Energy

5 Large Cap Energy Leaders to Buy After Huge Sector Sell-Off

Lee Jackson

Published: March 5, 2018 8:20 am

Last Updated: January 12, 2020 2:46 am

Even though West Texas Intermediate crude has remained over the $60 a barrel level, the energy sector was absolutely blasted last month. While hardly the only loser, as the overall markets reported the worst month in almost two years, the nearly 11% loss in the Energy Select Sector SPDR ETF (NYSEARCA: XLE) was a surprise to many.

The poor showing for the sector has put many of its top companies on sale, and with spring right around the corner, and the busy summer driving season not far-off, you can bet that oil prices should hold and investors start to look at the bargains in the sector.

We screened the Merrill Lynch energy research universe and found five large cap leaders that are all on sale, and which all pay outstanding and consistent dividends. These companies are also rated Buy at Merrill Lynch.

Chevron

This integrated giant is a safe way for investors looking to stay or get long the energy sector, and it has a 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.

While the company reported fourth-quarter earnings that missed consensus estimates, cash flow covered capital expenditures and the dividend. Production from the Permian Basin continues to exceed trajectory, and Chevron should provide investors with an update at the March 6 investors day.

Chevron shareholders receive a 4.04% dividend. The Merrill Lynch price target for the shares is $138, and the Wall Street consensus target is $135.60. Shares closed Friday at $110.92.

ConocoPhillips

This company may offer investors solid upside potential and could start growing the dividend again. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas 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.

Merrill Lynch has grown progressively more positive on the shares and noted this in a recent report:

Based on updated cash flow sensitivities we suggest operating operating cash flow could top $11 billion at $64 Brent, drawing more buybacks. With advantaged leverage to Brent and little production sharing contracts entitlement effects, we view Conoco as a strong free cash ‘yield’ name.

Investors receive a 2.13% dividend. Merrill Lynch has a $72 price target, and the consensus target is $66.55. Conoco closed Friday at $53.43 a share.

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Enterprise Products Partners

This is one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) provides a wide variety of midstream energy services, including gathering, processing, transportation and storage of natural gas, NGLs fractionation, import and export terminaling, and offshore production platform services.

One reason why many analysts may like the stock might be its distribution coverage ratio. That ratio is well above one-times, making it relatively less risky in its sector. The company’s distributions have grown for several quarters, and last year Enterprise Products announced that the board of directors of its general partner declared an increase in the quarterly cash distribution paid to partners to $0.4225 per common unit, or $1.70 on an annualized basis.

Investors receive a 6.79% distribution. The $30 Merrill Lynch price target is less than the consensus target of $31.81. Shares closed Friday at $25.03.

Exxon

This company remains a top Wall Street energy pick and is down over 15% in the past month, and it remains the preferred pick at Merrill Lynch. Exxon Mobil Corp. (NYSE: XOM) is the world’s largest international integrated oil and gas company. It explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa and elsewhere.

The company 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.

For 75 years in a row, Exxon has raised its dividend on a split-adjusted basis. Thanks to the company’s vertically integrated model in the oil and gas business, its profitability doesn’t suffer through commodity price swings like a company that’s a pure play in one segment of the value chain.

Shareholders receive a 4.08% dividend. Merrill Lynch has set its price objective at $102. The consensus estimate is just $87.19, and shares closed Friday at $75.55.

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.

In addition, the company engages in the conversion of crude oil into a range of refined products, including gasoline, diesel, heating oil, aviation fuel, marine fuel, liquefied natural gas for transport, lubricants, bitumen and sulphur; production and sale of petrochemicals for industrial customers; refining; trading and supply; pipelines and marketing; and alternative energy businesses.

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 5.09% dividend. The Merrill Lynch price objective is $74. The consensus figure is $77.74, and shares closed Friday at $62.82.

These five mega-cap companies to buy still offer value and potential upside, and they have come down dramatically in price over the past month. Add in the longtime consistent dividends payouts, and all five stocks make sense for growth accounts looking for energy exposure but with a degree of safety.