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The Zacks Oil and Gas - Exploration and Production - International industry has lately been pegged back by investor skepticism toward risky assets and lower realizations, to go with uncertainties related to slowing global economic growth and inflationary pressures. Although macro challenges are leading to some demand concerns, we think the space still has fuel left in the tank, especially for the operators that target growth opportunities and operating efficiency initiatives. We advise investors to focus on Tullow Oil, VAALCO Energy and EnQuest PLC.
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
Plunging Energy Prices: Energy remains the worst S&P 500 sector this year. The space has witnessed a total return of -11.7% in 2023 against the S&P 500's gain of around 2.9%. Of late, the going has been particularly tricky for "black gold." With investors dumping risky assets in the wake of the biggest U.S. bank collapse since 2008 and the Credit Suisse blowup, oil is trading below $70 for the first time since December 2021.
It's not any different for natural gas. The fuel slumped to a 25-year low in June 2020 but hit $10 per MMBtu for the first time since 2008 in August last year. Now, it has gone below $2.50, on adverse weather predictions and concerns that the banking crisis could prompt an economic slowdown that would hurt the consumption of energy.
Effects of High Inflation: Most energy companies (including the upstream operators) have been experiencing rising costs in the form of increased expenses related to maintenance and inventory. The inflationary environment, together with supply-chain tightness, is not only pushing costs higher but also affecting their capital programs. Apart from being hard to ignore, escalation in expenses is also drowning out the benefits of any commodity price increase.
In our view, the inflation-associated headwinds will continue to challenge growth and margin numbers with little chance of a quick resolution. Finally, what this means is that the central banks will be persistent with their aggressive policy of raising rates to stem inflation. This may lead to a rough road for oil/gas equities. In particular, worries about weaker energy demand due to the threat of recession (spurred by rising interest rates and slowing consumer spending) might jeopardize the commodity's ascent.
Companies Prioritizing Returning More Cash to Shareholders: The sharp increase in crude prices last year allowed the upstream operators to deliver a solid financial performance. In particular, cash from operations is on a sustainable path with revenues improving and companies slashing capital expenditures from the pre-pandemic levels amid higher commodity realizations. To put it simply, the environment of strong prices in 2022 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 Bearish Outlook
The Zacks Oil and Gas – International E&P industry is a 9-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #218, which places it in the bottom 12% of around 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates challenging 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 a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group's earnings growth potential. While the industry's earnings estimates for 2023 have gone down 48.4% since December, the same for 2024 have fallen 36.1% over the same timeframe.
Despite the dim 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 Underperforms Sector & S&P 500
The Zacks Oil and Gas - International E&P industry has fared worse than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has fallen 28.4% over this period compared with the broader sector's decrease of 6.3%. Meanwhile, the S&P 500 has lost 14.3%.
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 2.95X, significantly lower than the S&P 500's 11.90X. However, tt is slightly higher than the sector's trailing-12-month EV/EBITDA of 2.73X.
Over the past five years, the industry has traded as high as 16.32X, as low as 2.17X, with a median of 6.84X.
3 Oil and Gas - International E&P Stocks to Watch For
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.
Valued at around $450.8 million, VAALCO Energy has a trailing four-quarter earnings surprise of roughly 61.8%, on average. EGY currently carries a Zacks Rank #2 (Buy). VAALCO Energy's shares have lost 35.3% 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 2023 Zacks Consensus Estimate for TUWOY indicates 32.4% year-over-year revenue growth. Tullow Oil carries a Zacks Rank #3 (Hold). TUWOY's shares have lost 48.4% in a year.
EnQuest: This London-based upstream operator has key operations in the UK North Sea and Malaysia. The company's impressive production efficiency across the portfolio is at the crux of ENQUF's growth story. EnQuest has adjusted its capital plans to the prevailing market conditions, resulting in strong operating cash flows. ENQUF also possesses an active hedging program that provides further downside protection from commodity price fluctuations.
The 2023 Zacks Consensus Estimate for EnQuest Energy indicates 30.8% earnings per share growth over 2022. The #3 Ranked ENQUF's shares are down 38% in a year.
Why Haven't You Looked at Zacks' Top Stocks?
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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 Tullow Oil, VAALCO Energy and EnQuest PLC
For Immediate Release
Chicago, IL – March 22, 2023 – Today, Zacks Equity Research discusses Tullow Oil (TUWOY - Free Report) , VAALCO Energy (EGY - Free Report) and EnQuest PLC (ENQUF - Free Report) .
Industry: Oil & Gas - International E&P
Link: https://www.zacks.com/commentary/2068390/3-international-upstream-oil-gas-stocks-you-need-to-track
The Zacks Oil and Gas - Exploration and Production - International industry has lately been pegged back by investor skepticism toward risky assets and lower realizations, to go with uncertainties related to slowing global economic growth and inflationary pressures. Although macro challenges are leading to some demand concerns, we think the space still has fuel left in the tank, especially for the operators that target growth opportunities and operating efficiency initiatives. We advise investors to focus on Tullow Oil, VAALCO Energy and EnQuest PLC.
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
Plunging Energy Prices: Energy remains the worst S&P 500 sector this year. The space has witnessed a total return of -11.7% in 2023 against the S&P 500's gain of around 2.9%. Of late, the going has been particularly tricky for "black gold." With investors dumping risky assets in the wake of the biggest U.S. bank collapse since 2008 and the Credit Suisse blowup, oil is trading below $70 for the first time since December 2021.
It's not any different for natural gas. The fuel slumped to a 25-year low in June 2020 but hit $10 per MMBtu for the first time since 2008 in August last year. Now, it has gone below $2.50, on adverse weather predictions and concerns that the banking crisis could prompt an economic slowdown that would hurt the consumption of energy.
Effects of High Inflation: Most energy companies (including the upstream operators) have been experiencing rising costs in the form of increased expenses related to maintenance and inventory. The inflationary environment, together with supply-chain tightness, is not only pushing costs higher but also affecting their capital programs. Apart from being hard to ignore, escalation in expenses is also drowning out the benefits of any commodity price increase.
In our view, the inflation-associated headwinds will continue to challenge growth and margin numbers with little chance of a quick resolution. Finally, what this means is that the central banks will be persistent with their aggressive policy of raising rates to stem inflation. This may lead to a rough road for oil/gas equities. In particular, worries about weaker energy demand due to the threat of recession (spurred by rising interest rates and slowing consumer spending) might jeopardize the commodity's ascent.
Companies Prioritizing Returning More Cash to Shareholders: The sharp increase in crude prices last year allowed the upstream operators to deliver a solid financial performance. In particular, cash from operations is on a sustainable path with revenues improving and companies slashing capital expenditures from the pre-pandemic levels amid higher commodity realizations. To put it simply, the environment of strong prices in 2022 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 Bearish Outlook
The Zacks Oil and Gas – International E&P industry is a 9-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #218, which places it in the bottom 12% of around 250 Zacks industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates challenging 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 a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group's earnings growth potential. While the industry's earnings estimates for 2023 have gone down 48.4% since December, the same for 2024 have fallen 36.1% over the same timeframe.
Despite the dim 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 Underperforms Sector & S&P 500
The Zacks Oil and Gas - International E&P industry has fared worse than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has fallen 28.4% over this period compared with the broader sector's decrease of 6.3%. Meanwhile, the S&P 500 has lost 14.3%.
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 2.95X, significantly lower than the S&P 500's 11.90X. However, tt is slightly higher than the sector's trailing-12-month EV/EBITDA of 2.73X.
Over the past five years, the industry has traded as high as 16.32X, as low as 2.17X, with a median of 6.84X.
3 Oil and Gas - International E&P Stocks to Watch For
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.
Valued at around $450.8 million, VAALCO Energy has a trailing four-quarter earnings surprise of roughly 61.8%, on average. EGY currently carries a Zacks Rank #2 (Buy). VAALCO Energy's shares have lost 35.3% in a year.
You can see the complete list of today's Zacks #1 Rank stocks here.
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 2023 Zacks Consensus Estimate for TUWOY indicates 32.4% year-over-year revenue growth. Tullow Oil carries a Zacks Rank #3 (Hold). TUWOY's shares have lost 48.4% in a year.
EnQuest: This London-based upstream operator has key operations in the UK North Sea and Malaysia. The company's impressive production efficiency across the portfolio is at the crux of ENQUF's growth story. EnQuest has adjusted its capital plans to the prevailing market conditions, resulting in strong operating cash flows. ENQUF also possesses an active hedging program that provides further downside protection from commodity price fluctuations.
The 2023 Zacks Consensus Estimate for EnQuest Energy indicates 30.8% earnings per share growth over 2022. The #3 Ranked ENQUF's shares are down 38% in a year.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +6.2 average gain per year. Amazingly, they soared with average gains of +46.4%, +49.5% and +55.2% per year. Today you can access their live picks without cost or obligation.
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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.