Yahoo Finance 3 International Upstream Stocks Resilient to Industry Uncertainties
Ceasefire negotiations in the Middle East have alleviated concerns of broader conflict in the oil-rich region and cast a shadow on the Zacks Oil and Gas - Exploration and Production - International industry. Additionally, a decrease in global diesel demand is contributing to worries about slowing oil demand growth in major economies. The decision by the U.S. Federal Reserve to maintain interest rates, has further weighed on the space. Although macro challenges create uncertainties, there's resilience in the sector, especially for operators prioritizing growth and operational efficiency. Harbour Energy HBRIY, VAALCO Energy EGY and Capricorn Energy CRNCY emerge as stocks to watch, offering potential amid the prevailing economic headwinds.
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 determined by 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
Bearish Sentiment in the Market: Recently, Brent crude futures have fallen below $85 per barrel due to easing tensions in the Middle East following ceasefire talks, which have alleviated concerns of a broader conflict in the oil-rich region. Additionally, U.S. government data indicating an increase in domestic production has contributed to the decline. A decrease in global diesel usage is further raising worries about slowing oil demand growth in major economies. The decision by the U.S. Federal Reserve to maintain interest rates, suggesting potential constraints on economic growth and oil demand, has exerted further downward pressure on the commodity. Moreover, the oil market is factoring in the anticipated commencement of partial operations in Canada's Trans Mountain pipeline expansion project, which is expected to add 590,000 barrels per day from Alberta to Canada's Pacific Coast.
Inflationary Pressure: Most energy companies (including the upstream operators) have been experiencing rising costs in the form of increased expenses related to maintenance and inventory. Despite moderating from record levels, inflation in Europe and the United States remains above threshold levels. This, together with supply-chain tightness, is not only pushing costs higher but also affecting 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. This may lead to a rough road for oil/gas equities engaged in energy exploration and production.
Substantial Shareholder Returns: Despite gyrations in the energy market, upstream operators continue to give back cash to stakeholders. In particular, cash from operations is on a sustainable path, with revenues stabilizing and companies slashing capital expenditures from the pre-pandemic levels amid commodity realizations at a healthy enough level for market participants. To put it simply, efficiency improvements over the past few years helped the E&P firms 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 10-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #213, which places it in the bottom 15% 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 fairly dull 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. As a matter of fact, the industry’s earnings estimates for 2024 have gone down 49.4% in the past year.
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 edged up 0.1% over this period compared with the broader sector’s increase of 15%. Meanwhile, the S&P 500 has gained 23.6%.
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. 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 4.45X, significantly lower than the S&P 500’s 14.54X. However, it is higher than the sector’s trailing-12-month EV/EBITDA of 2.98X.
Over the past five years, the industry has traded as high as 11.36X, as low as 2.19X, with a median of 4.63X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Oil and Gas - International E&P in Focus
Harbour Energy: A pure-play upstream global oil and gas producer, Harbour Energy targets high-return, short-cycle drilling opportunities. The company's robust financial position and strict capital discipline support competitive shareholder returns and the optionality to grow inorganically. Harbour Energy's $11.2-billion deal to acquire substantially all of Wintershall Dea AG's upstream assets should expand its asset base significantly.
The 2024 Zacks Consensus Estimate for Harbour Energy’s earnings per share indicates 650% year-over-year growth. Valued at around $2.7 billion, HBRIY currently carries a Zacks Rank #3 (Hold). Harbour Energy’s shares have risen around 19.3% in a year.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: HBRIY
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 the Gabon offshore Etame license, EGY is known for its operational excellence and cost discipline, which are expected to generate significant free cash flows at the current strip pricing.
The first-quarter 2024 Zacks Consensus Estimate for VAALCO Energy’s revenue indicates 13.5% year-over-year growth. Valued at around $641.7 million, EGY recently wrapped up the acquisition of Sweden-based Svenska Petroleum Exploration. Currently carrying a Zacks Rank of 3, VAALCO Energy’s shares have surged around 54.7% in a year.
Price and Consensus: EGY
Capricorn Energy: Founded in 1981, Capricorn Energy’s productive capacity is based onshore Egypt, where it focuses on the lower cost rapid payback Western Desert. CRNCY’s attractive asset base and operational efficiency in the country provide it with a competitive advantage in an energy-hungry domestic and regional market.
Over the past 90 days, the Zacks Consensus Estimate for Capricorn Energy’s 2024 earnings per share has moved up 25%. Valued at around $210.3 million, CRNCY currently carries a Zacks Rank of 3. Capricorn Energy’s shares have gone down around 79.6% in a year.
Price and Consensus: CRNCY
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