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Outlook for Oil & Gas Integrated International Industry Bleak

Nilanjan Banerjee

The Zacks Oil and Gas Integrated International industry covers companies that are primarily involved in upstream, midstream and downstream businesses.

These companies have upstream businesses across the United States (including prolific shale plays and deepwater Gulf of Mexico), Asia, South America, Africa, Australia and Europe.

The midstream operations of integrated energy companies entail transporting oil, natural gas liquids and refined petroleum products. Under downstream businesses, the firms buy raw crude to produce refined petroleum products. The companies’ downstream activities also involve chemicals businesses that manufacture raw material used for manufacturing plastics.

Let’s take a look at the industry’s three major themes:

  • The recent outbreak of coronavirus in China has dented global energy demand. This is because Beijing being the largest importer of crude oil in the world is likely to witness economic slowdown owing to disruptions in businesses following widespread quarantines. Weak demand has primarily led West Texas Intermediate (WTI) oil price to hover around $50-per-barrel, marking a significant decline from more than $60-a-barrel psychological mark in early January. Low commodity price is thus hurting the integrated energy players’ upstream operations.
     
  • Since most nations are focusing on curbing greenhouse gas emissions, companies are likely to continue to produce huge natural gas volumes. Since the plentiful supply of the commodity has outpaced the demand for clean energy, the price of natural gas is likely to remain low, further hurting profits from upstream activities.
     
  • Although low oil prices have lowered input costs for refiners, weak demand for refined petroleum products, especially in China, with massive oil refining capacity, is dampening the prospects of downstream businesses.  

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil - Energy sector. It carries a Zacks Industry Rank #161, which places it at the bottom 37% 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 gloomy 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 negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are pessimistic about this group’s earnings growth potential. Over the past year, the industry’s earnings estimate for the current year has gone down 22.4%.

Before we present a few international integrated energy stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.

Industry Lags S&P 500 & Sector

The Zacks Oil and Gas Integrated International industry has lagged both the Zacks S&P 500 composite and the Zacks Oil - Energy sector over the past year.

The industry has declined 13% over this period against the S&P 500’s improvement of 24.5% and the broader sector’s decline of 11.4%.

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 4.74X, lower than the S&P 500’s 11.95X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 4.69X.

Over the past five years, the industry has traded as high as 9.83X, as low as 3.95X, with a median of 6.21X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio



Bottom Line

Low energy demand is likely to continue to hurt integrated energy players’ upstream and downstream operations. However, in the United States, the companies are coming out with fresh pipeline projects to capitalize on the transportation bottleneck problem.

Here, we present two stocks with a Zacks Rank #1 (Strong Buy) and another one with a Zacks Rank #2 (Buy) that are well positioned to gain amid the prevailing challenges. There are two other stocks with a Zacks Rank #3 (Hold) that investors may choose to hold on to. You can see the complete list of today’s Zacks #1 Rank stocks here.

Gazprom Neft (GZPFY): Based in St. Petersburg, Russia, Gazprom is a leading integrated energy firm. Over the past 60 days, the Zacks Consensus Estimate for this Zacks Rank #1 stock’s 2020 earnings per share has been revised upward.

Price and Consensus: GZPFY


PetroChina Company Limited
(PTR): PetroChina is the largest integrated oil company in China. In 2020, the Zacks Rank of 1 stock is likely to see earnings growth of 11.1%.

Price and Consensus: PTR



Chevron Corporation (CVX): Headquartered in San Ramon, CA, Chevron is one of the largest publicly-traded oil and gas companies in the world, based on proved reserves. Over the past 60 days, the Zacks Consensus Estimate for this Zacks Rank #2 stock’s 2020 earnings per share has been revised upward.

Price and Consensus: CVX



Exxon Mobil Corporation (XOM): This Irving, TX-based firm is the largest publicly traded energy player in the world. The #3 Ranked company is expected to see earnings growth of roughly 41% in 2020.

Price and Consensus: XOM



BP plc (BP): The British integrated energy firm has a positive average earnings surprise of 12.7% for the trailing four quarters. The Zacks #3 Ranked company has an estimated long-term earnings growth rate of 9%, higher than the industry’s 5.9%.

Price and Consensus: BP



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Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
 
PetroChina Company Limited (PTR) : Free Stock Analysis Report
 
Gazprom Neft OAO (GZPFY) : Free Stock Analysis Report
 
Chevron Corporation (CVX) : Free Stock Analysis Report
 
BP p.l.c. (BP) : Free Stock Analysis Report
 
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