4 International Upstream Stocks Countering Current Industry Headwinds

The year 2020 proved to be a rather tumultuous one for the Zacks Oil and Gas - Exploration and Production - International industry, but oil is showing promising signs starting out 2021, with prices recently hitting levels last seen in February 2020.

An uptick in commodity realizations is expected to improve returns for upstream firms like Cairn Energy plc (CRNCY), Kosmos Energy Ltd. (KOS), Vermilion Energy Inc. (VET) and Tullow Oil plc (TUWOY).

Industry Overview

The Zacks Oil and Gas - International E&P industry consists of companies based outside the United States and Canada focused on exploration and production (E&P) of oil and natural gas. These firms are engaged in finding hydrocarbon reservoirs, drilling oil and gas wells, and producing and selling these materials to be refined later into products such as gasoline.

3 Key Investing Trends to Watch in the Oil and Gas - International E&P Industry

Improvement in Oil & Gas Prices: The price of Brent crude — the international benchmark — has staged a remarkable comeback after skidding to a more than two-decade low of $15.98 per barrel in April. Currently at an 11-month high of more than $55, the oil market is expected to tighten throughout 2021, supported by the OPEC+ cuts and an earlier-than-expected pickup in the commodity’s demand on the back of vaccine rollouts. Meanwhile, natural gas — up 16% in 2020 for its biggest annual gain in four years — is nearing $3 per MMBtu due to a decline in production, steady improvement in shipments of liquefied natural gas (“LNG”) for export and the potential for colder temperatures (or larger draws due to more use of heaters) later in January. The oil and gas price gains will greatly benefit the results of E&P companies for obvious reasons.

Air Travel Will Struggle to Take Off: The impressive rally notwithstanding, oil prices are unlikely to move much higher as commercial passenger flights remain curtailed. In particular, the usage of distillates such as aviation fuel continues to be weak with air travel weighed down by the virus resurgence and its related restrictions. As long as the coronavirus outbreak continues, there will be pressure on the demand side of the equation. Per the International Energy Agency, crude consumption fell by an astounding 8.8 million barrels per day year over year in 2020. Evidently, the recovery in oil consumption is being impacted by localized lockdowns and containment measures to tackle the recent increase in COVID-19 cases.

Ongoing Commitment to Disciplined Capital Allocation:  The energy companies have changed their approach to spending capital. Over the past few years, producers worked tirelessly to cut costs to a bare minimum and look for innovative ways to churn out more oil and gas. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service providers. Moreover, driven by operational efficiencies, most E&P operators have been able to reduce unit costs, while the coronavirus-induced collapse in crude has forced them to adopt a more disciplined approach to spending capital. These actions might decrease short-term production but are expected to preserve cash flow, support balance sheet strength and help the companies eventually emerge stronger.

Zacks Industry Rank Acknowledges Upbeat Outlook

The Zacks Oil and Gas – International E&P industry is a 7-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #117, which places it in the top 46% 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 improving 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are starting to get optimistic about this group’s earnings growth potential. As a proof of this, the industry’s earnings estimates for 2021 have increased around 58% in seven months.

Considering the encouraging 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 lagged the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.

The industry has declined 60.1% over this period compared with the broader sector’s decrease of 24.3%. Meanwhile, the S&P 500 has gained 18.3%.

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 noncash expenses.

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 3.85X, significantly lower than the S&P 500’s 17.37X. It is also below the sector’s trailing-12-month EV/EBITDA of 5.20X.

Over the past five years, the industry has traded as high as 35.07X, as low as 2.19X, with a median of 12.57X.

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)

4 Oil and Gas - International E&P Stocks to Focus On

Vermilion Energy: Vermilion Energy is an oil and gas explorer with producing properties in Europe, North America and Australia. The company’s diversification across different continents provides it with certain advantages relative to other upstream players. The energy explorer is currently focused on cost reductions and positive free cash flow generation.

The 2021 Zacks Consensus Estimate for Vermilion Energy indicates 94.3% earnings per share growth over 2020. The company currently carries a Zacks Rank #2 (Buy). Vermilion Energy’s shares have gained 23.4% over the past six months.

You can see the complete list of today’s Zacks #1 Rank stocks here.

Price and Consensus: VET

 

Tullow Oil: Tullow Oil is a London-based hydrocarbon producer and explorer with the main focus on Africa. The company’s significant positions in discovered and emerging basins and focus on capital discipline should result in significant improvement in profitability.

The 2021 Zacks Consensus Estimate for Tullow Oil indicates 97.4% earnings per share growth over 2020. The company currently carries a Zacks Rank #3 (Hold). Tullow Oil’s shares have gained 13.6% over the past six months.

Price and Consensus: TUWOY

 

Kosmos Energy: Kosmos Energy is an oil and gas explorer focused on offshore Ghana, Equatorial Guinea and 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.   

The 2021 Zacks Consensus Estimate for Kosmos Energy indicates 87.1% earnings per share growth over 2020. The company currently carries a Zacks Rank #3 (Hold). Kosmos Energy’s shares have gained 94.8% over the past six months.

Price and Consensus: KOS

 

Cairn Energy: This Edinburgh, UK-based upstream operator has key operations in Senegal apart from its home country. Cairn Energy has adjusted its capital plans to the prevailing market conditions resulting in strong operating cash flows. The company also possesses an active hedging program that provides further downside protection from commodity price fluctuations.  

Over the past 30 days, Cairn Energy has seen the Zacks Consensus Estimate for 2021 improve 450%. The company currently carries a Zacks Rank #3 (Hold). Cairn Energy’s shares have gained 58.2% over the past six months.

Price and Consensus: CRNCY

 

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Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

Ignited by referendums and legislation, this industry is expected to blast from an already robust $17.7 billion in 2019 to a staggering $73.6 billion by 2027. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

See the pot stocks we're targeting >>

The year 2020 proved to be a rather tumultuous one for the Zacks Oil and Gas - Exploration and Production - International industry, but oil is showing promising signs starting out 2021, with prices recently hitting levels last seen in February 2020.

 

An uptick in commodity realizations is expected to improve returns for upstream firms like Cairn Energy plc (CRNCY), Kosmos Energy Ltd. (KOS), Vermilion Energy Inc. (VET) and Tullow Oil plc (TUWOY).

 

Industry Overview

 

The Zacks Oil and Gas - International E&P industry consists of companies based outside the United States and Canada focused on exploration and production (E&P) of oil and natural gas. These firms are engaged in finding hydrocarbon reservoirs, drilling oil and gas wells, and producing and selling these materials to be refined later into products such as gasoline.

 

3 Key Investing Trends to Watch in the Oil and Gas - International E&P Industry

 

Improvement in Oil & Gas Prices: The price of Brent crude — the international benchmark — has staged a remarkable comeback after skidding to a more than two-decade low of $15.98 per barrel in April. Currently at an 11-month high of more than $55, the oil market is expected to tighten throughout 2021, supported by the OPEC+ cuts and an earlier-than-expected pickup in the commodity’s demand on the back of vaccine rollouts. Meanwhile, natural gas — up 16% in 2020 for its biggest annual gain in four years — is nearing $3 per MMBtu due to a decline in production, steady improvement in shipments of liquefied natural gas (“LNG”) for export and the potential for colder temperatures (or larger draws due to more use of heaters) later in January. The oil and gas price gains will greatly benefit the results of E&P companies for obvious reasons.

 

Air Travel Will Struggle to Take Off: The impressive rally notwithstanding, oil prices are unlikely to move much higher as commercial passenger flights remain curtailed. In particular, the usage of distillates such as aviation fuel continues to be weak with air travel weighed down by the virus resurgence and its related restrictions. As long as the coronavirus outbreak continues, there will be pressure on the demand side of the equation. Per the International Energy Agency, crude consumption fell by an astounding 8.8 million barrels per day year over year in 2020. Evidently, the recovery in oil consumption is being impacted by localized lockdowns and containment measures to tackle the recent increase in COVID-19 cases.

 

Ongoing Commitment to Disciplined Capital Allocation:  The energy companies have changed their approach to spending capital. Over the past few years, producers worked tirelessly to cut costs to a bare minimum and look for innovative ways to churn out more oil and gas. And they managed to do just that by improving drilling techniques and extracting favorable terms from the beleaguered service providers. Moreover, driven by operational efficiencies, most E&P operators have been able to reduce unit costs, while the coronavirus-induced collapse in crude has forced them to adopt a more disciplined approach to spending capital. These actions might decrease short-term production but are expected to preserve cash flow, support balance sheet strength and help the companies eventually emerge stronger.

 

Zacks Industry Rank Acknowledges Upbeat Outlook

 

The Zacks Oil and Gas – International E&P industry is a 7-stock group within the broader Zacks Oil - Energy sector. It currently carries a Zacks Industry Rank #117, which places it in the top 46% 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 improving 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 top 50% of the Zacks-ranked industries is a result of a positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are starting to get optimistic about this group’s earnings growth potential. As a proof of this, the industry’s earnings estimates for 2021 have increased around 58% in seven months.

 

Considering the encouraging 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 lagged the broader Zacks Oil - Energy Sector as well as the Zacks S&P 500 composite over the past year.

 

The industry has declined 60.1% over this period compared with the broader sector’s decrease of 24.3%. Meanwhile, the S&P 500 has gained 18.3%.

 

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 noncash expenses.

 

On the basis of the trailing 12-month enterprise value-to EBITDA (EV/EBITDA) ratio, the industry is currently trading at 3.85X, significantly lower than the S&P 500’s 17.37X. It is also below the sector’s trailing-12-month EV/EBITDA of 5.20X.

 

Over the past five years, the industry has traded as high as 35.07X, as low as 2.19X, with a median of 12.57X.

 

Trailing 12-Month Enterprise Value-to EBITDA (EV/EBITDA) Ratio (Past Five Years)

 

 

 

 

 

 

4 Oil and Gas - International E&P Stocks to Focus On

 

Vermilion Energy: Vermilion Energy is an oil and gas explorer with producing properties in Europe, North America and Australia. The company’s diversification across different continents provides it with certain advantages relative to other upstream players. The energy explorer is currently focused on cost reductions and positive free cash flow generation.

 

The 2021 Zacks Consensus Estimate for Vermilion Energy indicates 94.3% earnings per share growth over 2020. The company currently carries a Zacks Rank #2 (Buy). Vermilion Energy’s shares have gained 23.4% over the past six months.

 

You can see the complete list of today’s Zacks #1 Rank stocks here.

 

Price and Consensus: VET

 

Tullow Oil: Tullow Oil is a London-based hydrocarbon producer and explorer with the main focus on Africa. The company’s significant positions in discovered and emerging basins and focus on capital discipline should result in significant improvement in profitability.

 

The 2021 Zacks Consensus Estimate for Tullow Oil indicates 97.4% earnings per share growth over 2020. The company currently carries a Zacks Rank #3 (Hold). Tullow Oil’s shares have gained 13.6% over the past six months.

 

Price and Consensus: TUWOY

 

Kosmos Energy: Kosmos Energy is an oil and gas explorer focused on offshore Ghana, Equatorial Guinea and 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. 

 

The 2021 Zacks Consensus Estimate for Kosmos Energy indicates 87.1% earnings per share growth over 2020. The company currently carries a Zacks Rank #3 (Hold). Kosmos Energy’s shares have gained 94.8% over the past six months.

 

Price and Consensus: KOS

 

Cairn Energy: This Edinburgh, UK-based upstream operator has key operations in Senegal apart from its home country. Cairn Energy has adjusted its capital plans to the prevailing market conditions resulting in strong operating cash flows. The company also possesses an active hedging program that provides further downside protection from commodity price fluctuations.

 

Over the past 30 days, Cairn Energy has seen the Zacks Consensus Estimate for 2021 improve 450%. The company currently carries a Zacks Rank #3 (Hold). Cairn Energy’s shares have gained 58.2% over the past six months.

 

Price and Consensus: CRNCY

 

Looking for Stocks with Skyrocketing Upside?

 

Zacks has just released a Special Report on the booming investment opportunities of legal marijuana.

 

Ignited by referendums and legislation, this industry is expected to blast from an already robust $17.7 billion in 2019 to a staggering $73.6 billion by 2027. Early investors stand to make a killing, but you have to be ready to act and know just where to look.

 

See the pot stocks we're targeting >>

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Vermilion Energy Inc. (VET) : Free Stock Analysis Report
 
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Kosmos Energy Ltd. (KOS) : Free Stock Analysis Report
 
Cairn Energy PLC (CRNCY) : Free Stock Analysis Report
 
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