It was inevitable, and when benchmark West Texas Intermediate (WTI) crude slid all the way to $26 back in February, you can just imagine the production projects that were based on cash-flows from 2011 to 2014 that got cancelled. In fact, based on current capital spending outlooks, the analysts at RBC estimate that energy producers in the firm’s energy coverage group will be spending about 92% of cash flow in 2016, and they maintain that under-investment could ultimately lead to a big supply issues by 2019.
So the question is how do investors exploit a production gap that could ultimately lead to higher prices and profits two and a half years out? Buy the top players in the industry that can hold their ground as oil stays range bound between $40 and $50 the rest of this year and gradually begins moving higher in 2017. We think four industry leaders may be the ticket.
This stock is very solid story for investors looking to stay long the energy sector, and it is a preferred U.S. company to own now. Chevron Corp. (NYSE: CVX) is an integrated oil and gas company with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals. It sports a sizable dividend and has a solid place in the sector when it comes to natural gas and liquefied natural gas (LNG). Some on Wall Street estimate the company will have a compound annual growth rate of over 5% for the next five years.
The company’s Permian Basin assets are a goldmine, and that the Australian LNG business will transition from a yearly $8 billion capital consumption drag to a $2 billion to $3 billion contributor. Combined with the much lower overall capital spending for the 2016 to 2018 period, the company is poised to not only hang around, but end the sector slump in a much better position. The analysts note the Permian acreage is profitable at $40 a barrel.
CEO John Watson has made it clear that preserving the dividend for investors is the top priority. Wall Street analysts point out that although the company trades in line with its peers, the growth potential and solid balance sheet deserve a 10% premium.
Chevron investors are paid a massive 4.38% dividend. The Wall Street consensus price target for the stock is $111.33. Shares closed trading on Tuesday at $97.70.
This company may offer investors solid upside potential, with little threat of an additional dividend cut after the one earlier this year. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, LNG and natural gas liquids (NGLs) worldwide. Conoco’s portfolio includes resource-rich North American tight oil and oil sands assets; lower-risk legacy assets in North America, Europe, Asia and Australia; various international developments; and an inventory of conventional and unconventional exploration prospects.
Many Wall Street analysts feel the company can accelerate growth from a reloaded portfolio depth in the Bakken and Eagle Ford, and with visibility on future growth from a sizable position in the Permian.
The company remains the one of the best values as short sellers circled after the dividend cut and many growth and income managers sold shares. JPMorgan notes that the company has underperformed this year versus its peer group and is offering investors solid value at current trading levels.
Conoco investors are paid a 2.56 % dividend. The consensus price target is posted at $52.27. The stock closed Tuesday at $39.01 a share.