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A case of an ever-improving demand picture against constrained supply should help oil prices maintain their forward momentum. The Zacks Oil and Gas - Exploration and Production - International industry has the potential to be an outsized beneficiary of this supportive landscape. A robust income proposition should translate into more generous earnings and cash flows for upstream firms like Vermilion Energy, Capricorn Energy, Tullow Oil and VAALCO Energy.
Industry Overview
The Zacks Oil and Gas - International E&P industry consists of companies primarily operating outside the United States and focused on the exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate, etc.
The economics of oil and gas supply and demand is the fundamental driver of this industry. In particular, a producer’s cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies are vulnerable to historically volatile prices in the energy markets.
A change in realizations affects their returns on drilling inventory and causes them to alter production growth rates. These operators are also exposed to exploration risks where drilling results are uncertain.
3 Key Investing Trends to Watch in the Oil and Gas - International E&P Industry
Signs of a Tighter Market: A year and half after the pandemic-driven epic oil price crash, optimism is back in the sector with Brent crude — the international benchmark — rallying above $90-a-barrel, with talks of a potential spike of more than $100. Following the historic plunge of 2020, the oil market has made a remarkable recovery, and a tight commodity market is evident.
Apart from a favorable demand/supply dynamic, high vaccination rates in most parts of the developed world and the calibrated production cuts by the OPEC+ cartel, the commodity’s upward momentum is being supported by recent geopolitical headlines that could impact production. For example, the Russia-Ukraine tensions and the attack by Yemen's Houthi group on OPEC-member UAE gave a boost to oil by threatening supply disruptions. Importantly, commodity prices appear to have entered a protracted period of stability at levels where the operators can generate free cash flow through their drilling activities.
Sustainable Cost Reductions: The energy companies have changed their approach to spending capital. Over the past few years, producers have worked tirelessly to cut costs to a bare minimum and look for innovative ways to churn out more oil and gas. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service providers.
Moreover, driven by operational efficiencies, most E&P operators have been able to reduce unit costs, while the coronavirus-induced collapse in crude forced them to adopt a more disciplined approach to spending capital. These actions might restrict short-term production but are expected to preserve cash flow, support balance sheet strength, and help the companies eventually emerge stronger.
In particular, cash from operations is on a sustainable path as revenues improve and companies slash capital expenditures from the pre-pandemic levels amid sharply higher commodity prices.
Focus on Shareholder Returns: The sharp increase in crude prices has allowed the upstream operators to deliver a solid financial performance. In particular, cash from operations should be on a sustainable path as revenues improve and companies slash capital expenditures from the pre-pandemic levels amid sharply higher commodity realizations.
To put it simply, the environment of strong prices has helped the E&P firms to generate significant “excess cash,” which they intend to use to boost investor returns. In fact, more and more energy companies are allocating their increasing cash pile by way of dividends and buybacks to pacify the long-suffering shareholders.
Zacks Industry Rank Reflects Upbeat Outlook
The Zacks Oil and Gas – International E&P industry is a nine-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #36, which places it in the top 14% 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 improving 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 a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. This is echoed by the industry’s earnings estimates for 2022 that have surged 92.3% in the past year.
Considering the encouraging near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas - International E&P industry has fared better than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has rocketed 136.5% over this period compared with the broader sector’s increase of 42.5%. Meanwhile, the S&P 500 has gained 17.6%.
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 non-cash expenses.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 8.52X, significantly lower than the S&P 500’s 14.83X. However, it is above the sector’s trailing-12-month EV/EBITDA of 4.83X.
Over the past five years, the industry has traded as high as 28.18X, as low as 2.19X, with a median of 9.04X.
4 Oil and Gas - International E&P Stocks to Focus On
Vermilion Energy: Vermilion Energy is an oil and gas explorer with producing properties in Europe, North America and Australia. The energy explorer’s diversification across different continents provides it with certain advantages relative to the other upstream players. VET, with its unique portfolio of high-margin, low-decline assets, is currently focused on cost reductions and positive free cash flow generation.
The 2022 Zacks Consensus Estimate for Vermilion Energy stands at $2.61 per share, indicating a turnaround from the year-ago loss. VET currently carries a Zacks Rank #1 (Strong Buy). Vermilion Energy’s shares have soared around 237% in a year.
Capricorn Energy: This Edinburgh, UK-based upstream operator has key operations in Mexico apart from its home country, while its impending entry in Egypt should spur significant growth opportunities. Capricorn Energy has adjusted its capital plans to the prevailing market conditions, resulting in strong operating cash flows. CRNCY also possesses an active hedging program that provides further downside protection from commodity price fluctuations.
The 2022 Zacks Consensus Estimate for Capricorn Energy indicates 102.5% earnings per share growth over 2021. The Zacks Rank #2 (Buy) CRNCY’s shares are up 11.9% in a year.
Tullow Oil: Tullow Oil is a London-based hydrocarbon producer and explorer, focusing mainly on Africa. TUWOY’s significant positions in discovered and emerging basins and focus on capital discipline should result in a noticeable improvement in profitability. In particular, the oil and gas finder’s operational excellence and technical expertise stand it in good stead.
The 2022 Zacks Consensus Estimate for Tullow Oil indicates 130.3% earnings per share growth over 2021. TUWOY carries a Zacks Rank #3 (Hold). Tullow Oil’s shares have gained some 64.8% in a year.
VAALCO Energy: Founded in 1985, VAALCO Energy’s productive capacity is based offshore West Africa, where it focuses on growth through a combination of acquisitions and active drilling. The operator of Gabon offshore Etame license, EGY is known for its operational excellence and cost discipline, which are expected to generate significant free cash flows at current strip pricing.
The 2022 Zacks Consensus Estimate for #3 Ranked VAALCO Energy indicates 119.8% earnings per share growth over 2021. EGY’s shares have gained approximately 90.3% in a year.
7 Best Stocks for the Next 30 Days
Just released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."
Since 1988, the full list has beaten the market more than 2X over with an average gain of +25.3% per year. So be sure to give these hand-picked 7 your immediate attention.
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights: Vermilion Energy, Capricorn Energy, Tullow Oil and VAALCO Energy
For Immediate Release
Chicago, IL – February 2, 2022 – Today, Zacks Equity Research discusses Vermilion Energy (VET - Free Report) , Capricorn Energy (CRNCY - Free Report) , Tullow Oil (TUWOY - Free Report) and VAALCO Energy (EGY - Free Report) .
Industry: Oil & Gas E&P - International
Link: https://www.zacks.com/commentary/1860362/4-international-upstream-stocks-offering-exposure-to-a-strong-industry
A case of an ever-improving demand picture against constrained supply should help oil prices maintain their forward momentum. The Zacks Oil and Gas - Exploration and Production - International industry has the potential to be an outsized beneficiary of this supportive landscape. A robust income proposition should translate into more generous earnings and cash flows for upstream firms like Vermilion Energy, Capricorn Energy, Tullow Oil and VAALCO Energy.
Industry Overview
The Zacks Oil and Gas - International E&P industry consists of companies primarily operating outside the United States and focused on the exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate, etc.
The economics of oil and gas supply and demand is the fundamental driver of this industry. In particular, a producer’s cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies are vulnerable to historically volatile prices in the energy markets.
A change in realizations affects their returns on drilling inventory and causes them to alter production growth rates. These operators are also exposed to exploration risks where drilling results are uncertain.
3 Key Investing Trends to Watch in the Oil and Gas - International E&P Industry
Signs of a Tighter Market: A year and half after the pandemic-driven epic oil price crash, optimism is back in the sector with Brent crude — the international benchmark — rallying above $90-a-barrel, with talks of a potential spike of more than $100. Following the historic plunge of 2020, the oil market has made a remarkable recovery, and a tight commodity market is evident.
Apart from a favorable demand/supply dynamic, high vaccination rates in most parts of the developed world and the calibrated production cuts by the OPEC+ cartel, the commodity’s upward momentum is being supported by recent geopolitical headlines that could impact production. For example, the Russia-Ukraine tensions and the attack by Yemen's Houthi group on OPEC-member UAE gave a boost to oil by threatening supply disruptions. Importantly, commodity prices appear to have entered a protracted period of stability at levels where the operators can generate free cash flow through their drilling activities.
Sustainable Cost Reductions: The energy companies have changed their approach to spending capital. Over the past few years, producers have worked tirelessly to cut costs to a bare minimum and look for innovative ways to churn out more oil and gas. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service providers.
Moreover, driven by operational efficiencies, most E&P operators have been able to reduce unit costs, while the coronavirus-induced collapse in crude forced them to adopt a more disciplined approach to spending capital. These actions might restrict short-term production but are expected to preserve cash flow, support balance sheet strength, and help the companies eventually emerge stronger.
In particular, cash from operations is on a sustainable path as revenues improve and companies slash capital expenditures from the pre-pandemic levels amid sharply higher commodity prices.
Focus on Shareholder Returns: The sharp increase in crude prices has allowed the upstream operators to deliver a solid financial performance. In particular, cash from operations should be on a sustainable path as revenues improve and companies slash capital expenditures from the pre-pandemic levels amid sharply higher commodity realizations.
To put it simply, the environment of strong prices has helped the E&P firms to generate significant “excess cash,” which they intend to use to boost investor returns. In fact, more and more energy companies are allocating their increasing cash pile by way of dividends and buybacks to pacify the long-suffering shareholders.
Zacks Industry Rank Reflects Upbeat Outlook
The Zacks Oil and Gas – International E&P industry is a nine-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #36, which places it in the top 14% 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 improving 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 a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are optimistic on this group’s earnings growth potential. This is echoed by the industry’s earnings estimates for 2022 that have surged 92.3% in the past year.
Considering the encouraging near-term prospects of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Outperforms Sector & S&P 500
The Zacks Oil and Gas - International E&P industry has fared better than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has rocketed 136.5% over this period compared with the broader sector’s increase of 42.5%. Meanwhile, the S&P 500 has gained 17.6%.
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 non-cash expenses.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 8.52X, significantly lower than the S&P 500’s 14.83X. However, it is above the sector’s trailing-12-month EV/EBITDA of 4.83X.
Over the past five years, the industry has traded as high as 28.18X, as low as 2.19X, with a median of 9.04X.
4 Oil and Gas - International E&P Stocks to Focus On
Vermilion Energy: Vermilion Energy is an oil and gas explorer with producing properties in Europe, North America and Australia. The energy explorer’s diversification across different continents provides it with certain advantages relative to the other upstream players. VET, with its unique portfolio of high-margin, low-decline assets, is currently focused on cost reductions and positive free cash flow generation.
The 2022 Zacks Consensus Estimate for Vermilion Energy stands at $2.61 per share, indicating a turnaround from the year-ago loss. VET currently carries a Zacks Rank #1 (Strong Buy). Vermilion Energy’s shares have soared around 237% in a year.
You can see the complete list of today’s Zacks #1 Rank stocks here.
Capricorn Energy: This Edinburgh, UK-based upstream operator has key operations in Mexico apart from its home country, while its impending entry in Egypt should spur significant growth opportunities. Capricorn Energy has adjusted its capital plans to the prevailing market conditions, resulting in strong operating cash flows. CRNCY also possesses an active hedging program that provides further downside protection from commodity price fluctuations.
The 2022 Zacks Consensus Estimate for Capricorn Energy indicates 102.5% earnings per share growth over 2021. The Zacks Rank #2 (Buy) CRNCY’s shares are up 11.9% in a year.
Tullow Oil: Tullow Oil is a London-based hydrocarbon producer and explorer, focusing mainly on Africa. TUWOY’s significant positions in discovered and emerging basins and focus on capital discipline should result in a noticeable improvement in profitability. In particular, the oil and gas finder’s operational excellence and technical expertise stand it in good stead.
The 2022 Zacks Consensus Estimate for Tullow Oil indicates 130.3% earnings per share growth over 2021. TUWOY carries a Zacks Rank #3 (Hold). Tullow Oil’s shares have gained some 64.8% in a year.
VAALCO Energy: Founded in 1985, VAALCO Energy’s productive capacity is based offshore West Africa, where it focuses on growth through a combination of acquisitions and active drilling. The operator of Gabon offshore Etame license, EGY is known for its operational excellence and cost discipline, which are expected to generate significant free cash flows at current strip pricing.
The 2022 Zacks Consensus Estimate for #3 Ranked VAALCO Energy indicates 119.8% earnings per share growth over 2021. EGY’s shares have gained approximately 90.3% in a year.
7 Best Stocks for the Next 30 Days
Just released: Experts distill 7 elite stocks from the current list of 220 Zacks Rank #1 Strong Buys. They deem these tickers "Most Likely for Early Price Pops."
Since 1988, the full list has beaten the market more than 2X over with an average gain of +25.3% per year. So be sure to give these hand-picked 7 your immediate attention.
See them now >>
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.