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The Zacks Oil and Gas - Exploration and Production - United States industry is facing several bearish trends that could put pressure on overall performance. A sluggish economic outlook coupled with China's decelerating growth has led the EIA to revise down its global crude consumption forecast for 2025. Moreover, the accelerating shift toward renewable energy and electric vehicles (EVs) is likely to further dampen traditional oil demand.
Despite these challenges, U.S. upstream operators are adapting by prioritizing shareholder returns. Firms are leveraging strong free cash flow and reducing capital expenditures, channeling excess cash into dividends and buybacks. Among these, Devon Energy, SM Energy, Northern Oil and Gas and Amplify Energy stand out as resilient investments, well-positioned to navigate the current headwinds while providing attractive returns for investors.
About the Industry
The Zacks Oil and Gas - US E&P industry consists of companies primarily based in the domestic market, 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 are the fundamental drivers of this industry. In particular, a producer's cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies' results are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns and causes them to alter their production growth rates. The E&P operators are also exposed to exploration risks where drilling results are comparatively uncertain.
3 Key Trends to Watch in the Oil and Gas - US E&P Industry
Slowing Demand and Economic Concerns: Pulled down by multiple factors, U.S. oil prices have been struggling to get past the $80-a-barrel level. The EIA's revised forecast of global crude consumption at 104.5 million barrels per day for 2025, down 200,000 barrels from prior estimates, reflects concerns over a potential U.S. recession and a decelerating Chinese economy. With a reduced demand growth rate of 1.6%, these factors have been exerting downward pressure on oil prices, highlighting vulnerabilities in global oil demand driven by economic uncertainties in major markets.
Energy Transition and EV Adoption: The push toward renewable energy and the rise of 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.
As it is, China's rapid electrification is causing its oil demand to peak and decline sooner than expected. Its oil imports, which totaled 11.4 million barrels per day in 2023, are expected to plateau by 2026 and decline thereafter. This shift is accelerating a global oversupply trend, contributing to lower oil prices as demand weakens.
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 Indicates Bearish Outlook
The Zacks Oil and Gas - US E&P industry is a 35-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #174, which places it in the bottom 30% 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. While the industry's earnings estimates for this year have gone down 26.4% in the past year, the same for 2025 have fallen 10.8% over the same timeframe.
Despite the dim 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 S&P 500 & Sector
The Zacks Oil and Gas - US E&P industry has fared worse than the Zacks S&P 500 composite as well as the broader Zacks Oil – Energy sector over the past year.
The industry has moved down 3.8% over this period compared with the broader sector's modest increase of 1.1%. Meanwhile, the S&P 500 has gained 19.1%.
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), the industry is currently trading at 7.39X, significantly lower than the S&P 500's 17.92X. It is, however, above the sector's trailing 12-month EV/EBITDA of 3.13X.
Over the past five years, the industry has traded as high as 11.82X, as low as 3.52X, with a median of 5.98X.
4 Stocks to Buy
SM Energy Company: Denver, CO-based SM Energy Company, previously known as St. Mary Land & Exploration Company, is an independent oil and gas explorer in North America. The company's operations are focused on the Permian Basin and South Texas & Gulf Coast regions.
The 2024 Zacks Consensus Estimate for SM indicates 27.7% year-over-year earnings per share growth. The Zacks Rank #1 (Strong Buy) company delivered a trailing four-quarter earnings surprise of roughly 11.9%, on average. SM Energy's shares have gained 13.5% in a year. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Devon Energy: It is an upstream energy explorer with strong U.S. operations spread across the key oil assets of Delaware Basin, Eagle Ford, Anadarko Basin, Williston Basin and Powder River Basin. With improved cycle time, incorporation of production optimization strategies and other cost-reduction initiatives, DVN is able to lower breakeven costs across its portfolio of assets.
Devon Energy's expected EPS growth rate for three to five years is currently 11.1%, which compares favorably with the industry's growth rate of 9.4%. The Zacks Consensus Estimate for DVN's 2024 earnings has moved up 4.8% over the past 60 days. The Zacks Rank #2 (Buy) company's shares have lost 11.2% in a year.
Northern Oil and Gas: Northern Oil and Gas' core operations are focused on three leading basins of the United States — the Williston, Permian and the Appalachian. The upstream operator employs a unique nonoperating business model, which helps it to keep costs down and increase free cash flow.
Carrying a Zacks Rank #2, the Zacks Consensus Estimate for NOG's 2024 earnings has moved up 3% over the past 60 days. Northern Oil and Gas delivered a trailing four-quarter earnings surprise of roughly 7.4% on average. The company's shares have gone down 5.6% in a year.
Amplify Energy: The Houston, TX-based operator has a strong presence in Oklahoma, Southern California, Texas, and it has stakes such as Bairoil in the Rocky Mountains. Amplify Energy's diversified operations — spread over five U.S. basins — mitigates pricing and operational disruptions, while its long-life, long-production assets generate sustainable cash flows.
The Zacks Consensus Estimate for Amplify Energy's 2024 earnings has moved up 11.3% over the past 60 days. With a Zacks Rank of 2, the oil and natural gas producer has a market capitalization of $281.8 million. AMPY's shares have edged down 1.4% in a year.
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.
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Zacks Industry Outlook Highlights Devon Energy, SM Energy, Northern Oil and Gas and Amplify Energy
For Immediate Release
Chicago, IL – August 15, 2024 – Today, Zacks Equity Research discusses Devon Energy (DVN - Free Report) , SM Energy (SM - Free Report) , Northern Oil and Gas (NOG - Free Report) and Amplify Energy (AMPY - Free Report) .
Industry: U.S. Oil & Gas: E&P
Link: https://www.zacks.com/commentary/2321803/what-to-expect-from-the-us-upstream-oil-gas-industry
The Zacks Oil and Gas - Exploration and Production - United States industry is facing several bearish trends that could put pressure on overall performance. A sluggish economic outlook coupled with China's decelerating growth has led the EIA to revise down its global crude consumption forecast for 2025. Moreover, the accelerating shift toward renewable energy and electric vehicles (EVs) is likely to further dampen traditional oil demand.
Despite these challenges, U.S. upstream operators are adapting by prioritizing shareholder returns. Firms are leveraging strong free cash flow and reducing capital expenditures, channeling excess cash into dividends and buybacks. Among these, Devon Energy, SM Energy, Northern Oil and Gas and Amplify Energy stand out as resilient investments, well-positioned to navigate the current headwinds while providing attractive returns for investors.
About the Industry
The Zacks Oil and Gas - US E&P industry consists of companies primarily based in the domestic market, 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 are the fundamental drivers of this industry. In particular, a producer's cash flow is primarily determined by the realized commodity prices. In fact, all E&P companies' results are vulnerable to historically volatile prices in the energy markets. A change in realizations affects their returns and causes them to alter their production growth rates. The E&P operators are also exposed to exploration risks where drilling results are comparatively uncertain.
3 Key Trends to Watch in the Oil and Gas - US E&P Industry
Slowing Demand and Economic Concerns: Pulled down by multiple factors, U.S. oil prices have been struggling to get past the $80-a-barrel level. The EIA's revised forecast of global crude consumption at 104.5 million barrels per day for 2025, down 200,000 barrels from prior estimates, reflects concerns over a potential U.S. recession and a decelerating Chinese economy. With a reduced demand growth rate of 1.6%, these factors have been exerting downward pressure on oil prices, highlighting vulnerabilities in global oil demand driven by economic uncertainties in major markets.
Energy Transition and EV Adoption: The push toward renewable energy and the rise of 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.
As it is, China's rapid electrification is causing its oil demand to peak and decline sooner than expected. Its oil imports, which totaled 11.4 million barrels per day in 2023, are expected to plateau by 2026 and decline thereafter. This shift is accelerating a global oversupply trend, contributing to lower oil prices as demand weakens.
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 Indicates Bearish Outlook
The Zacks Oil and Gas - US E&P industry is a 35-stock group within the broader Zacks Oil - Energy sector. The industry currently carries a Zacks Industry Rank #174, which places it in the bottom 30% 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. While the industry's earnings estimates for this year have gone down 26.4% in the past year, the same for 2025 have fallen 10.8% over the same timeframe.
Despite the dim 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 S&P 500 & Sector
The Zacks Oil and Gas - US E&P industry has fared worse than the Zacks S&P 500 composite as well as the broader Zacks Oil – Energy sector over the past year.
The industry has moved down 3.8% over this period compared with the broader sector's modest increase of 1.1%. Meanwhile, the S&P 500 has gained 19.1%.
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), the industry is currently trading at 7.39X, significantly lower than the S&P 500's 17.92X. It is, however, above the sector's trailing 12-month EV/EBITDA of 3.13X.
Over the past five years, the industry has traded as high as 11.82X, as low as 3.52X, with a median of 5.98X.
4 Stocks to Buy
SM Energy Company: Denver, CO-based SM Energy Company, previously known as St. Mary Land & Exploration Company, is an independent oil and gas explorer in North America. The company's operations are focused on the Permian Basin and South Texas & Gulf Coast regions.
The 2024 Zacks Consensus Estimate for SM indicates 27.7% year-over-year earnings per share growth. The Zacks Rank #1 (Strong Buy) company delivered a trailing four-quarter earnings surprise of roughly 11.9%, on average. SM Energy's shares have gained 13.5% in a year. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.
Devon Energy: It is an upstream energy explorer with strong U.S. operations spread across the key oil assets of Delaware Basin, Eagle Ford, Anadarko Basin, Williston Basin and Powder River Basin. With improved cycle time, incorporation of production optimization strategies and other cost-reduction initiatives, DVN is able to lower breakeven costs across its portfolio of assets.
Devon Energy's expected EPS growth rate for three to five years is currently 11.1%, which compares favorably with the industry's growth rate of 9.4%. The Zacks Consensus Estimate for DVN's 2024 earnings has moved up 4.8% over the past 60 days. The Zacks Rank #2 (Buy) company's shares have lost 11.2% in a year.
Northern Oil and Gas: Northern Oil and Gas' core operations are focused on three leading basins of the United States — the Williston, Permian and the Appalachian. The upstream operator employs a unique nonoperating business model, which helps it to keep costs down and increase free cash flow.
Carrying a Zacks Rank #2, the Zacks Consensus Estimate for NOG's 2024 earnings has moved up 3% over the past 60 days. Northern Oil and Gas delivered a trailing four-quarter earnings surprise of roughly 7.4% on average. The company's shares have gone down 5.6% in a year.
Amplify Energy: The Houston, TX-based operator has a strong presence in Oklahoma, Southern California, Texas, and it has stakes such as Bairoil in the Rocky Mountains. Amplify Energy's diversified operations — spread over five U.S. basins — mitigates pricing and operational disruptions, while its long-life, long-production assets generate sustainable cash flows.
The Zacks Consensus Estimate for Amplify Energy's 2024 earnings has moved up 11.3% over the past 60 days. With a Zacks Rank of 2, the oil and natural gas producer has a market capitalization of $281.8 million. AMPY's shares have edged down 1.4% in a year.
Why Haven't You Looked at Zacks' Top Stocks?
Since 2000, our top stock-picking strategies have blown away the S&P's +7.0 average gain per year. Amazingly, they soared with average gains of +44.9%, +48.4% and +55.2% per year.
Today you can access their live picks without cost or obligation.
See Stocks Free >>
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch/
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
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Zacks Investment Research
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Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performance for information about the performance numbers displayed in this press release.