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Outlook for Oil & Gas Integrated International Industry Bleak

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The Zacks Oil and Gas Integrated International industry covers companies that are primarily involved in upstream, midstream and downstream businesses.

These companies have upstream businesses across the United States (including prolific shale plays and deepwater Gulf of Mexico), Asia, South America, Africa, Australia and Europe.

The midstream operations of the integrated energy companies entail transporting oil, natural gas liquids and refined petroleum products. Under downstream businesses, the firms buy raw crude to produce refined petroleum products. The companies’ downstream activities also involve chemical businesses that manufacture raw material used for manufacturing plastics.

Let’s take a look at the industry’s three major themes:

  • Oil prices continue to retreat from historic gains after Saudi Arabia restored 50% of the crude production losses stemming from the drone attack on the kingdom’s oil facilities. Oil price is unlikely to recover anytime soon as Saudi Arabia confirmed that by the end of September, production will return to the pre-strike level. The weak crude pricing scenario is hurting integrated energy firms’ upstream operations.
     
  • Since most nations are focusing on curbing greenhouse gas emissions, the companies are likely to continue to produce huge natural gas volumes. Since the plentiful supply of the commodity has outpaced demand for clean energy, the price of natural gas is likely to remain low, further hurting profits from upstream activities.
     
  • The prolonged U.S.-China trade dispute and the slowdown in global economy have dented demand for refined petroleum products and chemicals, thereby dampening the prospects of downstream businesses.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil - Energy sector. It carries a Zacks Industry Rank #225, which places it at the bottom 12% 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 outperforms the bottom 50% by a factor of more than 2 to 1.

The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for the current year has gone down almost 36%.

Before we present a few international integrated energy stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.

Industry Lags S&P 500 But Outperforms Sector

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

The industry has declined 15% over this period against the S&P 500’s rise of 1.5% and the broader sector’s decline of 20%.

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) ratio, the industry is currently trading at 4.94X, lower than the S&P 500’s 11.22X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 4.75X.

Over the past five years, the industry has traded as high as 9.91X, as low as 3.91X, with a median of 6.13X.

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



Bottom Line

With the commodity pricing environment remaining weak and a slowing global economy hurting energy demand, the outlook for the integrated firms’ upstream, midstream and downstream businesses remains gloomy.

Here, we present five stocks with a Zacks Rank #3 (Hold) that investors may currently hold on to. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Exxon Mobil Corporation (XOM - Free Report) : This Irving, TX-based firm is the largest energy player in America. The company has average positive earnings surprise of 11.1% for the last four quarters. Notably, the Zacks Consensus Estimate for the firm’s 2019 earnings has remained the same over the past seven days. For 2020, the firm is likely to see earnings growth of 53%.

Price and Consensus: XOM



Chevron Corporation (CVX - Free Report) : Headquartered in San Ramon, CA, Chevron is the second-largest energy player in the United States. The company beat the Zacks Consensus Estimate in each of the prior four quarters, the average positive earnings surprise being 13.3%. The Zacks Consensus Estimate for the integrated company’s 2019 earnings has stayed put over the past seven days. Chevron is expected to report earnings growth of 22.4% in 2020.

Price and Consensus: CVX



BP plc (BP - Free Report) : The British integrated energy firm has a positive average earnings surprise of 19.1% for the trailing four quarters. The company has an estimated earnings growth rate of 10.1% for the last five years, higher than the industry’s 7.4%.

Price and Consensus: BP



Eni SpA (E - Free Report) : Headquartered in Rome, Italy, the company’s operations include upstream, midstream and downstream activities. The company posted an average positive earnings surprise of 0.6% for the past four quarters. For 2019, the company’s Zacks Consensus Estimate for earnings has been stable over the past seven days. We expect the firm to post earnings growth of 26% in 2020.

Price and Consensus: E



TOTAL SA (TOT - Free Report) : Headquartered in Paris, France, the company is the world’s leading integrated energy player. In the next five years, the company is expected to post earnings growth of roughly 8%, higher than the industry’s 7.4%.  

Price and Consensus: TOT



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