First they said oil couldn’t break $50 a barrel, then the basement was supposed to be $40, and now West Texas Intermediate is in the mid-$30s. Last week, analysts at Goldman Sachs said it could go to $20. The bottom line for shell-shocked energy investors is nobody is sure how low it will go. One thing is a given, though, over-leveraged mid and small cap companies are in big trouble, and for many this won’t end well.
An improving economy in 2016 can help, and clearly the dollar strength that we witnessed this year should taper some, but the fact remains that there is going to be some damage in the sector and it could get ugly. The best ideas for investors looking to add energy is to stay with the large cap leaders that have “been there, done that.” They have the deep pockets and the diversification to fight through this until better days return.
We screened the Merrill Lynch research database looking for large cap stocks rated Buy that pay good and reliable dividends that can be maintained. We found three outstanding choices for investors.
This company may offer investors some of the best total return possibilities for 2016, and the Merrill Lynch analysts recently added it to the firm’s US 1 list. ConocoPhillips (NYSE: COP) is the self-described world’s largest independent exploration and production company, based on production and proved reserves.
Headquartered in Houston, ConocoPhillips had operations and activities in 25 countries and has spent the past five years divesting assets. Although it is cash rich, the company has somewhat dampened earnings and growth expectations all year long.
Many Wall Street analysts feel Conoco can accelerate growth from reloaded portfolio depth in the Bakken and Eagle Ford, with visibility on future growth from a newly disclosed sizable position in the Permian. Conoco lowered its 2015 spending target in response to the lingering slump in crude prices.
Chairman and CEO Ryan Lance said recently that Conoco expects oil prices to start to move higher late next year, but the company is significantly reducing capital and operating costs, while maintaining its commitment to safety and asset integrity. He also said Conoco retains the flexibility to adjust capital spending in response to market factors. The 2016 capital budget was announced recently at $7.7 billion. Merrill Lynch feels that, with the capex below $8 billion, and additional asset sales, the dividend should remain safe.
Conoco investors receive a very strong 6.44% dividend. The Merrill Lynch price target is a whopping $77. The consensus price target is much lower at $60.95. Conoco closed Friday at $45.93.