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Oil & Gas US Integrated Industry Outlook: Prospects Gloomy

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 pipelines networks and storage sites. Moreover, the domestic integrated firms sell chemicals and refined petroleum products through downstream operations.

Overall, the upstream business is positively correlated to oil and natural gas prices. The produced commodity volumes are then transported through midstream assets, generating fee-based revenues. Notably, the health of the firms’ downstream operations relies typically on the demand for the end products.

Here are the three major industry themes:

  • The bearish outlook for oil price has been denting upstream businesses of the integrated energy players in the United States. With the widespread fear of global economic recession hurting oil demand, explorers and producers will find little incentive to ramp up upstream operations and will continue to lower the count of rigs in the domestic plays.
     
  • The midstream businesses of integrated companies are being hurt by the prevailing pipeline bottleneck problem. Owing to the transportation capacity constraint, the companies are failing to capitalize on the opportunity to generate additional stable fee-based revenues.
     
  • With recession on the horizon and possibilities that the largest economy will find it difficult to beat worldwide economic slowdown, the outlook of the companies’ downstream operations is weak. This is because demand for refined petroleum products and chemicals might take a beating.

Zacks Industry Rank Indicates Cloudy Prospects

The Zacks Oil & Gas US Integrated industry is a 12-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #188, which places it in the bottom 26% 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 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 do not have faith in this group’s earnings growth potential. In the past year, the industry’s earnings estimates for 2019 have declined 37.7%.

Before we present a few stocks that you may want to consider despite headwinds, 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 40.5% over this period, underperforming the S&P 500’s decline of 0.2% and the broader sector’s fall of 23.4%.

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 not just equity into account 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 3.58X, well below the S&P 500’s 10.7X. It is also lower than the sector’s trailing-12-month EV/EBITDA of 4.68X.

Over the past five years, the industry has traded as high as 10.35X, as low as 3.58X, with a median of 7.44X.

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



Bottom Line

The integrated energy companies’ midstream operations are unlikely to benefit in the near term, since most of the fresh pipelines are expected to come online next year to capitalize on the pipeline bottleneck. Moreover, possibility of a global economic slowdown which might hurt the U.S. economy doesn’t bode well for the companies’ downstream businesses.

One should particularly consider domestic integrated energy stocks that depict an upbeat earnings outlook. We are presenting four such stocks with a Zacks Rank #3 (Hold).

(You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here)

Headquartered in New York, Hess Corporation (HES) is a major producer of oil and natural gas in domestic resources. The company is likely to see a 47.3% year-over-year improvement in its bottom line in 2019.

Price and Consensus: HES



Marathon Oil Corporation (MRO), headquartered in Houston, TX, is among the leading explorers in domestic shale plays. Notably, in the past 30 days, five of 10 analysts have revised the company’s earnings estimates for 2019 upward.

Price and Consensus: MRO



Headquartered in Houston, TX, ConocoPhillips (COP) is the largest explorer and producer of oil and natural gas in the world, considering parameters like production and proved reserves. For 2019, the company has witnessed positive earnings estimate revision from three of five analysts in the past 30 days.

Price and Consensus: COP



Headquartered in Houston, TX, Occidental Petroleum Corporation (OXY) is primarily an explorer of oil and gas with strong focus on the prolific Permian basin. Since February, estimates for the company’s 2019 earnings have been revised 7% upward.

Price and Consensus: OXY


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Occidental Petroleum Corporation (OXY) : Free Stock Analysis Report
 
Marathon Oil Corporation (MRO) : Free Stock Analysis Report
 
Hess Corporation (HES) : Free Stock Analysis Report
 
ConocoPhillips (COP) : Free Stock Analysis Report
 
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