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4 Stocks in the U.S. Upstream Industry Worth a Closer Look
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While the commodity benchmarks have retreated from their earlier highs, they are strong enough for the Zacks Oil and Gas - Exploration and Production - United States industry to notch substantial gains. The recent increases in crude and fuel inventories, coupled with an uninspiring production cut announcement from OPEC, have overshadowed the energy demand prospects. The situation is further complicated by China's economic downturn. Natural gas is also not immune to the broader market decline, trading notably lower year to date. Despite macro challenges causing uncertainties in demand, the sector exhibits resilience, particularly for companies prioritizing growth and operational efficiency. EOG Resources (EOG - Free Report) , Matador Resources Company (MTDR - Free Report) , Northern Oil and Gas (NOG - Free Report) , and Evolution Petroleum (EPM - Free Report) are noteworthy options for investors navigating this intricate landscape, offering potential amidst prevailing economic headwinds.
About the Industry
The Zacks Oil and Gas - US E&P industry consists of companies primarily based in the domestic market, 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' results are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns and causes them to alter their production growth rates. The E&P operators are also exposed to exploration risks where drilling results are comparatively uncertain.
4 Key Trends to Watch in the Oil and Gas - US E&P Industry
Sustainable Cost-Cutting Efforts: 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 are expected to preserve cash flow and support balance sheet strength.
Signs of Softening Consumption: WTI crude, the U.S. benchmark, recently closed under $70 per barrel for the first time in over five months due to a substantial build in gasoline inventories and near-record domestic production. Despite OPEC+'s announcement of nearly 2 million additional barrels per day in production cuts, oil prices remained weak as the market sought more robust commitments. China's economic challenges added to the gloom, affecting global demand forecasts. Shifting focus to natural gas, the commodity, which had slumped to a 25-year low in June 2020 but reached $10 per MMBtu in August 2022, is now trading below $3. This decline is attributed to heightened production levels and predictions of lackluster weather-related demand.
Inflationary Pressure: Many U.S. energy upstream firms are grappling with escalating costs, predominantly tied to increased expenditures on maintenance and inventory. The current inflationary backdrop, coupled with tightness in the supply chain, not only elevates expenses but also adversely impacts capital programs. The substantial rise in costs, hard to overlook, is overshadowing any advantages derived from an increase in commodity prices. We expect that the challenges posed by inflation-related headwinds will persist, posing obstacles to growth and margin figures without a swift resolution in sight. This could result in a challenging path ahead for oil and gas equities, particularly amid concerns of weakened energy demand amid recessionary threats, potentially jeopardizing the commodity's upward trajectory.
Substantial Shareholder Returns: The triple-digit crude prices achieved post-pandemic in the previous year enabled upstream operators to exhibit robust financial performance. Notably, cash from operations has maintained a sustainable trajectory, with improved revenues and companies reducing capital expenditures from pre-pandemic levels amid stable commodity realizations. In essence, the favorable pricing environment in 2022 facilitated E&P firms in generating substantial "excess cash," which they plan to deploy to enhance returns for investors. Indeed, an increasing number of energy companies are channeling their growing cash reserves through dividends and buybacks, aiming to appease long-suffering shareholders.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - US E&P industry is a 38-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #90, which places it in the top 36% 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 upbeat 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 an encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming optimistic about this group’s earnings growth potential. While the industry’s earnings estimates for 2023 have gone up 10.7% in the past four months, the same for 2024 has risen 7%.
Considering the encouraging dynamics 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 Underperforms S&P 500 & Sector
The Zacks Oil and Gas - US E&P industry has fared worse than the Zacks S&P 500 composite as well as the broader Zacks Oil – Energy sector over the past year.
The industry has gone down 7.4% over this period compared with the broader sector’s decrease of 2.2%. Meanwhile, the S&P 500 has gained 16.5%.
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. 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 noncash expenses.
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 6.99X, significantly lower than the S&P 500’s 13.21X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 3.61X.
Over the past five years, the industry has traded as high as 12.20X, as low as 2.86X, with a median of 5.68X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
4 Stocks to Watch
Matador Resources Company: Matador’s upstream operations are mainly concentrated in the Delaware Basin, which is among the country’s most prolific oil and gas shale plays. Over the years, the company has boosted its Delaware holdings manifold and currently controls around 150,800 net acres. Matador plans to turn to sales a net of 100 wells this year — including operated and non-operated wells, signifying a solid production outlook. The implementation of dual-fuel and simul-frac techniques demonstrates its commitment to cost-effectiveness, saving $250,000 to $350,000 per well.
EOG Resources: EOG Resources is an energy explorer with an attractive growth profile, upper-quartile returns and a disciplined management team. With highly productive acreages in premier oil shale plays like the Permian and Eagle Ford, EOG has numerous untapped high-quality drilling sites. This not only bolsters the company’s production outlook but also lowers its risk profile. Additionally, EOG Resources maintains a strong balance sheet.
EOG beat the Zacks Consensus Estimate for earnings in three of the last four quarters and missed in the other. The company delivered a trailing four-quarter earnings surprise of roughly 9.2%, on average. EOG currently carries a Zacks Rank #2 (Buy). The energy explorer’s shares have lost 3.8% in a year.
Price and Consensus: EOG
Northern Oil and Gas: Northern Oil and Gas’ core operations are focused on three leading basins of the United States — the Williston, Permian and the Appalachian. The upstream operator employs a unique nonoperating business model, which helps it to keep costs down and increase free cash flow. Prioritizing returns to investors, NOG pays a 40 cents per share quarterly base dividend following a recent 5.3% hike.
Carrying a Zacks Rank #3 (Hold), the 2023 Zacks Consensus Estimate for Northern Oil and Gas indicates 6.6% earnings per share growth over 2022. NOG shares have gained 11.3% in a year.
Price and Consensus: NOG
Evolution Petroleum: Founded in 2003, Evolution Petroleum is an independent upstream operator engaged in the exploration, development and production of onshore oil and natural gas properties in the United States. Headquartered in Houston, TX, EPM is focused on the non-operated working interests in high-quality, long-life reserves in several properties across the nation. Evolution Petroleum is known for prioritizing the maximization of shareholder returns through buybacks and dividends.
EPM beat the Zacks Consensus Estimate for earnings in two of the last four quarters and missed in the other two. The Zacks Rank #3 company delivered a trailing four-quarter earnings surprise of roughly 3.3%, on average. Evolution Petroleum’s shares have lost 11.3% in a year.
Price and Consensus: EPM
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4 Stocks in the U.S. Upstream Industry Worth a Closer Look
While the commodity benchmarks have retreated from their earlier highs, they are strong enough for the Zacks Oil and Gas - Exploration and Production - United States industry to notch substantial gains. The recent increases in crude and fuel inventories, coupled with an uninspiring production cut announcement from OPEC, have overshadowed the energy demand prospects. The situation is further complicated by China's economic downturn. Natural gas is also not immune to the broader market decline, trading notably lower year to date. Despite macro challenges causing uncertainties in demand, the sector exhibits resilience, particularly for companies prioritizing growth and operational efficiency. EOG Resources (EOG - Free Report) , Matador Resources Company (MTDR - Free Report) , Northern Oil and Gas (NOG - Free Report) , and Evolution Petroleum (EPM - Free Report) are noteworthy options for investors navigating this intricate landscape, offering potential amidst prevailing economic headwinds.
About the Industry
The Zacks Oil and Gas - US E&P industry consists of companies primarily based in the domestic market, 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' results are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns and causes them to alter their production growth rates. The E&P operators are also exposed to exploration risks where drilling results are comparatively uncertain.
4 Key Trends to Watch in the Oil and Gas - US E&P Industry
Sustainable Cost-Cutting Efforts: 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 are expected to preserve cash flow and support balance sheet strength.
Signs of Softening Consumption: WTI crude, the U.S. benchmark, recently closed under $70 per barrel for the first time in over five months due to a substantial build in gasoline inventories and near-record domestic production. Despite OPEC+'s announcement of nearly 2 million additional barrels per day in production cuts, oil prices remained weak as the market sought more robust commitments. China's economic challenges added to the gloom, affecting global demand forecasts. Shifting focus to natural gas, the commodity, which had slumped to a 25-year low in June 2020 but reached $10 per MMBtu in August 2022, is now trading below $3. This decline is attributed to heightened production levels and predictions of lackluster weather-related demand.
Inflationary Pressure: Many U.S. energy upstream firms are grappling with escalating costs, predominantly tied to increased expenditures on maintenance and inventory. The current inflationary backdrop, coupled with tightness in the supply chain, not only elevates expenses but also adversely impacts capital programs. The substantial rise in costs, hard to overlook, is overshadowing any advantages derived from an increase in commodity prices. We expect that the challenges posed by inflation-related headwinds will persist, posing obstacles to growth and margin figures without a swift resolution in sight. This could result in a challenging path ahead for oil and gas equities, particularly amid concerns of weakened energy demand amid recessionary threats, potentially jeopardizing the commodity's upward trajectory.
Substantial Shareholder Returns: The triple-digit crude prices achieved post-pandemic in the previous year enabled upstream operators to exhibit robust financial performance. Notably, cash from operations has maintained a sustainable trajectory, with improved revenues and companies reducing capital expenditures from pre-pandemic levels amid stable commodity realizations. In essence, the favorable pricing environment in 2022 facilitated E&P firms in generating substantial "excess cash," which they plan to deploy to enhance returns for investors. Indeed, an increasing number of energy companies are channeling their growing cash reserves through dividends and buybacks, aiming to appease long-suffering shareholders.
Zacks Industry Rank Indicates Positive Outlook
The Zacks Oil and Gas - US E&P industry is a 38-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #90, which places it in the top 36% 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 upbeat 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 an encouraging earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming optimistic about this group’s earnings growth potential. While the industry’s earnings estimates for 2023 have gone up 10.7% in the past four months, the same for 2024 has risen 7%.
Considering the encouraging dynamics 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 Underperforms S&P 500 & Sector
The Zacks Oil and Gas - US E&P industry has fared worse than the Zacks S&P 500 composite as well as the broader Zacks Oil – Energy sector over the past year.
The industry has gone down 7.4% over this period compared with the broader sector’s decrease of 2.2%. Meanwhile, the S&P 500 has gained 16.5%.
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. 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 noncash expenses.
On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 6.99X, significantly lower than the S&P 500’s 13.21X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 3.61X.
Over the past five years, the industry has traded as high as 12.20X, as low as 2.86X, with a median of 5.68X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
4 Stocks to Watch
Matador Resources Company: Matador’s upstream operations are mainly concentrated in the Delaware Basin, which is among the country’s most prolific oil and gas shale plays. Over the years, the company has boosted its Delaware holdings manifold and currently controls around 150,800 net acres. Matador plans to turn to sales a net of 100 wells this year — including operated and non-operated wells, signifying a solid production outlook. The implementation of dual-fuel and simul-frac techniques demonstrates its commitment to cost-effectiveness, saving $250,000 to $350,000 per well.
The Zacks Consensus Estimate for this Zacks Rank #1 (Strong Buy) upstream firm’s 2023 earnings has been revised 10% upward over the past 60 days. MTDR shares have lost 6.1% in a year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: MTDR
EOG Resources: EOG Resources is an energy explorer with an attractive growth profile, upper-quartile returns and a disciplined management team. With highly productive acreages in premier oil shale plays like the Permian and Eagle Ford, EOG has numerous untapped high-quality drilling sites. This not only bolsters the company’s production outlook but also lowers its risk profile. Additionally, EOG Resources maintains a strong balance sheet.
EOG beat the Zacks Consensus Estimate for earnings in three of the last four quarters and missed in the other. The company delivered a trailing four-quarter earnings surprise of roughly 9.2%, on average. EOG currently carries a Zacks Rank #2 (Buy). The energy explorer’s shares have lost 3.8% in a year.
Price and Consensus: EOG
Northern Oil and Gas: Northern Oil and Gas’ core operations are focused on three leading basins of the United States — the Williston, Permian and the Appalachian. The upstream operator employs a unique nonoperating business model, which helps it to keep costs down and increase free cash flow. Prioritizing returns to investors, NOG pays a 40 cents per share quarterly base dividend following a recent 5.3% hike.
Carrying a Zacks Rank #3 (Hold), the 2023 Zacks Consensus Estimate for Northern Oil and Gas indicates 6.6% earnings per share growth over 2022. NOG shares have gained 11.3% in a year.
Price and Consensus: NOG
Evolution Petroleum: Founded in 2003, Evolution Petroleum is an independent upstream operator engaged in the exploration, development and production of onshore oil and natural gas properties in the United States. Headquartered in Houston, TX, EPM is focused on the non-operated working interests in high-quality, long-life reserves in several properties across the nation. Evolution Petroleum is known for prioritizing the maximization of shareholder returns through buybacks and dividends.
EPM beat the Zacks Consensus Estimate for earnings in two of the last four quarters and missed in the other two. The Zacks Rank #3 company delivered a trailing four-quarter earnings surprise of roughly 3.3%, on average. Evolution Petroleum’s shares have lost 11.3% in a year.
Price and Consensus: EPM