Despite the volatilities and uncertainties affecting the energy market, upstream businesses benefit from highly favorable oil prices. Additionally, integrated energy players’ midstream operations remain robust due to steady fee-based revenues derived from pipeline and storage assets, thereby improving the prospects for the Zacks Oil & Gas US Integrated industry.
Leading contenders in the industry poised to capitalize on this favorable business environment include ConocoPhillips COP, Marathon Oil Corporation MRO and Berry Corporation BRY.
About the Industry
The Zacks Oil & Gas US Integrated industry comprises companies primarily 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 pipeline networks and storage sites. Overall, the upstream business is positively correlated to oil and gas prices. The produced commodity volumes are transported through midstream assets, generating stable fee-based revenues. The integrated energy players in the United States also have access to downstream operations wherein the transported oil volumes are converted to finished products, comprising gasoline, natural gas liquids and diesel, through refining activities.
3 Trends Shaping the Future of the Industry
High Oil Prices: The price of West Texas Intermediate (“WTI”) crude is approaching the $80-per-barrel mark, which is extremely favorable for exploration and production activities. Brent price is also handsome, approaching $85 per barrel. Per the U.S. Energy Information Administration, the WTI and Brent spot average prices will be $83.05 per barrel and $87.79, respectively, in 2024, suggesting that the upstream business environment will continue to favor integrated players.
Stable Fee-Based Revenues: Integrated companies’ midstream businesses are relatively less exposed to the volatility in commodity prices. This is because pipeline and storage assets are usually booked by shippers for the long term, securing stable fee-based revenues.
Strong Focus on Lowering Emissions: Integrated players in the industry, with operations spreading across the United States and abroad, have recognized climate change as a serious risk that needs to be addressed. The companies are now focused on reducing greenhouse gas emissions and flaring rates.
Zacks Industry Rank Indicates Bullish Outlook
The Zacks Oil & Gas US Integrated industry is a 14-stock group within the broader Zacks Oil – Energy sector. The industry currently carries a Zacks Industry Rank #34, which places it in the top 14% 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 bright 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 Lags S&P 500, Beats Sector
The Zacks Oil & Gas US Integrated industry has outperformed the broader Zacks Oil – Energy sector, but lagged the Zacks S&P 500 composite over the past year.
The industry has jumped 24.7% over this period compared with the broader sector’s growth of 18.4% and the S&P 500’s surge of 27.8%.
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 5.27X, lower than the S&P 500’s 13.94X. It is, however, higher than the sector’s trailing 12-month EV/EBITDA of 2.99X.
Over the past five years, the industry has traded as high as 13.36X and as low as 3.29X, with a median of 5.00X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio
3 US Integrated Oil Stocks Moving Ahead of the Pack
ConocoPhillips has achieved a promising production outlook by leveraging its extensive drilling inventory and diversified upstream assets. Compared to composite stocks belonging to the industry, the leading upstream energy company has considerably lower exposure to debt capital. This reflects that the company, currently carrying a Zacks Rank #2 (Buy), is better positioned to rely on its strong balance sheet to withstand any adverse business scenario.
Price and Consensus: COP
Marathon Oil is a leading exploration and production player, having a strong footprint in prolific resources like Eagle Ford, Bakken, STACK and SCOOP in Oklahoma, and the Permian. The #2 Ranked company is thus well-positioned to capitalize on the high commodity pricing environment. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: MRO
Berry Corporation is leveraging favorable commodity prices to bolster its performance. The upstream company is highly dedicated to achieving sustainable cash flow by excelling in its operations. Berry, with a Zacks Rank of 2, has established an ambitious objective of reducing methane emissions from its current operations by 80% by 2025.
Price and Consensus: BRY
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ConocoPhillips (COP) : Free Stock Analysis Report
Marathon Oil Corporation (MRO) : Free Stock Analysis Report
Berry Corporation (BRY) : Free Stock Analysis Report
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