Rising crude oil prices are changing the calculus at least one analyst is using to recommend stocks in the large cap energy group. Merrill Lynch analyst Doug Leggate has shifted his focus from top dividend payers among this group to “yield” stocks.

The most significant change is a downgrade from Buy to Neutral on Exxon Mobil Corp. (NYSE: XOM) with a fair value of $96 a share, implying an upside of just 8% at current levels. Leggate notes:

[A]fter [ExxonMobil’s] strong relative performance and a valuation we estimate now ‘discounts’ long term oil prices around $73 (Brent), we view the shares as having moved ahead of sector peers, perhaps reflecting a relative scale that positions ExxonMobil as the ‘go to’ name for portfolio managers looking to reduce relative underweight positions in energy versus the wider S&P500. … As oil prices recover we believe the full extent of XOM’s portfolio ‘rate of change’ is likely to surprise on the upside, providing acceleration of free cash flow, and a step change in distributions back towards repurchasing shares. However, at the current price near ~$90, our analysis suggests this has been largely recognized with the shares already ‘discounting’ one of the highest oil prices in the sector, at ~$73 (Brent).

Merrill Lynch also noted the “rapid rebound” in Chevron Corp. (NYSE: CVX), and lumped the two integrated oil giants together as offering a lower income opportunity for investors than offered by two large cap exploration and production (E&P) companies. The analyst maintained a Neutral rating on Chevron stock with a price objective of $110, reflecting a potential upside of 9% to the current share price.

The analyst’s new top pick is Buy-rated E&P ConocoPhillips (NYSE: COP) with potential upside of 61% as the “top free cash yield idea,” even with a lower dividend yield after a dividend cut earlier this year.

Occidental Petroleum Inc. (NYSE: OXY), the other large-cap E&P in the Merrill Lynch peer group is also Buy rated with a price objective of $87 and upside potential of 15%. Leggate remains positive on Occidental, but says his analysis places “greater absolute value” with Conoco.

About Conoco, Leggate writes:

[ConocoPhillips] is positioned to deliver outsize returns to shareholders in the form of buybacks while potentially supporting competitive ‘growth per share’ that bridges the gap between the majors and the E&Ps. … In concert with our commodity team we continue to see an accelerated rebalancing of global supply and demand starting in 2H16 as non-OPEC growth stalls and where reemergence of supply disruptions occurs against the backdrop of a deteriorating global inventory cushion. While we do not expect a straight line recovery, inertia behind a slowdown in global capital spending increasingly risks a period of underinvestment that has its genesis in a technical overreaction that took oil to a $27 floor and elevated credit concerns. With the consequence of under investment in both short & long cycle projects, we believe the commodity discussion is poised for a shift towards one of under supply and increased risk that oil prices overshoot to the upside. In that scenario, ‘big oil’ would likely lag more levered peers, further positioning COP as our preferred major oil name.

None of these four stocks traded particularly well Thursday morning ahead of the release of official U.S. inventory levels. Exxon traded down about 1.7%, at $87.74 in a 52-week range of $66.55 to $90.46. The consensus price target on the stock is $85.16.

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Chevron traded down 1.2%, at $99.90 in a 52-week range of $69.58 to $104.26. The consensus price target for Chevron stock is $104.00.

ConocoPhillips traded down about 0.6%, at $43.79 in a 52-week range of $31.05 to $64.33. The consensus price target here is $50.64.

Occidental stock traded down about 1%, at $74.72 in a 52-week range of $58.24 to $79.75. The consensus price target is $77.83.

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