After a huge run from the February lows, the spot price of oil has recently pulled back about 10%, and for investors who have been waiting to add to positions or initiate some energy sector holdings, now may be a very good time to nibble on some of the top companies. For many investors, staying with the large cap integrated companies that are very liquid makes good sense. They also pay outstanding dividends, which should help in the event the sector and oil trade sideways for a while.
A new RBC research report remains positive on the top integrated companies, and while the second-quarter production numbers are usually lower, and costs typically higher, the cost reductions should help to offset some of the weakness. Three stocks are rated Outperform, and all are good for growth and income accounts.
This company remains a top Wall Street energy pick. Exxon Mobil Corp. (NYSE: XOM) is an energy sector play that the Merrill Lynch analysts are very positive on long-term, as the overall corporate strength of the massive integrated giant plays a significant part in the company’s usually solid earnings reporting pattern and in maintaining dividend coverage.
The company’s global downstream chemical segment plays a huge part for Exxon. It may be a part that many on Wall Street don’t fully appreciate as the segment contributes an estimated 16% of overall total revenue. Some very solid reasons for adding the stock to a long-term growth portfolio are that the company has consistently demonstrated disciplined investing, operational excellence and technological innovation.
Exxon is also a very strong company from a financial standpoint. It has an AA+ credit rating and an outstanding debt-to-equity ratio of 0.23. Exxon is free cash flow positive, with the company reporting free cash flow of $6.5 billion in 2015 and management cutting the capital expenditures budget for 2016. It is a sound investment to buy and hold forever.
Exxon investors receive a 3.17% dividend. The RBC price target for the stock is $100, and the Wall Street consensus price objective is $94.73. Shares closed on Monday at $94.82.
Royal Dutch Shell
This company has survived the plunge in oil pricing plunge as good as or better than any other major integrated stock. Royal Dutch Shell PLC (NYSE: RDS-A) operates as an independent oil and gas company worldwide through its Upstream and Downstream segments. The company explores for and extracts crude oil, natural gas and natural gas liquids.
Royal Dutch Shell also converts natural gas to liquids to provide fuels and other products; markets and trades crude oil and natural gas; transports oil; liquefies and transports gas; extracts bitumen from mined oil sands and converts it to synthetic crude oil; and generates electricity from wind energy.
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