Oil prices are still highly favorable for upstream business, despite volatilities and uncertainties are affecting the energy market. Integrated energy players’ midstream business is also sound since the companies generate stable fee-based revenues from pipeline and storage assets, thereby enhancing the outlook for the Zacks
Oil & Gas US Integrated industry. Among the frontrunners in the industry that will possibly make the most of the handsome business scenario are ConocoPhillips ( COP Quick Quote COP - Free Report) , Occidental Petroleum Corporation ( OXY Quick Quote OXY - Free Report) , Hess Corporation ( HES Quick Quote HES - Free Report) and Cactus Inc. ( WHD Quick Quote WHD - Free Report) . Industry Description
The Zacks Oil & Gas US Integrated industry comprises companies 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 pipeline 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 wherein the transported oil volumes are converted to finished products, comprising gasoline, natural gas liquids and diesel, through refining activities.
3 Trends Shaping the Future of the Oil & Gas US Integrated Industry
The price of West Texas Intermediate (WTI) crude is trading higher than the $80-per-barrel mark, still favorable for exploration and production activities. Possibilities of weak global economic growth, as central banks continue to raise interest rates to combat high inflations, could hurt oil demand. This bearish factor will probably get outweighed by the looming winter, which could increase the demand for heating oil, supporting crude price, at least in the short run. Oil Price Still High: The integrated companies’ midstream business is relatively less exposed to the volatility in commodity prices. This is because the pipeline and storage assets are usually booked by shippers for the long term, securing stable fee-based revenues. Stable Fee-Based Revenues:
Integrated players in the United States have recognized climate change as a serious risk that needs to be addressed. The companies are now focused on reducing greenhouse gas emissions and flaring rates. Climate Change Position: Zacks Industry Rank Indicates Bullish 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 #96, which places it in the top 38% of more than 250 Zacks industries.
Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates bullish near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform 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 and the Zacks S&P 500 composite over the past year.
The industry has risen 49.1% over this period against the S&P 500’s decline of 15.7% and the broader sector’s growth of 16.7%.
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 4.12X, lower than the S&P 500’s 11.42X. It is, however, higher than the sector’s trailing-12-month EV/EBITDA of 3.25X.
Over the past five years, the industry has traded as high as 13.41X, as low as 3.33X, with a median of 5.84X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
4 US Integrated Oil Stocks Moving Ahead of the Pack
Cactus: Cactus has been aiding its clients in fast-tracking their well drilling and completion activities. The company has also been enabling lower operator emissions per barrel of production. Thus, there has been a significantly lower carbon intensity per well. Cactus sports a Zacks Rank #1 (Strong Buy), and has witnessed upward earnings estimate revisions for 2022 and 2023 over the past 30 days. Price and Consensus: WHD ConocoPhillips: Considering production and reserves, ConocoPhillips is among the leading upstream energy players in the world. COP is strongly focused on returning capital to shareholders. The energy major has increased its planned 2022 return of capital to $15 billion.
ConocoPhillips, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 141.9% for 2022.
Price and Consensus: COP Hess: Headquartered in New York, Hess is a leading upstream firm with a footprint in Bakken, the Gulf of Mexico and offshore Guyana. The firm believes that its position in Guyana is strong enough to generate growth in long-term cashflows.
For 2022, Hess, carrying a Zacks Rank #3, has seen three upward earnings estimate revisions in the past 60 days.
Price and Consensus: HES Occidental Petroleum: Headquartered in Houston, TX, Occidental Petroleum is an oil and natural gas explorer with a presence in the midstream energy business. Apart from additional cost-saving measures, it has been capturing acquisition cost synergies, aiding its bottom line.
OXY has seen upward earnings estimate revisions for its 2022 bottom line over the past 30 days. Occidental Petroleum, with a Zacks Rank of 3, is likely to see earnings growth of 331.8% for 2022.
Price and Consensus: OXY