While some feel the recent rally in oil is about to run out of steam, there are solid reasons for investors to stay or get involved. The continued unrest in Venezuela could pressure supply, and the U.S. government is considering sanctions against the country for a recent special election vote that increased the power of President Nicolas Maduro and granted his government the ability to rewrite the constitution. While the government claimed 8 million citizens participated and voted in their victory, third-parties estimated that fewer than 4 million Venezuelans actually participated.
With the potential for Venezuelan sanctions, and Middle East nations vowing to continue to cut their production, it may be a solid time to put some capital toward the energy sector. As we have noted previously, energy was the only negative S&P 500 sector in the first half of 2017, and it is probably offering the best value in a rich market.
We screened the Merrill Lynch energy research universe for large cap companies rated Buy that also pay good dividends. We found four top companies that fit the bill perfectly.
This integrated giant is a safe way for investors looking to stay or get 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.
The company reported solid earnings for the second quarter, and analysts have noted that the Permian Basin remains a key source of capital flexibility, and it is a key issue behind their relative preference for Chevron versus some of the other majors. Merrill Lynch analysts noted this in their report:
Permian production is running ahead of guidance with implications on reducing sustaining capital for the broader portfolio. Major project starts, led by Gorgon continue to drive an inflection in free-cash-flow with the cash break-even trending below $50 by 2018.
Chevron shareholders receive a 3.9% dividend. The Merrill Lynch price target for the stock is $120 a share, and the Wall Street consensus price objective is $116.24. Shares closed trading on Tuesday at $110.78.
The world’s largest international integrated oil and gas company remains a top Wall Street energy pick. Exxon Mobil Corp. (NYSE: XOM) explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa, Asia, Australia and Oceania. It also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas, and petroleum products.
The company posted some messy second-quarter results, and Merrill Lynch feels the stock is still an outstanding place for investors to put money now. The team also cites the ability of the company to maintain and cover the cash dividend at lower oil prices as a key positive, and a recent report said this:
Management could do a better job of highlighting unusual items; on review the second quarter met consensus in contrast with a perceived miss. Analysis of operating cash flow suggests Exxon had a second quarter cash break-even of $35 although capex is running 33% below guidance. With $2 billion of free cash in the second quarter before working capital, the company remains a low risk strategic route to reweighting energy portfolios.
Shareholders receive a 3.85% dividend. Merrill Lynch has a $90 price objective, while the consensus target is $83.03. The stock closed Tuesday at $80.17.