The high crude prices, although favorable for upstream operations, have been severely hurting the integrated energy company’s refining operations. The slowdown in production growth of crude oil will probably limit earnings from upstream operations. On top of that, increasing renewables demand will make the outlook of the Zacks Oil & Gas US Integrated industry gloomy.

ConocoPhillips (COP Quick QuoteCOP - Free Report) , Occidental (OXY Quick QuoteOXY - Free Report) and National Fuel Gas Company (NFG Quick QuoteNFG - Free Report) are the energy companies that could sail through the challenging business scenario.

About the Industry

The Zacks Oil & Gas US Integrated industry comprises companies primarily involved in upstream and midstream energy businesses. The upstream operations involve 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 with oil and gas prices. The produced commodity volumes are 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 Industry

High Crude Prices to Hurt Refining:  The price of West Texas Intermediate (WTI) crude is trading at more than $85 per barrel, according to data from oilprice.com, owing to the ongoing war in the Middle East. Also, in its latest short-term energy outlook, the U.S. Energy Information Administration mentioned its expectation for the WTI oil price this year at $73.61 per barrel, higher than $65.40 last year. The high crude pricing environment is hurting the refining business of the integrated energy players.

Slowdown in Production Growth: The weakness in oil prices will likely impede production growth. Additionally, energy companies in the United States are increasingly focusing on returning capital to shareholders rather than allocating additional funds to production, which aligns with investors’ demands. This is hurting the integrated companies’ top lines.

Increasing Focus on Renewables: The world is gradually shifting to cleaner fuel and renewable energy to combat climate change. Thus, with solar and wind energy gaining prominence, demand for fossil fuels and petroleum products is likely to decline gradually, although the timeline is uncertain. The trend is not favorable for integrated players’ upstream and downstream operations.

Zacks Industry Rank Indicates Bearish Outlook

The Zacks Oil & Gas US Integrated industry is a 12-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #189, which places it in the bottom 23% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is the average of the Zacks Rank of all the member stocks, indicates gloomy 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 Lags S&P 500 & Sector

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

The industry has rallied 17.8% over this period compared with the broader sector’s gain of 32.7% and the S&P 500’s surge of 18.3%.

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.

Based on the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA), the industry is currently trading at 5.68X, lower than the S&P 500’s 17.18X. It is also lower than the sector’s trailing 12-month EV/EBITDA of 6.85X.

Over the past five years, the industry has traded as high as 13.82X and as low as 3.10X, with a median of 4.63X.

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

3 US Integrated Oil Stocks to Keep a Close Eye on

ConocoPhillips

With operations in resources with low breakeven costs, ConocoPhillips is likely to sail through the soft crude pricing environment. COP has operations in the Lower 48, which comprise the Permian, the most prolific basin in the United States. Other low-cost shale plays in the Lower 48 include Bakken and Eagle Ford. Thus, it is expected that upstream operations will be profitable for COP, which carries a Zacks Rank #3 (Hold), even if the oil price remains low. The current crude prices are high, and hence are highly favorable for COP’s upstream operations.

Price and Consensus: COP

Occidental

In the United States, Occidental, with a Zacks Rank of 3, is a major producer of oil and natural gas. In the domestic market, OXY has been experiencing efficiency improvements, including higher production volumes, while reducing capital spending and lowering operating costs. For creating long-term value for shareholders, Occidental has a strong focus on redirecting capital toward higher-return oil and gas projects.

Price and Consensus: OXY

National Fuel Gas

National Fuel Gas is well poised to navigate a volatile energy business environment, owing to its integrated business model, encompassing upstream, midstream and downstream activities. The #3 Ranked NFG is likely to capitalize on clean energy demand, thanks to its presence in the natural gas-rich Appalachian basin. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Price and Consensus: NFG