The upstream business of the integrated energy players is highly exposed to volatility in oil and gas prices. Also, the spike in input price in refining activities is making the outlook for the Zacks Oil & Gas US Integrated industry gloomy.
Among the companies in the industry that are likely to survive the business challenges are ConocoPhillips COP, Occidental Petroleum Corporation OXY and Marathon Oil Corporation MRO.
About the Industry
The Zacks Oil & Gas US Integrated industry comprises companies mostly involved in upstream and midstream energy businesses. The upstream operations entail oil and natural gas exploration and production in the prolific shale plays of the United States. The integrated energy companies are also engaged in midstream businesses through gathering and processing facilities along with transportation pipeline networks and storage sites. Overall, the upstream business is positively correlated to oil and gas prices. The produced commodity volumes are transported through midstream assets, generating stable fee-based revenues. The integrated energy players in the United States also have access to downstream operations wherein the transported oil volumes are converted to finished products, comprising gasoline, natural gas liquids and diesel, through refining activities.
3 Trends Shaping the Future of the Oil & Gas US Integrated Industry
Inflation Remains Elevated: Persistently high inflation levels and the slim likelihood of reverting to pre-pandemic conditions in the short term are contributing to increased market volatility. The elevated fuel prices resulting from this situation could negatively impact energy demand, presenting broader challenges for integrated energy companies.
Input Costs High in Refining Business: Oil is trading at more than the $70 per barrel mark, significantly raising input prices of refining operations. This is squeezing the profit of the refining business of the integrated firms in the United States.
Low Dividend Yield: Over the past two years, the composite stocks belonging to the industry have mostly generated lower dividend yields than the composite stocks belonging to the energy sector.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil & Gas US Integrated industry is a 12-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #150, which places it in the bottom 40% 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 bearish 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 consider, let’s take a look at the industry’s recent stock market performance and valuation picture.
Industry Lags Sector & S&P 500
The Zacks Oil & Gas US Integrated industry has lagged the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.
The industry has slipped 3.8% over this period compared with the broader sector’s growth of 0.2% and the S&P 500’s gain of 17.5%.
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 into account not just equity 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 4.71X, lower than the S&P 500’s 13.20X. It is, however, higher than the sector’s trailing-12-month EV/EBITDA of 3.67X.
Over the past five years, the industry has traded as high as 13.38X, as low as 3.29X, with a median of 4.85X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 US Integrated Oil Stocks Trying to Survive the Industry Challenges
ConocoPhillips: Considering production and reserves, ConocoPhillips is among the leading upstream energy players in the world. COP is strongly focused on returning capital to shareholders. For decades, COP, carrying a Zacks Rank #3 (Hold), has been banking on its diversified asset base to generate competitive cashflows.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: COP
Occidental Petroleum: Among the largest oil and natural gas producers in the United States, Occidental is well-positioned to gain in the ongoing handsome crude pricing scenario. OXY, with a Zacks Rank of 3, has seen upward earnings estimate revisions for 2023 in the past seven days.
Price and Consensus: OXY
Marathon Oil: Having a solid footprint in prolific resources like Eagle Ford in Texas, Bakken in North Dakota STACK and SCOOP in Oklahoma and Permian in New Mexico and Texas, Marathon Oil is well-positioned to capitalize on solid commodity prices.
Zacks #3 Ranked Marathon Oil has seen upward earnings estimate revisions for 2023 in the past 30 days.
Price and Consensus: MRO
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