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 in the United States (including prolific shale plays and deepwater Gulf of Mexico), Asia, South America, Africa, Australia and Europe.
The midstream operations of 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 making plastics.
Let’s take a look at the industry’s three major themes:
- The price of West Texas intermediate (WTI) crude has improved more than 37% in the past month, encouraging upstream energy companies operating in shale plays to reverse production cuts. Oil prices are likely to improve further since the global demand picture is improving with easing lockdowns measures that were taken to contain the spread of coronavirus. Notably, the news that Saudi Arabia and Russia have agreed in principle to extend the existing collective production cut through July is also backing the oil price recovery. Improving crude prices will thus boost integrated energy players’ cashflow from upstream operations.
- With strong presence in natural gas production, gathering and transportation businesses, the integrated companies are also well positioned to capitalize on the mounting demand for clean energy. Importantly, the companies generate stable fee-based revenues from their pipeline and terminal assets since those midstream infrastructures are being used by shippers to transport and store the produced oil and gas volumes for long term.
- The ebbing of coronavirus infections and the easing of lockdown restrictions across nations are driving worldwide fuel demand. This has brightened prospects for downstream business of integrated energy players. In other words, the integrated firms will generate improved cashflows from refining operations since demand for end products like gasoline and jet fuels is on the rise.
Zacks Industry Rank Indicates Bright Prospects
The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil - Energy sector. It carries a Zacks Industry Rank #87, which places it at the top 34% 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 encouraging 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 positive earnings outlook for the constituent companies in aggregate. 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 & Sector
The Zacks Oil and Gas Integrated International industry has lagged both the Zacks S&P 500 composite and the Zacks Oil - Energy sector over the past year.
The industry has declined 34.2% over this period against the S&P 500’s rise of 12.1% and the broader sector’s decline of 31.5%.
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 not just equity into account but also the level of debt.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 4.07X, lower than the S&P 500’s 11.40X. It is also below the sector’s trailing-12-month EV/EBITDA of 4.12X.
Over the past five years, the industry has traded as high as 9.88X, as low as 2.85X, with a median of 6.04X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
We expect the return of oil drillers to shale plays since commodity prices will recover further with a brightening demand and supply picture.
Overall, the upstream, midstream and downstream business scenarios are quite favorable for integrated energy players with operations across the world. With improving profit levels, the companies will be able to strengthen their balance sheets and other financials, which have been weakened by the coronavirus pandemic.
Here, we present one stock with a Zacks Rank #1 (Strong Buy) and another one with a Zacks Rank #2 (Buy) that are well positioned to gain. There are three other stocks with a Zacks Rank #3 (Hold) that investors may choose to hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.
Public Joint Stock Company Gazprom Neft (GZPFY - Free Report) : Based in St. Petersburg, Russia, Gazprom is a leading integrated energy firm. Over the past 30 days, the Zacks Consensus Estimate for this Zacks Rank #1 stock’s 2020 earnings per share has been revised upward.
Price and Consensus: GZPFY
Exxon Mobil Corporation (XOM - Free Report) : This Irving, TX-based firm is among the largest publicly-traded energy players in the world. The #2 Ranked company is expected to see earnings growth of 12.5% in the next five years compared with the industry’s 3.3%.
Price and Consensus: XOM
Chevron Corporation (CVX - Free Report) : Headquartered in San Ramon, CA, Chevron is one of the largest publicly-traded oil and gas companies in the world, based on proved reserves. The #3 Ranked company is expected to see earnings growth of 5% in the next five years compared with the industry’s 3.3%.
Price and Consensus: CVX
BP plc (BP - Free Report) : The British integrated energy firm has a positive average earnings surprise of 8.4% for the trailing four quarters. The Zacks #3 Ranked company has witnessed positive estimate revisions for its 2020 bottom line in the past 30 days.
Price and Consensus: BP
Royal Dutch Shell plc (RDS.A - Free Report) : Royal Dutch Shell is one of the primary oil supermajors. The Zacks #3 Ranked stock is likely to see earnings growth of 5% in the next five years compared with the industry’s 3.3%.
Price and Consensus: RDS.A