Despite volatilities and uncertainties affecting the energy market, oil prices are still highly favorable for upstream businesses. 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) . About the Industry
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 $70-per-barrel mark, still favorable for exploration and production activities. Per the U.S. Energy Information Administration, the WTI spot average price will be $77.10 per barrel in 2023, suggesting the upstream business environment will favor the integrated players. 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 #98, which places it in the top 39% 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 fallen 1.7% over this period compared with the S&P 500’s decline of 11.3% and the broader sector’s deterioration of 3.5%.
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 3.46X, lower than the S&P 500’s 12.19X. It is, however, higher than the sector’s trailing-12-month EV/EBITDA of 2.84X.
Over the past five years, the industry has traded as high as 13.41X, as low as 3.32X, with a median of 5.62X.
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 carries a Zacks Rank #3 (Hold) and is likely to see earnings growth of 27.2%. 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. Last year, the upstream firm returned as high as $15 billion to shareholders.
#3 Ranked COP employed a three-tier framework that comprised $5.7 billion in cash distributions through the ordinary dividend and variable return of cash route, while the remaining $9.3 billion was distributed through share repurchases.
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 its position in Guyana is strong enough to generate growth in long-term cashflows.
For 2023, Hess, carrying a Zacks Rank #3, has seen upward earnings estimate revisions in the past seven days.
Price and Consensus: HES Occidental Petroleum: Headquartered in Houston, TX, Occidental Petroleum, with a Zacks Rank of 3, 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. Price and Consensus: OXY