The Zacks Oil and Gas - Exploration and Production - International industry offers compelling investment opportunities driven by several positive factors. OPEC's recent report highlights a robust market underpinned by strong economic performance in key regions and increased air travel. This optimistic outlook sets a supportive backdrop for oil prices despite geopolitical and economic uncertainties. Moreover, while the energy transition and rising EV adoption pose long-term risks, the pace of infrastructure development remains slow, providing a continued window of opportunity for traditional oil and gas investments. Finally, upstream operators are focusing on maximizing shareholder returns through strong free cash flow generation and prudent capital management. Companies like VAALCO Energy EGY, Tullow Oil (TUWOY) and Capricorn Energy CRNCY seem to be particularly well-positioned to benefit from the favorable market dynamics.
Industry Overview
The Zacks Oil and Gas - International E&P industry consists of companies primarily operating outside the United States and focused on the exploration and production (E&P) of oil and natural gas. These firms find hydrocarbon reservoirs, drill oil and gas wells, and produce and sell these materials to be refined later into products such as gasoline, fuel oil, distillate, etc. The economics of oil and gas supply and demand is the fundamental driver of this industry. In particular, a producer’s cash flow is determined by realized commodity prices. In fact, all E&P companies are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns on drilling inventory and causes them to alter production growth rates. These operators are also exposed to exploration risks where drilling results are uncertain.
3 Key Investing Trends to Watch in the Oil and Gas - International E&P Industry
OPEC's Optimistic View: In its latest Oil Market Report, the organization revised its global economic growth forecast for 2024 slightly higher to 2.9%, attributing this adjustment to stronger-than-expected performance in key economies such as Brazil, Russia, India and China, and a recovery in the eurozone. OPEC maintains its oil demand growth forecast at 2.2 million barrels per day (mbd) for 2024, reflecting solid demand supported by economic growth and increased air travel. Looking ahead, OPEC's steady demand forecasts and the potential for supply constraints provide a supportive backdrop for prices. While geopolitical tensions and economic uncertainties remain, the underlying demand growth, particularly from transportation fuels and petrochemical production, is expected to sustain the market.
Energy Transition and EV Adoption: The push toward renewable energy and the rise of electric vehicles (EVs) pose significant long-term risks to traditional oil and gas demand. Despite the current slow infrastructure development, advancements in renewables and increased EV adoption could reduce fossil fuel dependency, pushing oil prices downward. The renewable energy sector, despite facing high capital costs now, may overcome these hurdles, potentially leading to reduced oil demand by the next decade.
Prioritizing Shareholder Returns: Despite gyrations in the energy market, upstream operators offer a low-cost way to gain broad exposure to leading blue-chip energy stocks, which have demonstrated strong free cash flow generation and attractive dividend growth. In particular, cash from operations is on a sustainable path, with revenues stabilizing and companies slashing capital expenditures from the pre-pandemic levels amid commodity realizations at a healthy enough level for market participants. To put it simply, efficiency improvements over the past few years helped the E&P firms generate significant “excess cash,” which they intend to use to boost investor returns. In fact, more and more energy companies are allocating their increasing cash pile by way of dividends and buybacks to pacify the long-suffering shareholders.
Zacks Industry Rank Reflects Positive Outlook
The Zacks Oil and Gas – International E&P industry is a 10-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #60, which places it in the top 24% of 250 Zacks industries.
The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates upbeat 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.
Considering the encouraging dynamics of the industry, we will present a few stocks that you may want to consider for your portfolio. But it’s worth taking a look at the industry’s shareholder returns and current valuation first.
Industry Underperforms Sector & S&P 500
The Zacks Oil and Gas - International E&P industry has fared worse than the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.
The industry has declined 17.6% over this period compared with the broader sector’s increase of 3.7%. Meanwhile, the S&P 500 has gained 19.3%.
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. For capital-intensive companies, EV/EBITDA is a better valuation metric because it is not influenced by changing capital structures and ignores the effect of non-cash expenses.
On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 4.21X, significantly lower than the S&P 500’s 19.35X. However, it is higher than the sector’s trailing 12-month EV/EBITDA of 3.17X.
Over the past five years, the industry has traded as high as 9.60X, as low as 2.19X, with a median of 4.44X.
Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)
3 Oil and Gas - International E&P to Buy
VAALCO Energy: Founded in 1985, VAALCO Energy’s productive capacity is based offshore West Africa, where it focuses on growth through a combination of acquisitions and active drilling. The operator of the Gabon offshore Etame license, EGY is known for its operational excellence and cost discipline, which are expected to generate significant free cash flows at the current strip pricing.
The second-quarter 2024 Zacks Consensus Estimate for VAALCO Energy’s revenues indicates 18.2% year-over-year growth. Valued at around $724.2 million, EGY recently wrapped up the acquisition of Sweden-based Svenska Petroleum Exploration. Currently carrying a Zacks Rank #2 (Buy), VAALCO Energy’s shares have surged around 67.4% in a year.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Price and Consensus: EGY
Tullow Oil: Tullow Oil is a London-based hydrocarbon producer and explorer, focusing mainly on Africa. TUWOY’s significant positions in discovered and emerging basins and focus on capital discipline should result in a noticeable improvement in profitability. In particular, the oil and gas finder’s operational excellence and technical expertise stand it in good stead.
Over the past 90 days, the Zacks Consensus Estimate for Tullow Oil’s 2024 earnings per share has moved up 20%. Valued at around $568.6 million, TUWOY currently carries a Zacks Rank of 2. Tullow Oil’s shares have fallen around 17.2% in a year.
Price and Consensus: TUWOY
Capricorn Energy: Founded in 1981, Capricorn Energy’s productive capacity is based onshore Egypt, where it focuses on the lower cost rapid payback Western Desert. CRNCY’s attractive asset base and operational efficiency in the country provide it with a competitive advantage in an energy-hungry domestic and regional market.
Over the past 60 days, the Zacks Consensus Estimate for Capricorn Energy’s 2024 earnings per share has remained unchanged. Valued at around $172.9 million, CRNCY currently carries a Zacks Rank of 2. Capricorn Energy’s shares have gone down around 45.1% in a year.
Price and Consensus: CRNCY
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