The Zacks Oil and Gas - Exploration and Production - International industry faces a challenging outlook amid shifting global dynamics. Geopolitical risks, including conflicts in Ukraine and the Middle East, have offered limited support to oil prices, with supply disruptions proving minimal. Meanwhile, rising production from non-OPEC+ nations, particularly the United States, Canada and Brazil, could lead to a surplus of up to 1.4 million barrels per day by the year-end.
While energy companies are prioritizing shareholder returns through dividends and buybacks, the growing momentum in renewable energy and electric vehicles poses a long-term threat to fossil fuel demand. However, not all is bearish. Companies like Kosmos Energy, Tullow Oil and Capricorn Energy stand out as potential winners, thanks to their strategic operations and resilience.
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.
4 Key Investing Trends to Watch in the Oil and Gas - International E&P Industry
Geopolitical Risks Offer Limited Support: Despite the ongoing conflicts in Ukraine and the Middle East, the geopolitical risk premium in oil prices diminished as actual supply disruptions remained minimal. OPEC+ extended its production cuts through March 2025, and potential sanctions on Iran under the Trump administration could tighten supply. However, rising non-OPEC+ production is expected to overshadow these constraints, leading to a potential surplus of up to 1.4 million bpd by the year’s end.
Supply Growth to Weigh on the Market: In 2024, U.S. oil production hit a record 13.46 million barrels per day (bpd), a 259,000 bpd increase over the previous year. The Energy Information Administration (EIA) projects output to rise further to 13.52 million bpd in 2025. However, the growth rate is moderating compared to the nearly 1 million bpd jump seen in 2023. Despite infrastructure constraints, the United States remains a key driver of global supply growth, alongside Brazil, Canada and Norway.
Energy Companies Reward Shareholders Amid Stability: Amid energy market fluctuations, upstream operators remain committed to rewarding shareholders with substantial cash returns. Operational cash flow has taken a steady course, supported by stabilized revenues and reduced capital expenditures compared to the pre-pandemic levels. Efficiency gains in recent years have enabled exploration and production firms to generate significant excess cash. This surplus is increasingly being directed toward dividends and share buybacks, providing long-suffering investors with much-deserved returns.
Renewables and EVs Pose Threats to Oil Demand: The growing focus on renewable energy and the accelerated adoption of electric vehicles (EVs) present a looming challenge to traditional oil and gas demand. While infrastructure development for renewables remains gradual, advancements in clean energy and expanding EV markets could significantly diminish reliance on fossil fuels. Though high capital costs currently constrain renewables, overcoming these barriers could lead to a noticeable decline in oil demand within the next decade.
Zacks Industry Rank Reflects Bearish Outlook
The Zacks Oil and Gas – International E&P industry is an eight-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #157, which places it in the bottom 37% 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 challenging 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.
The industry’s position in the bottom 50% of the Zacks-ranked industries is a result of a negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are becoming pessimistic about this group’s earnings growth potential. As a matter of fact, the industry’s earnings estimates for 2025 have gone down 73.5% in the past year.
Despite the dull near-term prospects 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 28.8% over this period compared with the broader sector’s increase of 11.9%. Meanwhile, the S&P 500 has gained 24.7%.
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 4.06X, significantly lower than the S&P 500’s 18.20X. However, it is higher than the sector’s trailing 12-month EV/EBITDA of 3.80X.
Over the past five years, the industry has traded as high as 9.60X, as low as 2.19X, with a median of 4.20X.
3 Oil and Gas - International E&P Stocks to Watch
Tullow Oil: It 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.
This Zacks Rank #2 (Buy) firm has a Value Score of A. Tullow Oil’s current market cap is roughly $407.7 million. The company’s shares have lost around 26% in a year.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Kosmos Energy: Kosmos Energy is an oil and gas explorer focused on offshore Ghana, Equatorial Guinea and the U.S. Gulf of Mexico. The dual-listed (NYSE & London) company’s low-cost assets, growing free cash flow generation and solid balance sheet are likely to increase shareholder returns.
Kosmos Energy’s Value Score of A indicates it would be a good stock to focus on for value investors. With a market capitalization of around $1.7 billion, KOS currently carries a #3 (Hold). Kosmos Energy’s shares have fallen around 43% in a year.
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 2025 earnings per share has jumped 167%. Valued at around $296.4 million, CRNCY is currently a Zacks #3 Ranked company. Capricorn Energy’s shares have surged around 97.5% in a year.
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