Oil & Gas - International Integrated Outlook: Prospects Dim

The Zacks Oil and Gas - International Integrated industry primarily consists of energy players with exposure to upstream, midstream and downstream businesses.

The upstream activities involve exploring and developing of oil and gas resources worldwide, including U.S. shale plays, deepwater Gulf of Mexico in the United States, shale and tight oil acres in Argentina and Canada along with offshore resources in Western Australia.

Through global midstream infrastructure assets - comprising pipeline networks and storage facilities - firms transport and store oil, natural gas and refined petroleum products. The companies' downstream businesses involve refining of raw crude to finished petroleum products. The downstream activities also entail distributing and marketing chemicals gasoline and other fuels.

Here are three major industry themes:

  • The oil pricing scenario will likely remain weak until next May when the supply of Iranian oil in the global economy will fall drastically. The radical decline will be resulting from the expiry of U.S. sanction waivers, which allow several countries to continue to import oil from Iran till mid-2019. Weak oil prices will thus provide less incentive to energy players to exploit oil resources and boost production, at least in the near term.

  • The spike in natural gas price in November made the commodity expensive, hurting demand. This has helped coal regain part of its market share for electricity generation, said Barclays PLC (BCS). Moreover, the slowdown in the global economy, affecting cleaner energy demand, will likely continue to push natural gas price lower. Hence, like oil, the possible weak natural gas pricing scenario is expected to hinder the commodity's exploration and production activities.

  • Since explorers and producers will likely be a little reluctant to continue operations, the demand for pipeline and storage assets is expected to take a hit. Downstream energy businesses are also expected to take a beating since a slowing global economy could lower demand for finished petroleum products and chemicals - being utilized for manufacturing thousands of industrial and consumer products.

Zacks Industry Rank Indicates Rough Times Ahead

The Zacks Oil and Gas - International Integrated industry is a 13-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #183, which places it in the bottom 29% 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. Since Jun 30, 2018, the industry's earnings estimates for the current year have moved 6.8% down.

Despite the bleak near-term industry prospects, we present a few stocks that you can keep an eye on or continue to hold if they are already in your portfolio. But it's worth taking a look at the industry's shareholder returns and current valuation first.

Industry Lags S&P 500 But Outperforms Sector

The Oil and Gas - International Integrated industry has outperformed its own sector over the past year. However, it has underperformed the Zacks S&P 500 composite over the same time frame.

Over this period, the industry has fallen 13.2% compared with the sector's decline of 18.6%. Meanwhile, the Zacks S&P 500 composite has declined 8.1%.

One-Year Price Performance

Industry's Current Valuation

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, which is a commonly used multiple for valuing energy stocks, the industry is currently trading at 4.96X, lower than the S&P 500's 9.31X. It is, however, above the sector's trailing-12-month EV/EBITDA of 4.74X.

Over the past five years, the industry has traded as high as 9.85X, as low as 3.88X, with a median of 6.05X, as the chart below shows.

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

Bottom Line

In 2017, the industry's free cashflow skyrocketed to $14.2 billion from just $308 million in 2016. However, the growth pace has decelerated drastically since free cashflow rose by only 6.5% through the trailing 12 months, as of Sep 30, 2018.

Oil supply glut, which will likely continue through first-half 2019, and weak global demand are expected to further affect the industry's free cashflow. In fact, weakening global economic growth is going to hurt the energy business as a whole.

None of the stocks in the Oil and Gas - International Integrated space currently sport a Zacks Rank #1 (Strong Buy) or 2 (Buy). However, we are presenting four stocks with a Zacks Rank #3 (Hold) that investors may hold on to. You can see the complete list of today's Zacks #1 Rank stocks here .

BP plc (BP): The Zacks Consensus Estimate for current-year earnings per share (EPS) for this British integrated energy firm reflects year-over-year growth of 92.5%. The company has a positive average earnings surprise of 11.8% for the trailing four quarters. The company has an estimated long-term earnings growth rate of 10.3%, higher than the industry's 7.1%.

Price and Consensus: BP

Royal Dutch Shell plc (RDS.A): The Zacks Consensus Estimate for current-year EPS for this energy firm - headquartered in The Hague, the Netherlands - reflects year-over-year growth of 38.02%. The integrated energy player has an estimated long-term earnings growth rate of 10%.

Price and Consensus: RDS.A

Exxon Mobil Corporation (XOM): This Irving, TX-based firm is the largest publicly traded energy player in the world. The company's 2018 bottom line will likely grow 30.6% year over year. Moreover, ExxonMobil is expected to see earnings growth of 8% over the next five years.

Price and Consensus: XOM


Price and Consensus: TOT

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Exxon Mobil Corporation (XOM): Free Stock Analysis Report

TOTAL S.A. (TOT): Free Stock Analysis Report

Royal Dutch Shell PLC (RDS.A): Free Stock Analysis Report

BP p.l.c. (BP): Free Stock Analysis Report

Barclays PLC (BCS): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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