Oil Had a Great 2016: 4 Stocks to Buy as 2017 May Be Even Better

December 27, 2016 by 247lee

This time last year investors were pretty down on the prospects for oil, and with good reason. By February oil bottomed at $26 and things were pretty bleak for the future. What a difference a year makes, with OPEC and other nations committing to a production cut that goes into effect January 1, the price of oil has doubled from the 2016 lows and it’s a whole new ballgame for investors.

While it’s unlikely oil will double again, having underperformed the market four out of the past five years, there’s reason to believe that 2017 could be solid, especially since the sector tends to be a good late cycle/reflationary performer. We screened the Merrill Lynch energy sector research universe for stocks rated Buy that also paid dividends. We found four that look good for 2017.

ConocoPhillips

This company may offer investors solid upside potential despite the big dividend cut earlier this year. 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. The company remains one of the best values as short sellers circled after the dividend cuts and many still remain short the stock.

The Merrill Lynch team noted in a recent report:

Conoco has redefined its investment case with the highest free cash leverage to a recovery in oil prices amongst the big oils. Management has addressed key questions around portfolio resilience: maintenance capex drops to $4.5 billion. Share buy backs prioritized over growth – 10% prospective free cash yield at $65 oil.

Conoco investors are paid a 1.95 % dividend. The Merrill Lynch price target on the stock is $70. The Wall Street consensus price target is much lower at $55.50. The shares closed last Friday at $51.37.

Devon Energy

This company is expected to have a substantial portion of its total 2016 production in natural gas, and it also resides on the US 1 list. Devon Energy Corp. (NYSE: DVN) an independent energy company, primarily engages in the exploration, development and production of oil, natural gas and NGLs in the United States and Canada. It operates approximately 19,000 wells. It also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensates through its natural gas pipelines, plants and treatment facilities.

Devon Energy’s third-quarter results set the tone for a very solid November after the company reported core earnings that were nearly double what Wall Street analysts were expecting. Fueling that result was the company’s continued ability to push down operating costs, which are now 37% below peak rates.

Shareholders are paid a small 0.5% dividend. The Merrill Lynch price target is at $61, and the consensus is posted at $50.69. The shares closed Friday at $47.02.

Occidental Petroleum

This is one of the higher yielding domestic stocks in the energy sector. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals. The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. The chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.

With a rock-solid balance sheet and a commitment to dividend coverage, investors look safe for now. Occidental has paid quarterly cash dividends continuously since 1975, and it has increased its dividend each year since 2002.

The market has shown a mixed reaction to the company’s gigantic first bolt-on acquisition in the Southern Delaware basin, where it acquired 35,000 net acres in Reeves and Pecos for $2 billion. Overall, Merrill Lynch is positive on the deal.

Shareholders receive a 4.22% dividend. Merrill Lynch has an $83 price target, and the consensus target is $77.71. The shares closed on Friday at $72.11 apiece.

Royal Dutch Shell

This company has survived the plunge in oil pricing 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 NGLs.

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.

In addition, the company engages in the conversion of crude oil into a range of refined products, including gasoline, diesel, heating oil, aviation fuel, marine fuel, LNG for transport, lubricants, bitumen and sulphur; production and sale of petrochemicals for industrial customers; refining; trading and supply; pipelines and marketing; and alternative energy businesses.

The company generated 3.83 billion cubic feet per day of natural gas in the second quarter of this year from its integrated gas operations and another 6.40 billion cubic feet per day from its upstream operations. It produced solid third-quarter results that exceeded Merrill Lynch expectations. The firm noted in a recent research report:

We increase our estimates and price objective as a result of results – remaining above consensus. We reiterate our Buy rating and continue to see Royal Dutch Shell as our preferred Integrated Oil Supermajor.

Investors receive a huge 5.9 % dividend. The $60 Merrill Lynch price target is near the the consensus target of $59.94, and the shares closed Friday at $54.11.

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The combination of the OPEC production cuts with worldwide growth expected to finally grow at a more normal level could be just the combination ticket for another solid year for energy stocks.