Commodities & Metals

Merrill Lynch Sees Volatile 2014 Oil Market for Top Stocks to Buy

At the end of last year and since we have published many of the top stock picks from firms we cover on Wall Street. Noticeably absent on the top sectors to buy on most of those lists was energy. In fact, the broad market is underweight energy and already wider market factors have dented strong performance in 2013. At the same time weather and a series of preannouncements have arguably diluted the influence of headline earnings in the upcoming earnings season.

In a new research report, the energy team at Merrill Lynch presents a case that many Wall Street analysts are starting to envision. They view 2014 with expectations of a more volatile year ahead, anchored on an increasingly seasonal trend as a consequence of rising domestic production and stagnant U.S. oil demand. One saving grace is that the largest rise in natural gas prices in years will help to balance earnings. Either way, Merrill Lynch like other companies, is much more comfortable with large cap names in what could be a rocky 2014.

We screened the Merrill Lynch list of stocks to buy for those with the biggest upside potential to the posted Merrill Lynch price targets.

Anadarko Petroleum Corp. (NYSE: APC) remains a top name for 2014 at Merrill Lynch. The analysts believe that the company emerges in 2014 with an increasingly “clean” investment case that stands on its merits as a growth story, and what they continue to believe is one of the most attractive absolute valuations in the sector. They also think the potential Tronox liability is priced in to the stock. Investors are paid a small 0.9% dividend. The Merrill Lynch price target is $105. The Thomson/First Call estimate is $102.47. The stock closed Friday at $$81.09. Hitting the Merrill Lynch target would be a 29% gain for investors.

Cabot Oil & Gas Corp. (NYSE: COG) is the top natural gas name to buy at Merrill Lynch. Even in a challenging gas environment, the analysts believe Cabot has the potential to deliver strong returns and an impressive growth trajectory. Should U.S. natural gas prices prove to be even better than the strip pricing over the next several years, the company stands to benefit as one of the most levered names in the sector. Investors are paid a miniscule 0.2% dividend. The Merrill Lynch price target is $47, and the consensus is at $44.70. Cabot closed Friday at $39.55. Hitting the target would be a 19% gain for investors.

Continental Resources Inc. (NYSE: CLR) was recently upgraded and makes the list of top names to buy. The company is one of the top names in the Bakken shale and the analysts are expecting a slow, but steady increase in production levels. The Merrill Lynch price target is posted at $145, and the consensus is at $131.45. Continental closed Friday at $106.91. A move to the target represents a 36% gain for investors.

EOG Resources Inc. (NYSE: EOG) is a top energy name added for 2014 at Merrill Lynch. The company is fueling record oil and natural gas production that is revolutionizing the U.S. energy position. Its position in the three biggest tight oil plays makes it a huge player in the exploration and production (E&P) field. EOG Resources would be a huge acquisition for even the biggest of big oil companies. That said, there is a lot to like about EOG as it is the top producer in the Eagle Ford Shale and it has solid positions in both the Bakken and Permian Basin. Investors are paid a tiny 0.5% dividend. The Merrill Lynch price target for the stock is posted at $190, and the consensus figure is $192.51. EOG closed Friday at $165.52. Trading to the target is a 15% gain for investors.

Hess Corp. (NYSE: HES) is the second largest producer in the Bakken region. However, unlike many other operators in the region, Hess’s Bakken assets make up less than a quarter of the company’s production and reserves. Investors are paid a 1.2% dividend. The Merrill Lynch price target for the stock is $115, the highest on Wall Street. The consensus estimate is set at $91.73. Hess closed Friday at $76.25. A move to the Merrill Lynch target would be a huge 51% gain.

Occidental Petroleum Corp. (NYSE: OXY) is another top domestic E&P name on the Merrill Lynch list for 2014. The company may be looking to sell a stake in its Middle East and North Africa operations. With an estimated value of $22 billion, the assets are located in the United Arab Emirates, Qatar, Oman, Bahrain, Yemen, Libya and Iraq. Some analysts believe that selling an $8 billion to $10 billion stake would raise needed cash for debt reduction and share repurchases. Shareholders are paid a 2.6% dividend. The Merrill Lynch price target for the stock is $130, and the consensus is at $109. Occidental closed Friday at $88. Trading to the target price would be a very impressive 48% gain.

Pioneer Natural Resources Co. (NYSE: PXD) is a huge player in the Permian basin in Texas, and it has been a huge winner for shareholders this year. Rumors have swirled the past half of this year that one of the big integrateds may target Pioneer as a takeover candidate. It would be a very expensive deal as the company’s market cap is almost 25 billion. The Merrill Lynch price target for the stock is a gigantic $275. The consensus number is lower at $221.15. Pioneer closed Friday at $172.73. Trading to the Merrill Lynch target would represent a stunning 59% gain for investors.

Range Resources Corp. (NYSE: RRC) is another top name to buy for continued possible gains in natural gas. The company holds interests in developed and undeveloped natural gas and oil leases in the Appalachian and Southwestern regions of the United States. Range Resources owns 4,637 net producing wells and approximately 1.6 million gross acres under lease in the Appalachian region. It also owns 1,536 net producing wells and approximately 811,000 gross acres under lease in Southwestern region. Investors are paid a small 0.20% dividend. The Merrill Lynch target is a set at $100, and the consensus figure is at $90.87. Range closed Friday at $86.16. Hitting the target would be a 16% gain.

The ongoing argument on Wall Street continues to be the price of oil over the next year. With increased domestic production, and demand lacking, some firms think the price could fall as low as $75. One thing is for sure, they key for investors is to own energy names that can succeed even if pricing does become a factor. The solid large cap stocks tend to fare much better is turbulent times than their small and mid-cap counterparts.