Oil prices, which are still high, continue to weigh on the refining sector, with substantial input costs compressing profit margins. Furthermore, a deceleration in oil production growth is expected to limit earnings from the upstream activities of integrated energy companies. At the same time, the rising demand for renewable energy is adding uncertainty to the prospects of the Zacks Oil and Gas Integrated International industry, creating a bleaker outlook.
Among the companies in the industry that will probably survive the business challenges are Chevron Corporation CVX, Shell plc SHEL, BP plc BP andEni SpA E.
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. In 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
Refining Business Grapple with Cost Pressures: With oil prices trading above $67 per barrel, integrated energy companies are experiencing substantial pressure on their refining operations. The high cost of crude oil, a crucial input for producing products like gasoline and jet fuel, is leading to elevated production expenses for refiners. These significant input costs are adversely impacting refiners' profitability.
Slowdown in Production Growth to Hurt Upstream Business: There has been a slowdown in oil production growth in the upstream businesses of integrated energy companies in the United States due to shareholder demands for a greater focus on returning capital rather than investing in production expansion. As production growth slows, output decreases, which can lead to reduced revenues. Since upstream operations depend heavily on volume to generate income, any stagnation in production growth has a direct and negative impact on their bottom line.
Growing Demand for Renewables a Concern:Governments, investors and stakeholders are placing growing emphasis on addressing climate change, leading to an increased demand for renewable energy. Consequently, the demand for products reliant on oil, natural gas and natural gas liquids is expected to decline, with solar and wind energy gaining prominence in the energy landscape. The integrated energy firms are adversely impacted by these trends as they are primarily engaged in the production and transportation of fossil fuels, such as oil, and selling refined petroleum products.
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 #138, which places it in the bottom 45% 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 bleak 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 Underperforms Sector and S&P 500
The Zacks Oil and Gas Integrated International industry has underperformed the broader Zacks Oil - Energy sector and the Zacks S&P 500 composite over the past year.
The industry has soared 13.2% over this period compared with the S&P 500’s gain of 34.9% and the broader sector’s rise of 14.2%.
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 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 4.29X, lower than the S&P 500’s 18.54X. It is, however, above the sector’s trailing 12-month EV/EBITDA of 3.52X.
Over the past five years, the industry has traded as high as 6.45X and as low as 2.74X, with a median of 4.18X.
Trailing 12-Month EV/EBITDA Ratio
4 Integrated International Stocks to Keep a Close Eye on
BP: The British energy giant plans to become a net-zero emissions company by 2050 or sooner. The integrated company aims to invest in and develop a renewable energy generation capacity of 20 gigawatts by 2025. Currently carrying a Zacks Rank #3 (Hold), BP has robust upstream and downstream operations. Notably, during periods of low oil prices, BP can rely on its strong downstream and marketing activities to support its financial performance. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: BP
Shell: In liquified natural gas, Shell is among the leading global players. Also, the rapid growth of its renewable business is among Shell's core strategies. On the renewable energy front, Shell has almost 47 gigawatts of renewable generation capacity, considering projects that are either in operation, under construction or in the pipeline. Thus, for renewables and energy solutions, SHEL, with a Zacks Rank of 3, is investing actively in solar energy, wind energy, electric vehicle charging and others.
Price and Consensus: SHEL
Eni: Eni is leading the energy transition as well. The integrated energy player has been building a full set of decarbonized products and services for clients to achieve carbon neutrality by mid-century. Even though the energy business scenario is challenging, Eni’s efficient exploration keeps it highly competitive. It carries a Zacks Rank #3.
Price and Consensus: E
Chevron: In the Permian — the most prolific basin in the United States — Chevron is among the largest producers of oil and natural gas, securing a solid production outlook. Also, the large integrated energy player, with a Zacks Rank of 3, maintains a conservative stance regarding capital spending, resulting in handsome generations in cashflows.
Price and Consensus: CVX
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