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The upstream business of integrated energy players is highly exposed to the recent volatility seen in oil and gas prices. Also, the spike in input price in refining activities is making the outlook for the Zacks Oil & Gas US Integrated industry rather gloomy.

Among the companies in the industry that are likely to survive these business challenges are DT Midstream Inc (DTM - Free Report), Equitrans Midstream Corporation (ETRN - Free Report), and Atlas Energy Solutions Inc. (AESI - Free Report).

About the Industry

The Zacks Oil & Gas US Integrated industry comprises companies primarily involved in upstream and midstream energy businesses. Upstream operations entail oil and natural gas exploration and production in the prolific shale plays of the United States. Integrated energy companies are also engaged in midstream businesses through gathering and processing facilities, along with transportation pipeline networks and storage sites.

Overall, upstream business is often positively correlated to oil and gas prices. The produced commodity volumes are transported through midstream assets, generating stable, fee-based revenues. Integrated energy players in the United States also have access to downstream operations wherein the transported oil volumes are converted to finished products, comprising gasoline, natural gas liquids, and diesel, through refining activities.

5 Trends Shaping the Future of the Oil & Gas US Integrated Industry

Inflation Remains Elevated: Persistently high inflation levels and the slim likelihood of reverting to pre-pandemic conditions in the short-term are contributing to increased market volatility. The elevated fuel prices resulting from this situation could negatively impact energy demand, presenting broader challenges for integrated energy companies.

Input Costs High in Refining Business: Oil has recently been seen trading at more than the $75 per barrel mark, significantly raising input prices of refining operations. This is squeezing the profit of the refining business of the integrated firms in the United States.

Future is in Renewables: 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.

Integrated energy players are adversely impacted by these trends as the companies’ operations are primarily engaged in the production of fossil fuels, such as oil, transporting the commodities, and selling end products like gasoline.

Upstream Unit Extremely Volatile: The upstream business of integrated energy players can be extremely volatile since the fate of the companies’ exploration and production activities is correlated to fluctuations in oil and gas prices.

Low Dividend Yield: Over the past two years, composite stocks belonging to the industry have mostly generated lower dividend yields than the composite stocks belonging to the broader energy sector.

Zacks Industry Rank Indicates Bearish Outlook

The Zacks Oil & Gas US Integrated industry is a 12-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #237, which places it in the bottom 5% 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 dull 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.

The Industry Lags S&P 500, Beats Sector

The Zacks Oil & Gas US Integrated industry has outperformed the broader Zacks Oil - Energy sector, but lagged the Zacks S&P 500 composite over the past year. The industry has jumped 3% over this period compared with the broader sector’s growth of 2.4% and the S&P 500’s surge of 24.9%.

One-Year Price Performance

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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.

On the basis of the trailing 12-month enterprise value-to-EBITDA (EV/EBITDA) ratio, the industry has recently been seen trading at 4.54X, lower than the S&P 500’s 13.64X. This is, however, higher than the sector’s trailing 12-month EV/EBITDA of 3.63X.

Over the past five years, the industry has traded as high as 13.38X and as low as 3.29X, with a median of 4.80X.

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

Image Source: Zacks Investment Research

Image Source: Zacks Investment Research

3 US Integrated Oil Stocks Trying to Survive Industry Challenges - Equitrans Midstream (ETRN)

With its strong focus on gas transmission, storage, and gas gathering systems in the prolific Marcellus and Utica regions, Equitrans Midstream generates stable cashflows. Thus, with its midstream assets, the company is supporting the production and development of natural gas across the resources.

Equitrans Midstream currently sports a Zacks Rank #1 (Strong Buy).

Price and Consensus: ETRN

Image Source: Zacks Investment Research

Atlas Energy (AESI) 

This company is a leader in the innovative logistics services space, providing services to oil and gas players operating in the prolific Permian Basin. Atlas Energy, carrying a Zacks Rank #3 (Hold), is likely to see earnings growth of 58.3% this year.

Price and Consensus: AESI

Image Source: Zacks Investment Research

DT Midstream (DTM)

Being a leading operator of natural gas interstate and intrastate pipelines, DT Midstream generates stable, fee-based revenues. The Zacks #3 (Hold) Ranked midstream player is well-positioned to capitalize on rising clean energy demand since it transports natural gas.

Price and Consensus: DTM

Image Source: Zacks Investment Research

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