’s diversification across different continents provides it with certain advantages relative to the other upstream players. The energy explorer, with its unique portfolio of high margin, low decline assets, is currently focused on cost reductions and positive free cash flow generation.
The 2021 Zacks Consensus Estimate for Vermilion Energy indicates 173.64% earnings per share growth over 2020. The company currently carries a Zacks Rank #3 (Hold). Vermilion Energy’s shares have gained 66.9% so far this year.
Price and Consensus: VET
Cairn Energy: This Edinburgh, UK-based upstream operator has key operations in Mexico apart from its home country, while its impending entry in Egypt should spur significant growth opportunities. Cairn Energy has adjusted its capital plans to the prevailing market conditions resulting in strong operating cash flows. The company also possesses an active hedging program that provides further downside protection from commodity price fluctuations.
The 2021 Zacks Consensus Estimate for Cairn Energy indicates 75% earnings per share growth over 2020. Zacks #3 Ranked Cairn Energy’s shares have lost 28.6% since the start of 2021.
Price and Consensus: CRNCY
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
4 Stocks From the Tepid International Upstream Industry to Watch Out For
While the macro commodity outlook remains bullish, the Zacks Oil and Gas - Exploration and Production - International industry is still far from normal, with the state of Chinese economy being the latest source of concern. But a supportive landscape and robust income proposition should translate into improving earnings and cash flows for upstream firms like Vermilion Energy (VET - Free Report) , Cairn Energy (CRNCY - Free Report) , Tullow Oil (TUWOY - Free Report) , and VAALCO Energy (EGY - Free Report) .
Industry Overview
The Zacks Oil and Gas - International E&P industry consists of companies primarily operating outside the United States, focused on exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate, etc. The economics of oil and gas supply and demand is the fundamental driver of this industry. In particular, a producer’s cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies' are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns on drilling inventory and causes them to alter production growth rates. These operators are also exposed to exploration risks where drilling results are uncertain.
3 Key Investing Trends to Watch in the Oil and Gas - International E&P Industry
Bullish Commodity Outlook: Energy recovery is gaining steam at a faster-than-expected pace as investors welcome the reality of a post-vaccine world. Mobility restrictions have been rolled back and most parts of the economy have reopened. Also, adding to this bullish narrative are the OPEC+ production cut and supportive government policies. Consequently, the demand for oil and gas is flourishing. With Brent crude — the international benchmark — rallying to $75-a-barrel and natural gas surging to seven-year highs amid the macro tailwinds, the E&P companies will greatly benefit for obvious reasons. Importantly, commodity prices appear to have entered a protracted period of stability at levels where the operators can generate free cash flow through their drilling activities.
Worries Over the Health of China’s Economy: The energy market’s latest source of concern is the state of the Chinese property sector and its economy in general. A possible default of China Evergrande — a heavily indebted real estate giant that appears unlikely to settle its interest payments — could affect the world’s biggest oil importer’s overall health. This could peg back the Chinese economy, which could severely disrupt oil’s demand recovery from COVID-19.
Leaner Cost Structure: The energy companies have changed their approach to spending capital. Over the past few years, producers worked tirelessly to cut costs to a bare minimum and look for innovative ways to churn out more oil and gas. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service providers. Moreover, driven by operational efficiencies, most E&P operators have been able to reduce unit costs, while the coronavirus-induced collapse in crude forced them to adopt a more disciplined approach to spending capital. These actions might keep short-term production flat (or marginally up) but are expected to preserve cash flow, support balance sheet strength, and help the companies eventually emerge stronger.
Zacks Industry Rank Reflects Tepid Outlook
The Zacks Oil and Gas – International E&P industry is a nine-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #128, which places it in the bottom 49% 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 challenging 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.
Despite the dim near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas - International E&P industry has fared better than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has rocketed 129% over this period compared with the broader sector’s increase of 40.3%. Meanwhile, the S&P 500 has gained 33.2%.
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. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 6.86X, significantly lower than the S&P 500’s 15.59X. However, it is above the sector’s trailing-12-month EV/EBITDA of 4.84X.
Over the past five years, the industry has traded as high as 35.07X, as low as 2.19X, with a median of 10.75X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
4 Oil and Gas - International E&P Stocks to Focus On
Tullow Oil: Tullow Oil is a London-based hydrocarbon producer and explorer with its main focus on Africa. The company’s significant positions in discovered and emerging basins and focus on capital discipline should result in a noticeable improvement in profitability. In particular, the oil and gas finder’s operational excellence and technical expertise stand it in good stead.
The 2021 Zacks Consensus Estimate for Tullow Oil indicates 115.15% earnings per share growth over 2020. The company carries a Zacks Rank #2 (Buy). Year to date, Tullow Oil’s shares have gained 37%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: TUWOY
VAALCO Energy: Founded in 1985, VAALCO Energy’s productive capacity is based offshore of West Africa, where it focuses on growth through a combination of acquisitions and active drilling. The operator of Gabon offshore Etame license is known for its operational excellence and cost discipline, which are expected to generate significant free cash flows at current strip pricing.
The 2021 Zacks Consensus Estimate for #2 Ranked VAALCO Energy indicates 437.50% earnings per share growth over 2020. The company’s shares have gained 39% since the beginning of this year.
Price and Consensus: EGY
Vermilion Energy: Vermilion Energy is an oil and gas explorer with producing properties in Europe, North America, and Australia. The company’s diversification across different continents provides it with certain advantages relative to the other upstream players. The energy explorer, with its unique portfolio of high margin, low decline assets, is currently focused on cost reductions and positive free cash flow generation.
The 2021 Zacks Consensus Estimate for Vermilion Energy indicates 173.64% earnings per share growth over 2020. The company currently carries a Zacks Rank #3 (Hold). Vermilion Energy’s shares have gained 66.9% so far this year.
Price and Consensus: VET
Cairn Energy: This Edinburgh, UK-based upstream operator has key operations in Mexico apart from its home country, while its impending entry in Egypt should spur significant growth opportunities. Cairn Energy has adjusted its capital plans to the prevailing market conditions resulting in strong operating cash flows. The company also possesses an active hedging program that provides further downside protection from commodity price fluctuations.
The 2021 Zacks Consensus Estimate for Cairn Energy indicates 75% earnings per share growth over 2020. Zacks #3 Ranked Cairn Energy’s shares have lost 28.6% since the start of 2021.
Price and Consensus: CRNCY