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Outlook for Oil & Gas Integrated International Industry Dull

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 the 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:

  • Although prices of both Brent and West Texas Intermediate (WTI) crude oil have recovered since the beginning of 2019, the future direction of the commodities’ prices are primarily dependent on OPEC’s Vienna meet on Jun 25. Since the United States has declined to extend oil sanction waivers to the customers of Iran, the expected loss of Iranian oil from the global crude supply might prompt the cartel to ramp up production. This is likely to lower the price of oil and thereby hurt the integrated firms’ upstream businesses.

  • Since most nations are focusing on curbing greenhouse gas emissions, the 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.

  • Presently, the global market seems uncertain as fresh trade tensions are brewing between the United States and China. This is likely to hurt demand for refined petroleum products and chemicals, thereby dampening the prospects of downstream businesses.

Zacks Industry Rank Indicates Bleak Prospects

The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil - Energy sector. It carries a Zacks Industry Rank #203, which places it at the bottom 21% 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 almost 8%.

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 But Outperforms Sector

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

The industry has declined 12.9% over this period against the S&P 500’s rise of 4.8% and the broader sector’s decline of 19.1%.

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 noncash expenses.

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 5.05X, lower than the S&P 500’s 10.90X. It is, however, above the sector’s trailing-12-month EV/EBITDA of 4.84X.

Over the past five years, the industry has traded as high as 9.85X, as low as 3.88X, with a median of 6.22X.

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

Bottom Line

The anticipated weakness in commodity prices and uncertainty in the global market are expected to hurt integrated energy players’ upstream and downstream operations. Moreover, in the United States, the companies are witnessing pipeline bottleneck problems and thereby losing the opportunity to generate more fee-based revenues.

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

Repsol SA (REPYY): Headquartered in Madrid, Spain, the company is a leading integrated energy company. Over the past 30 days, the Zacks Consensus Estimate for this Zacks Rank #1 stock’s 2019 earnings per share has been revised upward.

Price and Consensus: REPYY


YPF Sociedad Anonima (YPF): Based in Buenos Aires, Argentina, YPF Sociedad — carrying a Zacks Rank #2 — is an integrated energy firm with exposure to exploration & production of oil and natural gas along with a significant presence in transportation and refining businesses. The Zacks Consensus Estimate for the firm’s 2019 earnings per share has been revised upward by more than 76% over the past 30 days.

Price and Consensus: YPF


Exxon Mobil Corporation (XOM): This Irving, TX-based firm is the largest publicly traded energy player in the world. The #3 Ranked company has average positive earnings surprise of 2.5% for the last four quarters. Moreover, ExxonMobil is expected to see earnings growth of 12% over the next five years, better than the industry’s 7%.

Price and Consensus: XOM


BP plc (BP): The British integrated energy firm has a positive average earnings surprise of 17.5% for the trailing four quarters. The Zacks #3 Ranked company has an estimated long-term earnings growth rate of 7.1%, marginally higher than the industry.

Price and Consensus: BP


Royal Dutch Shell plc (RDS.A): The Zacks Consensus Estimate for current-year EPS of this energy firm — headquartered in The Hague, Netherlands — reflects year-over-year growth of 8.3%. The integrated energy player, with Zacks Rank of 3, has an estimated long-term earnings growth rate of 7.3%, better than the industry.

Price and Consensus: RDS.A


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