Image: ShutterstockDespite volatility and uncertainties affecting the energy market, oil prices are highly favorable for upstream businesses. Integrated energy players’ midstream businesses are also sound since the companies generate stable fee-based revenues from pipeline and storage assets, thereby enhancing the outlook for the Zacks Oil and Gas Integrated International industry.Among the front-runners in the industry that will possibly make the most of the handsome business scenario are Exxon Mobil Corporation (XOM – Free Report), Chevron Corporation (CVX – Free Report), and BP plc (BP – Free Report).
About the Industry
The Zacks Oil and Gas Integrated International industry covers companies primarily involved in upstream, midstream, and downstream operations. These companies have upstream businesses in the United States (including prolific shale plays and the deepwater Gulf of Mexico), Asia, South America, Africa, Australia, and Europe.Midstream operations of energy companies entail transporting oil, natural gas liquids, and refined petroleum products. In downstream businesses, the firms buy raw crude to produce refined petroleum products. The companies’ downstream activities involve chemical businesses that manufacture raw materials for plastics.Integrated players are gradually focusing on renewables, leading to the energy transition. These firms aim to lower emissions from operations and cut the carbon intensity of the products sold.
3 Trends Shaping the Future of the Industry
High Oil Prices: The price of West Texas Intermediate crude is trading higher than the $70-per-barrel mark, which is still favorable for exploration and production activities. The price of Brent oil is also rather handsome, trading at more than $75 per barrel.Per the U.S. Energy Information Administration, the WTI and Brent spot average prices will be $77.63 per barrel and $82.40, respectively, in late 2023, suggesting that the upstream business environment will favor integrated players.Stable Fee-Based Revenues: Integrated companies’ midstream businesses are relatively less exposed to the volatility in commodity prices. This is because pipeline and storage assets are usually booked by shippers for the long-term, securing stable fee-based revenues.Strong Focus on Lowering Emissions: Integrated players in the industry, with operations spreading across the United States and abroad, have recognized climate change as a serious risk that needs to be addressed. These companies are now focused on reducing greenhouse gas emissions and flaring rates.
Zacks Industry Rank Indicates a Bullish Outlook
The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil – Energy sector. It carries a Zacks Industry Rank #66, which places it in the top 26% 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 bullish 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.
The Industry Underperforms the Sector and the S&P 500
The Zacks Oil and Gas Integrated International industry has underperformed the broader Zacks Oil – Energy sector and the Zacks S&P 500 composite over the past year. The industry has risen 1.3% over this period, outpacing the S&P 500’s rally of 24.6% and the broader sector’s improvement of 3.0%.
One-Year Price Performance
The Industry’s Current Valuation
Since oil and gas companies are debt-laden, it makes sense to value them based on the Enterprise Value/Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA) 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 EV/EBITDA, the industry has recently been seen trading at 3.16X, lower than the S&P 500’s 13.61X. It is also below the sector’s trailing 12-month EV/EBITDA of 3.59X.Over the past five years, the industry has traded as high as 6.07X and as low as 2.57X, with a median of 4.46X.
Trailing 12-Month EV/EBITDA Ratio
3 Integrated International Stocks Moving Ahead of the Pack – BP
This British energy giant plans to become a net-zero emissions player by 2050 or earlier. The integrated company intends to invest and create its renewable energy generation capacity of 20 gigawatts by 2025.The company, currently carrying a Zacks Rank #3 (Hold), has solid upstream and downstream activities. BP also has a strong focus on reducing its debt load, and it has been returning capital to shareholders through buybacks and growing dividends.
Price and Consensus: BP
Chevron
This company is also a leading integrated energy player with operations across the world. Apart from a strong balance sheet, it has a solid capital discipline that will help it tide over volatile commodity prices.The energy major’s conservative capital spending will probably help CVX generate considerable cash flow, even in an unstable business scenario. The primary growth driver for the Zacks Rank #3 (Hold) stock, at least in the near-term, is its low-cost Permian projects.
Price and Consensus: CVX
ExxonMobil
This one is among the largest integrated energy companies in the world. The energy major can rely on its strong balance sheet to withstand any business turmoil. ExxonMobil, which has a Zacks Rank #3 (Hold), is banking on low-cost project pipelines centered around the Permian — the most prolific basin in the United States — and offshore Guyana resources.
Price and Consensus: XOM
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