If there is one sector that has frustrated investors this year, it has been energy, and with good reason. While West Texas Intermediate crude is only down about 8% this year, the SPDR S&P Oil & Gas Exploration & Production ETF is down a stunning 24%. This also comes on the heels of the International Energy Agency forecasting its strongest oil demand growth in two years. The Paris-based agency recently raised its 2017 estimate to 1.6 million barrels per day from 1.5 million on stronger-than-expected European and U.S. demand growth, as well as production declines in OPEC and non-OPEC countries.
In a new research report, the energy team at JPMorgan, they like others on Wall Street, focus on companies with solid free cash flow. They report noted this:
Investor frustration is building with exploration and production companies. While acronyms like “GOR” or gas/oil ratio have been used as a scapegoat, we think that a more important psychological shift is underway around capital allocation. E&Ps singular focus on net-asset-value is no longer being valued the same way in the market, while companies that have a more balanced free-cash-flow generation and capital allocation approach are outperforming.
Five top companies are now favored by the JPMorgan analysts, all are rated Overweight.
This top company is still down a stunning 30% since January and is an outstanding Buy at current levels. Anadarko Petroleum Corp. (NYSE: APC) operates through three segments. The Oil and Gas Exploration and Production segment explores for and produces natural gas, oil, condensate, and natural gas liquids (NGLs). The other segments are Midstream and Marketing.
The company remains a solid value play, and despite less than stellar second-quarter results, many on Wall Street are very positive on the story for the rest of 2017 and beyond.
Most on Wall Street now expect lower production and capital spending from Anadarko. The reduced production mainly stems from an asset sale and the impact from the Colorado incidents earlier this year. The free-cash-flow deficit is $375 million for 2018 and $104 million for 2019.
Shareholders receive just a 0.4% dividend. JPMorgan has a $54 price target on the stock. The Wall Street consensus target is $60.40. Shares traded early Friday at $43.45.
This integrated giant is a safer 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. 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. The JPMorgan report noted this:
For now, we assume that Chevron will be conservative on return of capital in a $50 per barrel Brent environment. We see minimal dividend increases of ~1c quarterly hike once every four quarters. We do not assume that the company would buy back stock as long as oil is less than $60 per barrel.
Chevron shareholders receive a 3.78% dividend. The JPMorgan price target is $123, and the consensus price objective is $115.19. Shares traded Friday at $114.35.