When oil was trading around the $100 a barrel range, analysts said the price of the black gold was going higher, and the companies that were in the Permian Basin and the other shales had “must own” stocks. But all of that has changed with oil range bound between $45 and $50. The question for investors is an easy one: With many on the sell-side so bearish on the sector, isn’t it time to take a look?
In perusing our 24/7 Wall St. research database, we came across some very interesting data from the team at Jefferies in regards to the energy sector. We knew in advance that the energy sector was the only S&P 500 sector down in the first half, but some additional data points really stood out:
- Major firms on Wall Street are slashing their oil price targets, and some have even argued that oil could go below the $40 mark. Very bearish overall.
- Total U.S. petroleum inventories are declining on a year-over-year basis for the first time since early 2015.
- Total exploration and production capital expenditures have seen the deepest cuts since 1998 and 1999.
- The performance of the S&P energy sector relative to the S&P 500 is the worst in five years.
- The energy sector’s share of total market capitalization is now below the 2016 low.
While it’s not always good to be a contrarian just for the sake of being contrarian, it makes sense to look for values in a sector that is receiving absolutely zero love. We screened the Jefferies research database, and found four large cap stocks that all are rated Buy and pay outstanding dividends. Adding some shares now may be a great move.
This integrated giant is a safer way for investors looking to stay or get long the energy sector, and it has big Permian Basin exposure. Chevron Corp. (NYSE: CVX) is a U.S.-based integrated oil and gas company with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals.
The company sports a sizable dividend and has a solid place in the sector when it comes to natural gas and liquefied natural gas. Some on Wall Street estimate the company will have a compound annual growth rate of over 5% for the next five years.
The company reported solid earnings for the second quarter, and analysts have noted that the Permian Basin remains a key source of capital flexibility, and it is a key issue behind their relative preference for Chevron versus some of the other majors. The analysts noted in their report:
Permian production is running ahead of guidance with implications on reducing sustaining capital for the broader portfolio. Major project starts, led by Gorgon continue to drive an inflection in free-cash-flow with the cash breakeven trending below $50 by 2018.
Shareholders receive a 4.0% dividend. The Jefferies price target for the stock is $130, and the Wall Street consensus price objective is $116.38. Shares traded early Friday at $111.20.
This stock may offer investors solid upside potential and the company could start growing the dividends again. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied 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.
Conoco has redefined its investment case with the highest free cash leverage to a recovery in oil prices among the big oil plays. Management has addressed key questions around portfolio resilience: maintenance capital expenditures have dropped to $4.5 billion and share buybacks have been prioritized over growth. In addition, ConocoPhillips has significantly improved its balance sheet and is committed to returning $6 billion via buybacks through 2019 in most realistic pricing scenarios.
Investors receive a 2.5% dividend. Jefferies has a $54 price target. The consensus target is $51.89, and shares were last seen at $44.95.