Numerous components go into the price of any commodity. Obviously, supply and demand is key, as too much supply or too little demand can cause the price to drop rapidly, as we saw back in 2014 when oil plunged to just over $26 a barrel. However, if you take the supply-demand issue and toss in a geopolitical event, then you have the makings of a potential for a surge in pricing.
When French President Macron made his state visit last week, he encouraged President Trump and Congress to stay in the Iranian nuclear deal that was forged by President Obama and then-Secretary of State John Kerry. The deal, which included pallets of money delivered to Iran, may be on life support, and the president has pushed for a much stronger agreement. With the deal unlikely to make it past the summer in many experts’ minds, it may make sense to grab more energy stocks now, as Iran oil exports could drop meaningfully with renewed sanctions and demand is increasing, especially from China.
We screened the Merrill Lynch research energy universe database looking for the companies that offer the best risk-reward, are rated Buy and have the biggest upside to the Merrill Lynch price target. We found four that look like solid plays for investors now.
This integrated giant is a safer 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 (LNG). Some on Wall Street estimate that the company will have a compound annual growth rate of over 5% for the next five years.
With Permian production and asset disposals targets reset, the company can raise the dividend 20% and buyback 15% of shares. Many analysts view the strategy update as appropriately conservative for one of the more oil-levered majors. The Chevron strategy through 2020 is focused on discipline enabled by step change in capital efficiency driven by doubling Permian production.
Chevron reported per-share earnings that beat the consensus forecast by Thomson Reuters. Chevron shares are up nearly 18% over the past year, recovering from a drop earlier in 2018 after the company’s fourth-quarter earnings badly missed expectations. In the first quarter, Chevron’s profits from its upstream business, which produces oil and gas, doubled from a year ago. That offset a 21% drop in earnings in its downstream segment, which includes refining crude oil into fuels like gasoline.
Chevron shareholders receive an outstanding 3.54% dividend. The Merrill Lynch price target for the shares is $138, and the Wall Street consensus target is $137.12. The shares closed trading on Friday at $126.62.
This is a top Permian Basin play for more aggressive accounts and is a top pick across Wall Street. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas.
Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.
Wall Street analysts have noted in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow, but could put the company in play as a takeover target. Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.
Merrill Lynch was very positive when the company initiated a dividend, and the firm said this last month:
Underscoring increased confidence in its ability to grow cash flow, the company initiated a $0.50 annual cash dividend starting in the first quarter of 2018 Full year production guidance is ahead of expectations with emphasis on disciplined growth; efficiency gains to continue. We reiterate our Buy rating on top tier growth profile, superior cash margins, steady execution & strong balance sheet.
Merrill Lynch has a $153 price target, and the consensus target is $156.67. Shares closed Friday at $125.85.