4 International Oil Stocks to Escape Coronavirus-Led Industry Woes
The coronavirus pandemic disrupted upstream, intermediate and downstream energy operations worldwide. Social distancing measures have weighed on fuel demand in all countries and bleak prospects for the Zacks Oil and Gas Integrated International industry.
However, with the gradual return of people to easing lockdown measures, the prospects for international integrated energy providers around the world have improved somewhat. Industry front-runners trying to weather the challenging business scenario include Exxon Mobil Corporation (XOM), Chevron Corporation (CVX), Royal Dutch Shell (RDS.A), and TOTAL SE (TOT).
About the industry
The Zacks Oil and Gas Integrated International industry includes companies that primarily operate in the upstream, midstream and downstream sectors.
These companies have upstream businesses in the United States (including prolific slate games and deep sea golf of Mexico), Asia, South America, Africa, Australia, and Europe.
The midstream operations of integrated energy companies include the transportation of oil, natural gas liquids and refined petroleum products. Downstream, companies buy crude oil to make refined petroleum products. The companies' downstream activities also include chemical companies that produce raw materials for the manufacture of plastics.
What is shaping the future of the integrated international oil and gas industry?
Low Oil Price: Although crude oil prices have rebounded in part in recent months, the price of commodities has fallen significantly since early 2020 when West Texas Intermediate (WTI) crude oil traded above $ 60 a barrel. The price of crude oil caused by coronaviruses has forced most utilities to cut investment budgets, triggering the need to curb production. In particular, the gradual limitation of operations by explorers has become apparent as drill rigs have removed oil rigs from national and international resources month after month. Overall, the unfavorable raw material price scenario, which is unlikely to improve unless the world receives an effective coronavirus vaccine, will continue to affect the upstream business of international integrated energy companies.
Midstream companies are content with lowering fees: lower crude oil production has in turn weighed on demand for midstream infrastructure, including pipeline networks and storage facilities. As a result, several energy companies with a midstream presence have no choice but to offer discounts to shippers in order to survive the pandemic. As reported by Bloomberg, the premium for shipping crude oil to export centers on the Gulf Coast has fallen from around $ 3 per barrel at the start of 2020 to below $ 1 per barrel. In fact, the lower premium is not enough to cover transportation fees for energy companies operating pipelines in the productive Permian Basin, as the pandemic has weighed heavily on demand for midstream assets.
Soft Gasoline Demand: Although a low oil price is a boon to refiners, the demand for refined petroleum products like gasoline, diesel fuel and jet fuel is relatively low compared to the prepandemic due to the social distancing measures caused by the virus The outbreak will continue to have a negative impact on those downstream The activities of international integrated energy companies.
Switching to renewable energies: It was a challenge for energy companies to supply the whole world with sustainable energy and at the same time to reduce greenhouse gas emissions. Indeed, European energy companies are actively focusing on clean energy and setting ambitious goals to tackle the problem of climate change. As the demand for fossil fuels gradually fades, international integrated companies are likely to continue to increase spending on renewable energy, making the outlook for the oil and gas business bleak.
Zacks' industry rank indicates a bearish outlook
The Zacks Oil and Gas Integrated International industry is part of the broader Zacks Oil - Energy sector. It has a Zacks Industry Rank # 237, which is below 6% of more than 250 Zacks Industries.
The group's Zacks Industry Rank, which is basically the average of the Zacks Rank of all member stocks, suggests grim near-term prospects. Our research shows that the top 50% of Zacks industries outperform the bottom 50% by a factor of more than 2 to 1.
The industry's position in the bottom 50% of the Zacks industries results from negative earnings prospects for individual companies as a whole. Before we outline some international integrated energy stocks that you might consider adding to your portfolio, let's take a look at recent stock market performance and industry valuation.
Industrial Delay Sector and S&P 500
Zacks Oil and Gas Integrated International's industry lagged the broader Zacks Oil - Energy sector and the Zacks S&P 500 Composite last year.
The industry is down 47.7% over the period, compared with the S&P 500 improving 16.7% and the broader sector plummeting 40.4%.
Annual price development
Current evaluation of the industry
Since oil and gas companies are heavily indebted, it makes sense to value them based on Enterprise Value / Earnings before Interest Tax Depreciation and Amortization (EV / EBITDA). This is because the valuation metric takes into account not only equity, but also debt.
Based on the trailing 12-month ratio of enterprise value to EBITDA (EV / EBITDA), the industry is currently trading at 3.35 times, which is below 14.96 times the S&P 500. It's also below the Sector's 12-month EV / EBITDA trailing 4.00X.
Over the past five years, the industry has traded 9.88 times, 2.85 times and a median of 6.04 times.
Trailing 12-month ratio of enterprise value to EBITDA (EV / EBITDA)
4 Integrated international stocks trying to weather industry challenges
Given the downbeat industry scenario, it may be wise for investors to exercise caution by either staying on the sidelines for a while or by holding onto these four fundamentally solid Zacks Rank # 3 (hold) stocks. The full list of today's Zacks # 1 Rank (Strong Buy) stocks can be found here.
Exxon Mobil Corporation: The company is one of the largest integrated energy companies in the world. The energy major can rely on his strong record to survive the pandemic. The company is projected to see earnings growth of 341.2% in 2021 as global fuel demand is projected to recover significantly over the next year as the world is projected to receive effective coronavirus drugs and vaccines in the first half of 2021. In addition, over the next five years the stock is expected to see earnings growth of 8.7%, outperforming the industry's 4.3%.
Price and consensus: XOM
Chevron Corporation: The company is also a leading integrated utility with global operations. Aside from a strong balance sheet, Chevron has solid capital discipline that will help it weather the pandemic. In particular, the energy major's conservative investments, especially during the pandemic, are likely to help the company generate significant cash flow. Over the next five years, the stock is expected to see earnings growth of 5%, outperforming the industry mark.
Price and consensus: CVX
Royal Dutch Shell: Aside from a strong presence in the oil and gas business, the integrated energy major is trying to harness the growing space for renewable energy. The energy major has big plans to become a net zero emissions company by 2050 or earlier. In the last 60 days, the share was corrected upwards for 2020 and 2021 respectively.
Price and consensus: RDS.A.
TOTAL SE: The integrated energy major is the second largest company in the global liquefied natural gas business. In addition, the company is capitalizing on the increasing demand for renewable energies and has set itself the ambitious goal of becoming a zero-emissions company by 2050 or earlier. In the last 60 days in particular, the stock has been revised upwards for 2020.
Price and consensus: DEAD
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Chevron Corporation (CVX): Free Stock Research Report
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