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Oil & Gas US Integrated Industry Outlook Upbeat on Upstream

Nilanjan Banerjee

The Zacks Oil & Gas US Integrated industry comprises companies that are 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 their gathering and processing facilities along with transportation pipeline networks and storage sites.

Overall, the upstream business is positively correlated to oil and natural gas prices. The produced commodity volumes are then transported through midstream assets, leading to stable fee-based revenues.

Here are the industry’s three major themes:

  • West Texas Intermediate (WTI) crude has recovered significantly and is now trading above the $60-a-barrel mark. In fact, more upside awaits oil prices in 2020 as its demand outlook is improving, since tensions between the United States and China are easing and global supply is shrinking, with OPEC agreeing to deepen oil production cut. The positive crude pricing scenario is highly favorable for oil exploration and production businesses.
     
  • Rising demand for cleaner energy has been backing export volumes of natural gas from the United States. Notably, since it will take time to replace oil by alternative sources of energy, export volumes of the commodity are likely to rise steadily in the coming years. Thus, natural gas explorers and producers are well positioned to capitalize on domestic and global clean energy needs.
     
  • Moreover, for the first time since government monthly records began in 1949, the United States has established itself as a net petroleum exporter. This is because in September, America’s exported volumes of oil and petroleum products were more than imported, per data provided by U.S. Energy Information Administration. Thus, to support growing oil and gas production in the U.S. shale plays, there is heightened demand for the companies’ fresh midstream infrastructure to gather, store, process and transport the commodities.

Zacks Industry Rank Indicates Encouraging Prospects

The Zacks Oil & Gas US Integrated industry is an eight-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #56, which places it in the top 22% 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 outperforms 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 and S&P 500

The Zacks Oil & Gas US Integrated industry has lagged the broader Zacks Oil - Energy sector as well as the Zacks S&P 500 composite over the past year.

The industry has lost 12.7% over this period against the S&P 500’s rally of 28.4% and the broader sector’s increase of 2.7% in the same timeframe.

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 5.75X, lower than the S&P 500’s 11.93X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 5.01X.

Over the past two years, the industry has traded as high as 10.53X, as low as 3.55X, with a median of 5.56X.

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



Bottom Line

To sum up, the upstream business seams lucrative since the commodity pricing environment is expected to remain favorable.

The midstream business front looks attractive as well, backing the bullish outlook for the industry. Notably, Permian, which is the most prolific basin in the United States, is still facing a pipeline bottleneck problem. To solve the shortage in transportation capacities, major energy players have started bringing fresh pipeline networks online. Thus, integrated energy firms are poised to gain from the existing and fresh pipeline networks through their midstream operations.

We are presenting two stocks with a Zacks Rank #2 (Buy) and three with a Zacks Rank #3 (Hold) that are well positioned to grow.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Marathon Oil Corporation (MRO): Headquartered in Houston, TX, Marathon Oil is an explorer and producer with strong focus on the United States. Over the past 60 days, the Zacks #2 Ranked stock has seen positive earnings estimate revisions of more than 14% for 2019 to 70 cents. For 2020, the stock’s consensus estimate for earnings has been revised upward to 26 cents from 16 cents over the same time frame.

Price and Consensus: MRO



Based in Denver, CO, Antero Midstream Corporation (AM) is a leading provider of integrated and customized midstream services. In the gas-rich Marcellus and Utica Shale plays, the company operates natural gas gathering pipelines, compression stations, processing and fractionation plants. In the next five years, the stock is likely to see earnings growth of 5.8%.

Price and Consensus: AM




Hess Corporation (HES): Headquartered in New York, Hess is a leading explorer and producer of oil and natural gas. The company also has midstream presence through a master limited partnership. In 2019 and 2020, the Zacks #3 Ranked stock is likely to see bottom-line growth of 6.8% and 44.6%, respectively.

Price and Consensus: HES




Occidental Petroleum Corporation (OXY): Headquartered in Houston, TX, Occidental Petroleum is an oil and natural gas explorer with presence in the midstream energy business. Notably, the Zacks Consensus Estimates for earnings of the #3 Ranked stock have remained in line for 2019 and 2020 over the past seven days. In the next five years, the stock is expected to witness earnings growth of 5%.

Price and Consensus: OXY




Cactus, Inc. (WHD): Headquartered in Houston, TX, the company is a leading manufacturer of wellhead and pressure control equipment. Since the favorable crude pricing environment is likely to boost drilling activities, Cactus is expected to generate cash flow from renting or selling the equipment used for drilling and completing wells. In 2019, the Zacks #3 Ranked stock is likely to see earnings growth of 3.4%.

Price and Consensus: WHD




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Cactus, Inc. (WHD) : Free Stock Analysis Report
 
Occidental Petroleum Corporation (OXY) : Free Stock Analysis Report
 
Marathon Oil Corporation (MRO) : Free Stock Analysis Report
 
Hess Corporation (HES) : Free Stock Analysis Report
 
Antero Midstrm (AM) : Free Stock Analysis Report
 
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