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Oil & Gas International E&P Outlook: Positive Signs Amid Uncertainty

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The Zacks Oil and Gas - International E&P industry consists of companies based outside the United States and Canada focused on exploration and production (E&P) of oil and natural gas. These firms are engaged in finding hydrocarbon reservoirs, drilling oil and gas wells, and producing and selling these materials to be refined later into products such as gasoline.

Let’s take a look at the industry’s three major themes:

  • There is increasing evidence that a fundamental change is occurring in the oil market. Brent crude, the international benchmark, popped above $85 a barrel and was trading at multiyear highs in early October. A looming shortage of the commodity on Iran sanctions helped in driving oil prices higher. Now, in a reversal, oil is facing a two-pronged attack: rising supply from major producers and fear that an economic slowdown will dampen the outlook for demand. Oil’s troubles pushed the index into a bear market, leading to a 20% drop from recent highs. While the future direction of crude's movement is anybody's guess, it might be prudent for investors to maintain caution in these uncertain times — either withdraw for a while or look for fundamentally sound stocks.
     
  • Meanwhile, natural gas prices are on a tear. The commodity rallied to its highest level since November 2014 as inventories are significantly below their five-year average amid the early winter chill. Natural gas recently broke the $4 per MMBtu mark for the first time in four years with cooler weather conditions resulting in strong demand for the heating fuel. Despite skyrocketing production, natural gas entered the winter season with stockpiles at their lowest in 15 years. If the current (2018-2019) winter turns out to be colder than normal, the surge in expected demand — in the face of relative deficit of natural gas inventory — could trigger a large rally in the commodity's price.
     
  • Over the past few years, energy 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 producers. Moreover, driven by operational efficiencies, most E&P operators have been able to reduce unit costs and live within their cash flows. All of these factors, together with production growth and capital discipline have resulted in surging free cash flows. With cash generation expected to remain robust even at relatively low oil prices, there is strong potential for greater return of capital to shareholders through dividend growth and stock buybacks.

Zacks Industry Rank Indicates Signs of Improving Conditions

The Zacks Oil and Gas - International E&P is a 12-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #109, which places it in the top 43% 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 solid 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 for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Lags Sector & S&P 500

The Zacks Oil and Gas - International E&P has lagged the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 22.8% over this period compared to the S&P 500’s rise of 5.8% and broader sector’s fall of 1.3%.

One-Year Price Performance

 

Industry’s Current Valuation 

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing oil and gas drilling stocks, the industry is currently trading at 9.86X, lower than the S&P 500’s 10.79X. It is, however, well above the sector’s trailing-12-month EV/EBITDA of 5.39X.

Over the past five years, the industry has traded as high as 71.98X, as low as 7.01X, with a median of 15.97X, as the chart below shows.

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

 

 

Bottom Line

Global oil supplies are looking plentiful and are expected to outstrip demand at the beginning of 2019. Predictions of more crude coming to the supply side through rising production in the United States, Saudi Arabia and Russia have added to the bearish sentiment on the market. Even the demand side looks jittery with OPEC and the IEA forecasting weaker consumption.

However, one must note that there is still an air of uncertainty over the impact of the Trump administration’s sanctions against Iran. While exports out of Iran are likely to decline gradually, the much talked-about waivers to some of the country’s biggest buyers of oil are only temporary in nature. Fast-falling production in Venezuela, signs of robust demand in China and Saudi Arabia’s announced supply cut should provide further support to crude prices.

Natural gas futures, meanwhile, are likely to soar on tight supplies amid expectations of strong winter weather.

None of the stocks in the Oil and Gas – International E&P space currently sports a Zacks Rank #1 (Strong Buy). However, we are presenting two stocks with a Zacks Rank #2 (Buy) that are well positioned to grow. There are also two stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Cairn Energy plc (CRNCY - Free Report) : This Edinburgh, UK-based upstream operator has key operations in Senegal apart from its home country. Cairn Energy carries a Zacks Rank #2 and has an attractive expected earnings growth of 38.1% for the next year.

Price and Consensus: CRNCY

 

Hurricane Energy plc (HRCXF - Free Report) : This UK-headquartered oil and gas explorer — focused on the Rona Ridge, in the West of Shetland region of the UK Continental Shelf — also has a Zacks Rank #2. The 2019 Zacks Consensus Estimate for Hurricane Energy represents some 175% EPS growth over 2018. 

Price and Consensus: HRCXF

 

Kosmos Energy Ltd. (KOS - Free Report) : This energy finder is active in Ghana, Equatorial Guinea, and the U.S. Gulf of Mexico, with exploration acreage across the Atlantic Basin. Kosmos Energy carries a Zacks Rank #3 and has an attractive expected earnings growth of 250% for the next year.

Price and Consensus: KOS

 

Ophir Energy plc (OPHRY - Free Report) : This London, UK-headquartered oil and gas explorer — with operations in Africa, Asia and Mexico — also has a Zacks Rank #3. The 2019 Zacks Consensus Estimate for Hurricane Energy represents some 114.5% EPS growth over 2018.

Price and Consensus: OPHRY

 

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