Why Jefferies May Be Wall Street's Biggest Energy Bull
It’s one thing to call a sector’s turn way in advance. It’s quite another to become bullish when the underlying commodity of the sector is hitting highs not seen in almost four years. That is exactly what is trending on Wall Street and has been for the past couple of months. Energy horribly underperformed for years, and even though the commodity price was rising, the stocks in many cases didn’t trade up near as much. Importantly, one of the main metrics of the sector, which is production, was actually starting to slow, but few seemed to notice.
One company that we cover here at 24/7 Wall St. that has been right on this sector with its calls for some time is Jefferies. The firm made the case long before the United States backed out of the Iran deal that demand was picking up and supply was staying flat. Toss in the fact that, like gold, oil is a cheap inflation hedge, and you have all the makings of a continued rally.
Needless to say, $100 a barrel will put a crimp in the economy, and at current prices, it is estimated that energy could absorb as much as one-third of the benefits derived from the tax overhaul. Simply put though, energy may be the best bet through the summer and the rest of 2018.
We screened through the top picks at Jefferies, which include exploration and production companies, master limited partnerships (which as measured by the Alerian MLP index are still down 5% this year following a 14% decline in 2017), large cap integrateds and oilfield services companies. We found seven stocks that look like great additions for growth portfolios.
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 Corporation (NYSE: CVX) is a US-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 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.
The analyst report noted this:
We believe the Chevron portfolio is the most strategically advantaged in the super-major sector, with visible growth and an industry leading Permian position. A progressive dividend remains Chevron’s #1 financial priority, but we also expect the company will generate sufficient discretionary cash flow to fund a $26b repurchase program from 2018-2020. The company expects an annual capital program of $18b-20b will be sufficient to fund cash flow and production growth and to replace reserves.
Chevron shareholders receive a 3.45% dividend. The Jefferies price target for the shares is $149, and the Wall Street consensus target is $139.53. The stock closed Tuesday at $129.74.