Yahoo Finance 4 Integrated Energy Stocks Set to Escape Industry Weakness
Uncertainties and commodity price volatility are affecting the energy market, hurting the prospects of upstream and downstream businesses, thereby making the outlook for the Zacks Oil and Gas Integrated International industry gloomy.
Among the companies in the industry that will probably survive the business challenges are Exxon Mobil Corporation XOM,Chevron Corporation CVX, BP plc BP andYPF Sociedad Anónima YPF.
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.
3 Trends Shaping the Future of the Industry
Mild Recession: Analysts expect a mild recession in the latter half of this year since the recent failures of banks have led to a tighter lending environment. This is spurring market volatility and could hurt energy demand, affecting oil prices. Thus, upstream businesses of the integrated energy players are under pressure.
Refining Business Under Pressure: Worries about recessions have also raised concerns about weak fuel demand. Since cashflows from refining activities are dependent on demand for end petroleum products, the integrated companies’ refining businesses might get hurt.
Low Dividend Yield: Over the past year, the composite stocks belonging to the industry are mostly generating lower dividend yields than the composite stocks belonging to the energy sector.
Zacks Industry Rank Indicates Bearish Outlook
The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil - Energy sector. It carries a Zacks Industry Rank #158, which places it in the bottom 37% 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 outperform the bottom 50% by a factor of more than 2 to 1.
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 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 13.1% over this period against the S&P 500’s decline of 6.3% and the broader sector’s fall of 0.6%.
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 2.95X, lower than the S&P 500’s 12.65X. It is also below the sector’s trailing-12-month EV/EBITDA of 2.96X.
Over the past five years, the industry has traded as high as 7.07X, as low as 2.57X, with a median of 4.77X.
Trailing 12-Month EV/EBITDA Ratio
4 Integrated International Stocks Moving Ahead of the Pack
BP: The British energy giant plans to become a net-zero emissions player by 2050 or earlier. The integrated company intends to invest and create its renewable energy generation capacity of 20 gigawatts by 2025. The company, currently carrying a Zacks Rank #3 (Hold), has strong upstream and downstream activities. BP also has a strong focus on reducing its debt load and has been returning capital to shareholders through buybacks and growing dividends.
Price and Consensus: BP
Chevron: It 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 CVX generate considerable cash flow, even in an unstable business scenario. The primary growth driver for the #3 Ranked stock, at least in the near term, is its low-cost Permian projects.
Price and Consensus: CVX
YPF Sociedad: Being a leading energy player, YPF Sociedad is Argentina’s largest company, considering revenues. Compared to the past few years, YPF, sporting a Zacks Rank #1 (Strong Buy), is reflecting healthier adjusted EBITDA and margins. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: YPF
ExxonMobil: It 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, with a Zacks Rank of 3, is banking on low-cost project pipelines centered around the Permian — the most prolific basin in the United States — and offshore Guyana resources.
Price and Consensus: XOM
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Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
BP p.l.c. (BP) : Free Stock Analysis Report
Chevron Corporation (CVX) : Free Stock Analysis Report
YPF Sociedad Anonima (YPF) : Free Stock Analysis Report
