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Robust Near-Term Outlook for Oil & Gas US Integrated Industry

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The Zacks Oil and Gas U.S. Integrated industry comprises stocks having exposure to upstream, midstream and downstream energy businesses mostly in the domestic market.

Upstream activities involve exploration and production of oil and natural gas, while transportation of extracted commodities from wellhead to storage and processing terminals constitutes midstream operations. Through downstream businesses, the integrated energy firms refine raw crude before distributing the end products like gasoline to retail petrol pumps.

With exposure to every facet of energy operations, the integrated firms are relatively immune to volatility in oil and gas prices and hence could reward investors with stable cash flows.  

Here are the three major industry themes:

  • Natural gas futures price recently crossed the $4 per million Btu psychological mark for the first time since 2014-end, with winter paying an early visit to the United States this year and also on forecasts of freezing weather conditions. Global clean energy demand is also fueling natural gas price. Meanwhile, on Nov 23, the U.S. crude benchmark plunged to its lowest level since mid-October 2017, reflecting rising supply from major producers and fear that an economic slowdown will dampen the outlook for demand. Temporary U.S. allowance to some nations to purchase Iranian crude despite Washington’s restored sanctions against the Islamic Republic also compounded the losses. However, Saudi Arabia’s intention to push OPEC for a joint production cut could help oil price to recover. Overall, companies with natural-gas heavy production should benefit from the fuel’s healthy prices.
  • There has been a dearth of sufficient midstream energy assets to support escalating production of natural gas and oil in the U.S. shale fields. The mounting demand for additional pipeline and storage facilities compelled energy firms to continue investing billions of dollars for fresh midstream infrastructures. Although new pipeline projects could majorly address the bottleneck issue, these are unlikely to start operations before the second half of 2019.
  • Constrained pipeline capacity is prompting operators in the Permian Basin to sell stranded oil at a big discount to Cushing, OK WTI crude price. Hence, refiners may continue to gain from low input cost. This could be offset partially by a slowing domestic economy, as projected by many economists – following rising interest rate and intensifying U.S.-China trade war – which might hurt demand for end products like gasoline.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Oil and Gas U.S. Integrated industry is an 11-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #106, which places it in the top 41% 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. Looking at the aggregate earnings estimate revisions, it appears that analysts are gaining confidence in this group’s earnings growth potential. In the past year, the industry’s earnings estimate for the current year has surged by almost 300%.  

Before we present a few stocks that you may want to hold on to, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms S&P 500 & Sector

The Zacks Oil and Gas U.S. Integrated industry has outperformed the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.

The stocks in the industry have collectively risen 9.6% over this period compared with the S&P 500’s nominal rise of 1%. The broader sector has however declined 5.7%.

One-Year Price Performance

Industry’s Current Valuation

On the basis of trailing 12-month enterprise value-to-earnings before interest, tax, depreciation, and amortization (EV/EBITDA) ratio, which is a commonly used multiple for valuing oil and gas stocks, we see that the industry is currently trading at 5.61 compared with the S&P 500’s 10.64 and the sector’s 5.34.  

Over the past five years, the industry has traded as high as 20.97X, as low as 4.29X and at the median of 8.37X, as the chart below shows.

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

Bottom Line

Since the stocks belonging to the industry are integrated energy players, the firms’ overall businesses, with low correlation to commodity pricing volatility, successfully managed to earn $5.8 billion net operating cash flow, which skyrocketed 44.9% through the first-nine months of 2018.

Of the total cash flow, nearly $1 billion has been allotted as dividend over the same time frame. Notably, the stocks belonging to the industry collectively paid a five-year median dividend yield of 3.1%, higher than the elite S&P 500 Index’s 1.9% yield.

Overall, cheap input cost of the refiners, persistent low feedstock costs for petrochemical plants, mounting demand for fresh midstream assets and need for fuel to heat up rooms this winter will continue to back the stocks belonging to the industry to generate handsome cash flows.   

None of the stocks in the Zacks Oil and Gas U.S. Integrated space currently sports a Zacks Rank #1 (Strong Buy) or #2 (Buy). However, we are presenting four stocks with a Zacks Rank #3 (Hold) that investors may focus on.

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

ConocoPhillips (COP - Free Report) : This Houston, TX-based energy firm has one of the largest upstream operations in the world. The Zacks Consensus Estimate for current-year EPS has increased almost 8% over the past 60 days. The stock has gained 29.8% in the past year.

Price and Consensus: COP

Occidental Petroleum Corp. (OXY - Free Report) : The consensus estimate for the company’s current-year EPS has moved up nearly 4% over the past 60 days. In the past year, the energy player has gained 2.6%. The company has strong presence in operations related to upstream, midstream & marketing and chemicals.

Price and Consensus: OXY


Hess Corp. (HES - Free Report) : For this energy firm with extensive exploration and production businesses, the Zacks Consensus Estimate for the current year has been revised to a profit of 2 cents from a loss of 66 cents over the past 60 days. The stock has gained 24.5% over the past year.

Price and Consensus: HES


PermRock Royalty Trust (PRT - Free Report) : The stock with interests in upstream properties has declined 30.5% in the past year. The consensus estimate for current-year EPS for the stock has remained stable over the past 60 days.

Price and Consensus: PRT


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