The crude pricing environment is highly favorable for the integrated energy company’s exploration and production operations. The integrated players also have a stable midstream business that generates cashflows during all the business cycles, thereby making the prospects of the Zacks Oil and Gas Integrated International industry promising.

Also, due to their integrated business model, Exxon Mobil Corporation (XOM Quick QuoteXOM - Free Report) , Chevron Corporation (CVX Quick QuoteCVX - Free Report) and BP plc (BP Quick QuoteBP - Free Report) are well-positioned to make the most of the promising business environment.

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

High Oil Price to Aid Cash Flows: The price of West Texas Intermediate (“WTI”) crude is trading at more than the $90 per barrel mark. The high price is being backed by ongoing tensions in the Middle East. Also, the U.S. Energy Information Administration (“EIA”) in its latest short-term energy outlook projected WTI at $87.41 per barrel this year, higher than $65.40 last year. A highly favorable pricing environment for the commodity is likely to continue to back the upstream operations of the integrated energy players.

Sturdy Midstream Demand: With the possibility of upstream activities to ramp up, thanks to strong commodity prices, oil and gas production is expected to increase further. This will likely boost the demand for pipeline and storage assets since more commodities will need to be transported and stored. Importantly, the midstream business has lower exposure to commodity price volatility since shippers generally book pipeline assets for the long term, thereby generating stable fee-based revenues.

Business Diversification: International integrated energy companies are gradually investing in the renewable business. Thus, by diversifying operations, companies will be able to capitalize on the mounting demand for cleaner energy.

Zacks Industry Rank Indicates Bullish Prospects

The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil - Energy sector. The industry carries a Zacks Industry Rank #3, which places it in the top 1% 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 bleak 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 bet on, let’s take a look at the industry’s recent stock market performance and valuation picture.

Industry Outperforms the Sector and the S&P 500

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

The industry has rallied 50.3% over this period compared with the S&P 500’s surge of 36.3% and the broader sector’s improvement of 47%.

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 6.68X, lower than the S&P 500’s 18.20X. It is also below the sector’s trailing 12-month EV/EBITDA of 6.91X.

Over the past five years, the industry has traded as high as 7.30X and as low as 2.80X, with a median of 4.19X.

Trailing 12-Month EV/EBITDA Ratio

3 Integrated International Stocks to Bet on Right Away

BP is an integrated energy giant and is well-positioned to capitalize on high oil prices through its upstream operations. Notably, increasing global demand for LNG will continue to support natural gas. Therefore, BP, currently sporting a Zacks Rank #1 (Strong Buy), through its upstream activities, is well-positioned to benefit from the rising demand for clean energy. You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: BP

With upstream businesses contributing the most to its earnings, ExxonMobil’s business outlook seems promising, thanks to high oil prices. Investors should also keep in mind that XOM, carrying a Zacks Rank #2 (Buy), has a strong balance sheet, on which it could rely during an unfavorable business environment. The debt to capitalization of ExxonMobil stands at 14.04%, lower than the 30.1% of the industry’s composite stocks. Coming to the integrated energy giant’s dividend commitment story, over the past 43 years, ExxonMobil has been rewarding its shareholders with annual dividend hikes at an average rate of 5.8%.

Price and Consensus: XOM

Chevron is an integrated energy giant with a stable business model. In the Permian, the most prolific basin in the United States, CVX, with a Zacks Rank of 1, has a strong footprint. Also, the company has a pristine balance sheet with significantly lower debt capital exposure than the industry’s composite stocks.

Price and Consensus: CVX