Merrill Lynch Makes 4 Big Oil Upgrades, Bracing for $60 Oil in 2017

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Can it finally be the case that there is good news in the oil patch these days? It may be true, but the qualification for what makes for good news in 2016 might be very different when compared to good news of 2014. Several things have happened of late, with Goldman Sachs calling for a stable price range and with U.S. oil rig counts growing seven weeks straight with $40 or so oil — currently closer to $45 a barrel.

Now we have Merrill Lynch changing its tune on the oil patch. The firm’s strategist is Savita Subramanian, and she has raised Merrill Lynch’s energy sector focus up to Overweight. The firm’s commodity strategists now forecast a significant rally in oil prices, and without surprise they are viewing that as bullish for energy stocks. The official view is now for $60 oil in 2017.

Subramanian pointed out that energy’s depressed earnings may stand out at a time that energy remains underowned. Her note said:

Energy looks expensive on depressed earnings, but higher oil prices should drive higher earnings estimates. Investors are still underweight the sector and the sector’s weight in the S&P 500 has fallen to historically bullish levels.

Doug Leggate, one of the Merrill Lynch energy equity analysts, has come out with several upgrades in the oil and gas stocks. There may be more upgrades coming if the firm’s view is as universal as it seems.

Marathon Oil Corp. (NYSE: MRO) was raised to Buy from Neutral. The firm’s price objective was raised to $21 from $20. Leggate’s upgrade note said he recognizes an improved risk versus reward profile along with the firm’s resource outlook. If this pans out, it implies a total return upside north of 40%. Leggate said:

Marathon Oil remains one of the most oil levered of the large cap US oils, with a production mix weighted 65% to liquids (54% oil). While this has positioned Marathon with attractive upside versus peers we have previously viewed this as a binary outcome of higher oil prices. However, over the past few months we believe a series of events have improved MRO’s relative investment case led by an improved balance sheet outlook post disposals, increased capital flexibility and critically, the recent PayRock acquisition that in our view moves Marathon into the ‘rate of change’ bucket amongst the large cap U.S. oils.

Marathon Oil was trading up almost 1% at $15.03 on Tuesday. Its consensus analyst price target is $18.00, and it has a 52-week trading range of $6.52 to $20.44.

Leggate added Devon Energy Corp. (NYSE: DVN) to the firm’s US 1 list of top ideas, noting that Devon is a binary value and it is viewed as a rate of change in an overweight energy portfolio. Leggate said that Devon checks the box on the three themes that frame Merrill Lynch’s sector view: dislocation, rate of change and binary value. Leggate also expects Devon’s guidance to move high enough to beat estimates and to guide higher in the second half of 2016.

Devon shares were last seen up almost 1% at $42.26, and the consensus price target is $45.07. Its 52-week range is $18.07 to $48.68.