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Oil & Gas US Integrated Industry Outlook Shadowed by Coronavirus

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 gathering and processing facilities along with transportation pipelines 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, generating stable fee-based revenues.

Here are the three major themes in the industry:

  • Crude oil continues to remain in the bearish territory as global energy demand has been dented by the coronavirus pandemic. Persistent weakness in crude prices has forced most of the energy players to cut capital spending budget, which triggers the need to curtail production volumes. Hess Corporation (HES) is one such firm in the industry which recently revised downward its 2020 capital budget. Notably, the gradual curtailment in operations by explorers has become quite apparent as drillers have been removing rigs week after week from shale plays. Overall, the unfavorable pricing scenario of the commodity has been affecting the upstream business of integrated energy players.

  • Although low oil is a boon for refiners, weak demand for refined petroleum products such as gasoline, diesel fuel and jet fuel, owing to the strict lockdown and social distancing measures due to the virus outbreak, has been negatively impacting integrated energy firms’ downstream operations.

  • The integrated firms’ midstream businesses are however comparatively more stable than the upstream and downstream operations. This is because the pipeline networks are usually booked by shippers for a long term, generating stable fee-based revenues for the companies. Generally, midstream operations are relatively stable for not being significantly exposed to volatility with respect to oil and gas prices.

Zacks Industry Rank Indicates Bearish Outlook

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 #170, which places it in the bottom 33% 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 are pessimistic on this group’s earnings growth potential. While the industry’s earnings estimates for 2020 have moved down 147.20% in the past year, the same for 2021 have slumped 122.2%.

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 51.1% over this period as compared with the S&P 500’s decline of 0.5% and the broader sector’s slump of 40.2%.

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 4.08X, lower than the S&P 500’s 10.45X. It is, however, higher than the sector’s trailing-12-month EV/EBITDA of 3.84X.

Over the past two years, the industry has traded as high as 9.51X, as low as 3.30X, with a median of 5.15X.



Bottom Line

Although there are hopes of a rise in fuel demand as economies will reopen soon since early studies of coronavirus drug trial show some success, things need to improve a lot more. Till things get to or near normal, upstream and downstream businesses will continue to remain in the bearish territory.

Considering the downbeat industry scenario, it might be prudent for investors to maintain caution by either keeping on the sidelines for a while or holding on to these four fundamentally-sound Zacks Rank #3 (Hold) stocks. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ConocoPhillips (COP): Based on production and proved reserves, the company is the largest explorer and producer in the world. Notably, the Houston, TX-based company is likely to see earnings growth of 6% in the next five years.

Price and Consensus: COP



Marathon Oil Corporation (MRO): Headquartered in Houston, TX, Marathon Oil is an explorer and producer with strong focus on the United States. In the next five years, the stock is likely to see earnings growth of 5%.

Price and Consensus: MRO



Occidental Petroleum Corporation (OXY): Headquartered in Houston, TX, Occidental Petroleum is an oil and natural gas explorer with presence in the midstream energy business. The stock is likely to see earnings growth of 5.5% in the next five years.

Price and Consensus: OXY


Antero Midstream Corporation (AM): The company is primarily involved in operating midstream energy properties. The Denver, CO-based firm has seen positive earnings estimate revisions for 2020 and 2021, respectively, in the past 30 days.

Price and Consensus: AM


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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
 
Antero Midstream Corporation (AM) : Free Stock Analysis Report
 
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Zacks Investment Research