Despite the fact that OPEC compliance is down to its lowest levels since the production cuts were announced last November, the low prices for gasoline, especially in the busy summer driving months, is helping to push demand higher. In fact, the International Energy Agency said that global oil demand growth saw dramatic acceleration in the second quarter and revised 2017 growth forecasts up 100,000 barrels per day to 1.4 million. So it makes sense to stay in the energy game, but what is the safest route to go?
With cheap gasoline comes higher demand, and higher demand is just the ticket for the top refining stocks. With shale producers continuing to keep production at high levels, and OPEC members frustrated with quotas, there is a good chance that oil stays range bound between $40 and $50 for the next couple of years, barring an all-out Middle East war.
We screened the Merrill Lynch research database and found three top companies that are rated Buy and pay solid dividends. They all make sense for growth and income accounts looking for energy exposure, but wary of crude price swings. All three have solid upside to the Merrill Lynch price targets as well.
This top refiner has been on a nice roll, but it still trades well below highs posted in late 2015. Marathon Petroleum Corp. (NYSE: MPC) recently was added to the Franchise Picks List, and it has a diversified business that operates through Refining & Marketing, Speedway and Pipeline Transportation segments.
The company owns and operates seven refineries in the Gulf Coast and Midwest regions of the United States, which refine crude oil and other feedstocks, and it distributes refined products through barges, terminals and trucks, as well as purchases ethanol and refined products for resale.
The company announced in January its plans to significantly accelerate its dropdown of assets with an estimated $1.4 billion of master limited partnership eligible annual earnings before interest, taxes, depreciation and amortization being transferred to MPLX.
Investors are paid a solid 2.67% dividend. The Merrill Lynch price target for the stock is $67, and the consensus price objective is $63.25. The stock closed Thursday at $53.84.
This is another top energy company, and only 9% of fund managers own it now. Tesoro Corp. (NYSE: TSO) is an independent refiner and marketer of petroleum products. The company operates seven refineries concentrated in the western United States with throughput capacity of 851,000 of barrels per day. Tesoro’s retail marketing system includes 574 company operated retail stations.
Tesoro has told Wall Street it expects about $1 billion of EBITDA from its logistics segment going forward. The company plans to grow the segment by focusing on low-risk, accretive growth projects. While some on Wall Street say the easy money has been made in the refiner’s, Tesoro remains a top play, especially as the company widens business silos and opportunities
Tesoro investors are paid a 2.27% dividend. Merrill Lynch has a whopping $121 price target, and the consensus target is $106.50. The stock closed Thursday at $96.79.
Only 17% of institutional funds currently own this Wall Street and Merrill Lynch favorite. Valero Energy Corp. (NYSE: VLO) is the largest independent petroleum refining and marketing company in the United States. It is based out of San Antonio, owns 13 refineries in the United States, Canada and Europe, and has total throughput capacity of around 2.5 million barrels per day.
The stock has traded solidly higher since December, but like some of the others it still trades below the highs that were printed two years ago. Trading at a low 12.9 times forward earnings estimates and sporting an incredible price to earnings growth ratio of 0.73, this company may very well be the best of the bunch.
Investors are paid a 4.13% dividend. The whopping $86 Merrill Lynch price target compares with the consensus of $74.17 and Thursday’s close at $67.78 a share.
Three great stocks to buy that pay dividends and, more importantly, keep investors in the energy sector while being less exposed to what could be longer term lower oil prices. All three companies will report second-quarter numbers late in July or in the first week of August.