4 Integrated US Oil Stocks Set to Escape Industry Weakness
Inflation is still high, thereby continuing to raise concerns about an economic slowdown. Also, uncertainties and commodity price volatility are affecting the energy market, hurting the prospects of upstream and downstream businesses, thereby making the outlook for the Zacks Oil & Gas US Integrated industry gloomy.
Among the companies in the industry that will probably survive the business challenges are ConocoPhillips COP, Hess Corporation HES, Cactus Inc. WHD and PHX MINERALS INC. PHX.
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
Inflationary Pressure: The market is cheering as with the decline in fuel prices, U.S. inflation recently hit the lowest mark since 2021. However, many analysts have warned that the underlying inflation is still stubbornly high, spurring market volatility. This could hurt energy demand, which might affect oil prices. Thus, upstream businesses of the integrated energy players are still under pressure.
Refining Business Under Pressure: Worries about an economic slowdown, as inflationary pressure is still there, have also raised concerns about weak fuel demand. Since cashflows from refining activities are dependent on demand for end petroleum products, the integrated companies’ refining businesses might get hurt. Moreover, high oil has increased input costs for the refining business.
Declining Free Cashflows: Over the past three reported quarters, the composite stocks belonging to the industry consistently witnessed a decline in free cashflows. This implies that the businesses of most of the integrated players belonging to the industry are under pressure.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil & Gas US Integrated industry is a 11-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #169, which places it in the bottom 33% 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 Underperforms S&P 500, Matches Sector
The Zacks Oil & Gas US Integrated industry has matched the broader Zacks Oil - Energy sector but underperformed the Zacks S&P 500 composite over the past year.
Like the broader sector, the industry has declined 4.5% over this period, while the S&P 500 gained 14.6%.
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.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 3.39X, lower than the S&P 500’s 13.17X. It is, however, higher than the sector’s trailing-12-month EV/EBITDA of 2.80X.
Over the past five years, the industry has traded as high as 13.38X, as low as 3.26X, with a median of 5.26X.
Trailing 12-Month Enterprise Value-to-EBITDA (EV/EBITDA) Ratio
4 US Integrated Oil Stocks Trying to Survive the Industry Challenges
Cactus: Cactus has been aiding its clients in fast-tracking their well drilling and completion activities. The company has also been enabling lower operator emissions per barrel of production. Thus, there has been a significantly lower carbon intensity per well. Cactus carries a Zacks Rank #3 (Hold) and is likely to see earnings growth of 27.2% and 15.2% for 2023 and 2024, respectively.
Price and Consensus: WHD
ConocoPhillips: Considering production and reserves, ConocoPhillips is among the leading upstream energy players in the world. It is strongly focused on returning capital to shareholders. ConocoPhillips, with a Zacks Rank of 3, is also progressing on its 2030 GHG emissions-intensity reduction ambition. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: COP
Hess: Headquartered in New York, Hess is a leading upstream firm with a footprint in Bakken, the Gulf of Mexico and offshore Guyana. The firm, carrying a Zacks Rank #3, believes that its position in Guyana is strong enough to generate growth in long-term cashflows.
Price and Consensus: HES
PHX MINERALS: The royalty interest production figures of PHX MINERALS, for the last four reported figures, depict significant improvement. With new wells coming online in the prolific Haynesville Shale and Bakken plays, PHX MINERALS, carrying a Zacks Rank #2 (Buy), is witnessing a production increase in royalty volumes.
Price and Consensus: PHX
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ConocoPhillips (COP) : Free Stock Analysis Report
Hess Corporation (HES) : Free Stock Analysis Report
PHX Minerals Inc. (PHX) : Free Stock Analysis Report
Cactus, Inc. (WHD) : Free Stock Analysis Report
