While the overall market continued to chug ahead during the first quarter of 2017 in a continuation of the Trump rally, energy stocks have suffered as the price of crude is down over 10% from highs and still trading below $50 a barrel. In fact, energy is close to a two-standard deviation underperformance versus the S&P 500 this quarter, something that has only happened three other times.
In a new research report from Savita Subramanian, the outstanding equity and quant strategist at Merrill Lynch, she moves the energy sector to an Overweight rating citing the fact it is the worst performer year to date, the overall positive view on oil and earnings, plus the current positioning and valuation. We covered the sector upgrade in depth.
We screened the Merrill Lynch energy research universe and found five top stocks rated Buy, all of which pay outstanding dividends.
This integrated giant is a safer way for investors looking to stay long the energy sector, and it has big Permian Basin exposure. Chevron Corp. (NYSE: CVX) is a U.S.-based integrated oil and gas company with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals.
The company sports a sizable dividend and has a solid place in the sector when it comes to natural gas and liquefied natural gas (LNG). Some on Wall Street estimate the company will have a compound annual growth rate of over 5% for the next five years.
Chevron missed estimates badly, and combined with the dip in crude price, has sold off, giving investors a great entry point. Many analysts feel the company is the best positioned integrated.
Chevron shareholders are paid an outstanding 4.01% dividend. The Merrill Lynch price target is a massive $145, and the Wall Street consensus price objective is lower at $126.26. Shares closed trading on Monday at $107.66 apiece.
This stock may offer investors solid upside potential and the company could start growing the dividends again. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, 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.
Conoco has redefined its investment case with the highest free cash leverage to a recovery in oil prices among the big oil plays. Management has addressed key questions around portfolio resilience: maintenance capital expenditures have dropped to $4.5 billion and share buybacks have been prioritized over growth.
Conoco investors are paid a 2.31% dividend. Merrill Lynch has a $70 price target on the stock. The consensus target is much lower at $57.90. The stock closed most recently at $45.86 per share.