The business prospects for upstream, midstream and downstream operations of international integrated energy players appear encouraging for the long term. Among the players, Exxon Mobil Corporation XOM,Chevron Corporation CVX, Shell plc SHEL, BP plc BP and Eni SpA E are well-positioned to make the most of the promising business environment.
About the Industry
The Zacks Oil and Gas Integrated International industry covers companies primarily involved in upstream, midstream and downstream operations. These companies have upstream businesses in the United States (including prolific shale plays and the deepwater Gulf of Mexico), Asia, South America, Africa, Australia and Europe. Midstream operations of 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 involve chemical businesses that manufacture raw materials for making plastics. The integrated players are now gradually focusing on renewables, leading to the energy transition. The firms aim to lower emissions from operations and cut the carbon intensity of the products sold.
4 Trends Shaping the Future of the Oil & Gas Integrated International Industry
Oil Price Healthy: Although oil price is currently trading below $100 per barrel on recession fears, there are possibilities that commodity price might cross the psychological benchmark since the supply remains tight. Thus, a favorable commodity pricing scenario will continue to aid the upstream business of international integrated energy players.
Sturdy Midstream Demand: With the possibility of upstream energy companies adding more rigs, oil and gas production is expected to increase further. This will likely boost the demand for pipeline and storage assets since more commodities will be needed to be transported and stored. Importantly, the midstream business has lower exposure to commodity price volatility since shippers generally book pipeline assets for the long term, thereby generating stable fee-based revenues.
Recovered Downstream Business: Since the countries have been ramping up the rollout of coronavirus vaccines, this is encouraging more people to go to offices and travel. With social-distancing measures becoming flexible, the demand for gasoline, diesel and jet fuel will increase. Also, with recession fears mounting, many economists believe that the impact will be mild, thereby not hitting gasoline demand significantly.
Business Diversification: International integrated energy companies are gradually investing in the renewable business. Thus, by diversifying operations, companies will be able to capitalize on the mounting demand for cleaner energy.
Zacks Industry Rank Indicates Encouraging Outlook
The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil - Energy sector. It carries a Zacks Industry Rank #51, which places it at the top 20% 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 impressive 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.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Before we present a few international integrated energy stocks that you may want to consider or keep an eye on, let’s take a look at the industry’s recent stock market performance and current valuation.
Industry Outperforms Sector and S&P 500
The Zacks Oil and Gas Integrated International industry has outperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.
The industry has gained 25.1% over this period compared with the S&P 500’s decline of 13.1% and the broader sector’s growth of 16.3%.
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 Enterprise Value/Earnings before Interest Tax Depreciation and Amortization (EV/EBITDA) ratio. This is because the valuation metric takes not just equity into account but also the level of debt.
On the basis of the trailing 12-month EV/EBITDA, the industry is currently trading at 3.58X, lower than the S&P 500’s 12.23X. It is also below the sector’s trailing-12-month EV/EBITDA of 3.63X.
Over the past five years, the industry has traded as high as 7.33X, as low as 2.76X, with a median of 4.81X.
Trailing 12-Month EV/EBITDA Ratio
5 Integrated International Stocks Moving Ahead of the Pack
BP: The British energy giant has been generating handsome returns from refining and marketing operations, thanks to the reopening of the economies. On the dividend front, BP expects that if the oil price trades around $60 per barrel, it will be able to hike its dividend per ordinary share by around 4% annually through 2025. Investors applaud BP since it also expects to reward shareholders with stock buybacks. BP, currently sporting a Zacks Rank #1 (Strong Buy), believes it will be able to buy back shares worth $4 billion annually through 2025 if the oil price hovers around $60 per barrel.
Price and Consensus: BP
Chevron: Chevron is also a leading integrated energy player with operations across the world. Apart from a strong balance sheet, it has a solid capital discipline that will help it tide over volatile commodity prices. The energy major’s conservative capital spending will probably help the company generate considerable cash flow, even in an unstable business scenario. The primary growth driver for Chevron, at least in the near term, is its low-cost Permian projects. The stock, presently carrying a Zacks Rank #3 (Hold), has seen upward earnings estimate revisions for 2022 in the past 30 days.
Price and Consensus: CVX
Eni: Eni’s energy business is spread worldwide, with a strong upstream presence. In the Ivory Coast, it made major oil and gas discoveries. The #3 Ranked company has set an ambitious goal to fully decarbonize its products and processes. Over the past 30 days, Eni has witnessed upward estimate revisions for 2022 earnings per share.
Price and Consensus: E
Exxon Mobil: ExxonMobil is among the largest integrated energy companies in the world. The energy major can rely on its strong balance sheet to withstand any business turmoil. ExxonMobil is banking on low-cost project pipelines centered around Permian — the most prolific basin in the United States — and offshore Guyana resources. The stock, having a Zacks Rank of 3 at present, has seen upward estimate revisions for 2022 earnings in the past seven days.
Price and Consensus: XOM
Shell: Being a leading player in liquefied natural gasacross the globe, Shell’s business prospects seem bright. In the energy transition front, Shell is playing a crucial role, setting an ambitious goal of achieving a net-zero-emissions energy business by 2050 or before. For 2022, SHEL, with Zacks Rank of 1, has witnessed upward earnings estimate revisions in the past seven days.
Price and Consensus: SHEL
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