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4 Integrated Energy Stocks Set to Escape Industry Weakness

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Increased oil prices are hurting the refining business since the input price is quite high. Also, declining free cashflow and rising demand for renewables are making the outlook for the Zacks Oil and Gas Integrated International industry gloomy.

Among the companies in the industry that will probably survive the business challenges are Exxon Mobil Corporation (XOM - Free Report) , Shell plc (SHEL - Free Report) , BP plc (BP - Free Report) and Eni SpA (E - Free Report) .

About the Industry

The Zacks Oil and Gas Integrated International industry covers companies primarily involved in upstream, midstream and downstream operations. These companies have upstream businesses in the United States (including prolific shale plays and the deepwater Gulf of Mexico), Asia, South America, Africa, Australia and Europe. Midstream operations of energy companies entail transporting oil, natural gas liquids and refined petroleum products. In downstream businesses, the firms buy raw crude to produce refined petroleum products. The companies’ downstream activities involve chemical businesses that manufacture raw materials for making plastics. The integrated players are now gradually focusing on renewables, leading to the energy transition. The firms aim to lower emissions from operations and cut the carbon intensity of the products sold.

3 Trends Shaping the Future of the Industry

Refining Business Under Pressure: Oil price is trading at a significantly higher level. This is leading to an increase in input cost for the refiners, thereby squeezing the profit of the refining business of the integrated energy companies. 

Declining Free Cashflows: Since the third quarter of 2022, some of the major integrated players belonging to the industry have witnessed a considerable decline in free cashflows. This downturn can be linked to the easing of oil prices from their post-pandemic peaks, coupled with the companies' significant capital expenditures during the same time frame. Considering the limited likelihood of crude oil prices reaching the triple-digit level in the foreseeable future and the firms’ approach to financing their substantial budget primarily through operating cash flow, we expect the energy players’ free cash flows to remain under pressure.

Growing Demand for Renewables a Concern: Governments, investors and stakeholders are placing growing emphasis on addressing climate change, leading to an increased demand for renewable energy. Consequently, the demand for products reliant on oil, natural gas and natural gas liquids is expected to decline, with solar and wind energy gaining prominence in the energy landscape. The integrated energy firms are adversely impacted by these trends as the companies are primarily engaged in the production and transportation of fossil fuels, such as oil, and selling refined petroleum products.

Zacks Industry Rank Indicates Bearish Outlook

The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil - Energy sector. It carries a Zacks Industry Rank #196, which places it in the bottom 22% 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 bearish 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 Underperforms Sector and S&P 500

The Zacks Oil and Gas Integrated International industry has underperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.

The industry has fallen 1.2% over this period compared to the S&P 500’s gain of 27.3% and the broader sector’s rise of 4%.

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 Enterprise Value/Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA) ratio. This is because the valuation metric takes not just equity into account but also the level of debt.

On the basis of the trailing 12-month EV/EBITDA, the industry is currently trading at 3.27X, lower than the S&P 500’s 14.66X. It is also below the sector’s trailing 12-month EV/EBITDA of 3.76X.

Over the past five years, the industry has traded as high as 6.07X and as low as 2.57X, with a median of 4.18X.

Trailing 12-Month EV/EBITDA Ratio

4 Integrated International Stocks to Keep a Close Eye on

BP: It is a British energy giant that is planning to become a net-zero emissions player by 2050 or earlier. The integrated company intends to invest and create its renewable energy generation capacity of 20 gigawatts by 2025. The company, carrying a Zacks Rank #3 (Hold), also has strong upstream and downstream activities. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: BP

Shell: In liquified natural gas, Shell is among the leading global players. Also, the rapid growth of its renewable business is among Shell's core strategies. On the renewable energy front, Shell has roughly 47 gigawatts of renewable generation capacity, considering projects that are either in operation, under construction or in the pipeline. Thus, for renewables and energy solutions, SHEL, with a Zacks Rank of 3, is investing actively in solar energy, wind energy, electric vehicle charging and others.

Price and Consensus: SHEL

Eni: Eni is leading the energy transition as well. The integrated energy player has been building a full set of decarbonized products and services for clients to achieve carbon neutrality by mid-century. Even though the energy business scenario is challenging, Eni’s efficient exploration keeps it highly competitive.  

Price and Consensus: E

ExxonMobil: It is among the largest integrated energy companies in the world. The energy major can rely on its strong balance sheet to withstand any business turmoil. ExxonMobil, with a Zacks Rank of 3, is banking on low-cost project pipelines centered around the Permian — the most prolific basin in the United States — and offshore Guyana resources.

Price and Consensus: XOM

See More Zacks Research for These Tickers

Normally $25 each - click below to receive one report FREE:

BP p.l.c. (BP) - free report >>

Exxon Mobil Corporation (XOM) - free report >>

Eni SpA (E) - free report >>

Shell PLC Unsponsored ADR (SHEL) - free report >>

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