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3 International Upstream Stocks That Are Ripe for Picking
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The Zacks Oil and Gas - Exploration and Production - International industry appears on track for substantial gains as commodity prices continue to move higher. Building on this bullish narrative, upstream firms like Vermilion Energy (VET - Free Report) , Tullow Oil (TUWOY - Free Report) and EnQuest PLC (ENQUF - Free Report) have lots of upside and are likely to see impressive revenue and cash flow growth. To add to the optimism, the industry operators’ improved cost structure should ensure strong margins going forward.
Industry Overview
The Zacks Oil and Gas - International E&P industry consists of companies primarily operating outside the United States and focused on the 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
Significant Increase in Oil Price: The energy market continues to enjoy support from geopolitical uncertainty amid Russia’s military operations in Ukraine. In March, Brent crude — the international benchmark — surged to a 13½-year high of almost $140 on concerns about supplies from Russia, which is one of the world's largest producers of the commodity. The Biden administration’s ban on the import of Russian crude and energy products contributed to oil’s rapid price increase. Agreed, crude has pulled back from its lofty levels, but with the conflict showing no signs of a quick resolution and the European Union finally following the United States in blocking imports of Russian energy — even at the detriment of their economies — the oil bulls are getting a fresh impetus. 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.
Lower Cost Structure: The energy companies have changed their approach to spending capital. Over the past few years, producers have 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 restrict short-term production but are expected to preserve cash flow, support balance sheet strength, and help the companies to eventually emerge stronger. In particular, despite continued inflation and supply chain challenges, cash from operations is on a sustainable path as revenues improve and companies slash capital expenditures from the pre-pandemic levels amid sharply higher commodity prices.
Strong Financial Returns for Shareholders: The sharp increase in crude prices has allowed the upstream operators to deliver a solid financial performance. Cash from operations looks sustainable as revenues improve and companies cut capital expenditures from the pre-pandemic levels amid sharply higher commodity realizations. To put it simply, the environment of strong prices has helped the E&P firms to generate significant “excess cash,” which they intend to use to boost investor returns. In fact, energy companies are increasingly allocating their rising cash pile by way of dividends and buybacks to pacify the long-suffering shareholders.
Zacks Industry Rank Reflects Upbeat 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 #52, which places it in the top 21% 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 improving 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. While the industry’s earnings estimate for 2022 have surged 444.7% in the past year, the same for 2023 have risen by an astounding 7,700% over the same timeframe.
Considering the encouraging 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 much 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 152.3% over this period compared with the broader sector’s increase of 36.3%. Meanwhile, the S&P 500 has lost 3.6%.
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 4.97X, significantly lower than the S&P 500’s 13.04X. However, it is above the sector’s trailing-12-month EV/EBITDA of 4.42X.
Over the past five years, the industry has traded as high as 26.26X, as low as 2.19X, with a median of 8.34X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Oil and Gas - International E&P Stocks to Buy Now
Vermilion Energy: Vermilion Energy is an oil and gas explorer with producing properties in Europe, North America and Australia. The energy explorer’s diversification across different continents provides it with certain advantages relative to the other upstream players. VET, with its unique portfolio of high-margin, low-decline assets, is currently focused on cost reductions and positive free cash flow generation.
Valued at around $2.3 billion, Vermilion Energy has a projected earnings growth rate of 111.9% for 2022. VET currently carries a Zacks Rank #1 (Strong Buy). Vermilion Energy’s shares have soared around 166.7% in a year.
Tullow Oil: Tullow Oil is a London-based hydrocarbon producer and explorer, focusing mainly on Africa. TUWOY’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.
Over the past 60 days, Tullow Oil saw the Zacks Consensus Estimate for 2022 move up 33.3%. TUWOY carries a Zacks Rank #2 (Buy). Tullow Oil’s shares have lost some 7.9% in a year.
Price and Consensus: TUWOY
EnQuest: This London-based upstream operator has key operations in the UK North Sea and Malaysia. The company’s impressive production efficiency across the portfolio is at the crux of ENQUF’s growth story. EnQuest has adjusted its capital plans to the prevailing market conditions, resulting in strong operating cash flows. ENQUF also possesses an active hedging program that provides further downside protection from commodity price fluctuations.
The 2022 Zacks Consensus Estimate for EnQuest Energy indicates 53.9% earnings per share growth over 2021. The Zacks Rank #2 ENQUF’s shares are up 31% in a year.
Price and Consensus: ENQUF
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3 International Upstream Stocks That Are Ripe for Picking
The Zacks Oil and Gas - Exploration and Production - International industry appears on track for substantial gains as commodity prices continue to move higher. Building on this bullish narrative, upstream firms like Vermilion Energy (VET - Free Report) , Tullow Oil (TUWOY - Free Report) and EnQuest PLC (ENQUF - Free Report) have lots of upside and are likely to see impressive revenue and cash flow growth. To add to the optimism, the industry operators’ improved cost structure should ensure strong margins going forward.
Industry Overview
The Zacks Oil and Gas - International E&P industry consists of companies primarily operating outside the United States and focused on the 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
Significant Increase in Oil Price: The energy market continues to enjoy support from geopolitical uncertainty amid Russia’s military operations in Ukraine. In March, Brent crude — the international benchmark — surged to a 13½-year high of almost $140 on concerns about supplies from Russia, which is one of the world's largest producers of the commodity. The Biden administration’s ban on the import of Russian crude and energy products contributed to oil’s rapid price increase. Agreed, crude has pulled back from its lofty levels, but with the conflict showing no signs of a quick resolution and the European Union finally following the United States in blocking imports of Russian energy — even at the detriment of their economies — the oil bulls are getting a fresh impetus. 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.
Lower Cost Structure: The energy companies have changed their approach to spending capital. Over the past few years, producers have 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 restrict short-term production but are expected to preserve cash flow, support balance sheet strength, and help the companies to eventually emerge stronger. In particular, despite continued inflation and supply chain challenges, cash from operations is on a sustainable path as revenues improve and companies slash capital expenditures from the pre-pandemic levels amid sharply higher commodity prices.
Strong Financial Returns for Shareholders: The sharp increase in crude prices has allowed the upstream operators to deliver a solid financial performance. Cash from operations looks sustainable as revenues improve and companies cut capital expenditures from the pre-pandemic levels amid sharply higher commodity realizations. To put it simply, the environment of strong prices has helped the E&P firms to generate significant “excess cash,” which they intend to use to boost investor returns. In fact, energy companies are increasingly allocating their rising cash pile by way of dividends and buybacks to pacify the long-suffering shareholders.
Zacks Industry Rank Reflects Upbeat 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 #52, which places it in the top 21% 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 improving 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. While the industry’s earnings estimate for 2022 have surged 444.7% in the past year, the same for 2023 have risen by an astounding 7,700% over the same timeframe.
Considering the encouraging 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 much 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 152.3% over this period compared with the broader sector’s increase of 36.3%. Meanwhile, the S&P 500 has lost 3.6%.
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 4.97X, significantly lower than the S&P 500’s 13.04X. However, it is above the sector’s trailing-12-month EV/EBITDA of 4.42X.
Over the past five years, the industry has traded as high as 26.26X, as low as 2.19X, with a median of 8.34X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Oil and Gas - International E&P Stocks to Buy Now
Vermilion Energy: Vermilion Energy is an oil and gas explorer with producing properties in Europe, North America and Australia. The energy explorer’s diversification across different continents provides it with certain advantages relative to the other upstream players. VET, with its unique portfolio of high-margin, low-decline assets, is currently focused on cost reductions and positive free cash flow generation.
Valued at around $2.3 billion, Vermilion Energy has a projected earnings growth rate of 111.9% for 2022. VET currently carries a Zacks Rank #1 (Strong Buy). Vermilion Energy’s shares have soared around 166.7% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Price and Consensus: VET
Tullow Oil: Tullow Oil is a London-based hydrocarbon producer and explorer, focusing mainly on Africa. TUWOY’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.
Over the past 60 days, Tullow Oil saw the Zacks Consensus Estimate for 2022 move up 33.3%. TUWOY carries a Zacks Rank #2 (Buy). Tullow Oil’s shares have lost some 7.9% in a year.
Price and Consensus: TUWOY
EnQuest: This London-based upstream operator has key operations in the UK North Sea and Malaysia. The company’s impressive production efficiency across the portfolio is at the crux of ENQUF’s growth story. EnQuest has adjusted its capital plans to the prevailing market conditions, resulting in strong operating cash flows. ENQUF also possesses an active hedging program that provides further downside protection from commodity price fluctuations.
The 2022 Zacks Consensus Estimate for EnQuest Energy indicates 53.9% earnings per share growth over 2021. The Zacks Rank #2 ENQUF’s shares are up 31% in a year.
Price and Consensus: ENQUF