The International Energy Agency has been raising its oil demand forecasts recently, and it looks as though investors are starting to take the increases to heart. After being the worst performing sector in the S&P 500 in the first half of 2017, energy is moving higher, and with good reason. Here is what the IEA said recently:
The International Energy Agency estimates in its September Oil Market Report that global oil demand grew by 2.3 million barrels a day in the second quarter of 2017, the largest quarterly jump in demand in two years, while oil inventories in Economic Co-Operation and Development countries continued declining in August toward the historic five-year average.
The bottom line? While oil prices may not break above $60 for some time, getting through the psychological $50 mark is huge. We screened the Merrill Lynch research universe and found four top integrated giants that still look like outstanding plays now. All are rated Buy at Merrill Lynch.
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.
Chevron shareholders receive a 3.66% dividend. The Merrill Lynch price target for the stock is $120, and the Wall Street target is $115.77. Shares closed Monday at $117.99.
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, liquefied natural gas (LNG) and 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, and share buybacks have been prioritized over growth.
Investors receive a 2.12% dividend. Merrill Lynch has a $58 price target, while the consensus target is $50.42. Shares closed Monday at $49.98.
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 3.8% dividend. The $90 Merrill Lynch price objective compares with the consensus target price of $82.79 and the most recent close at $80.98.
Royal Dutch Shell
This company has survived the seesaw 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.
Shell’s fourth consecutive quarter of dividend coverage at lower oil prices helps reaffirm the positive investment case for the company. Earnings have continued to surprise Wall Street to the upside, and analysts are bullish on the company’s cost reduction targets.
Investors receive a 5.35% dividend. The Merrill Lynch price objective is $66. The consensus figure is $63.65, and shares closed Monday at $59.87.
These top mega-cap integrated companies have shown strong moves from the levels that were printed in the summer. Despite the strength, they all still make sense for investors looking to add energy. The fact they all pay good dependable dividends is another big positive.