Energy

Now Is the Time to Buy Mega-Cap Energy Stocks as Oil Stumbles

Lee Jackson

Published: May 29, 2018 10:05 am

Last Updated: January 11, 2020 11:04 pm

It looked like a clear road to $80 a barrel, and if you believe the financial press, that is exactly where Saudi Arabia and many of the OPEC nations want the price of oil to go. However, President Trump has backed out of the Iran deal and once again imposed sanctions that curtail the oil exports from that country. In addition, Venezuela’s situation is a mess, and its output has dropped to the lowest levels in 28 years.

With OPEC countries promising to replace that missing production, and a huge stockpile build last week, the price of oil dropped a whopping 4% last Friday to under $70. In addition, oil stocks, which had been on a roll, got hammered as trigger-happy investors were happy to take some of the big gains they have posted this year.

The good news for those looking to add energy is that some of the safest and biggest dividend-paying mega-cap integrated companies got hammered last week, offering some of the best entry points in a while. Toss in that the busy summer driving and vacation season is here, and now may be the time to scoop up some top players.

We screened the Merrill Lynch energy universe research database and found five Buy-rated plays that pay solid dividends and look like solid selections now.

Anadarko Petroleum

This top company’s stock is still down a stunning 30% from highs printed in 2014, the last time oil traded at $70. 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 reported impressive first-quarter results, and Merrill Lynch said this when covering the earnings:

Adjusted earnings per share of $0.52 beat consensus of $0.40 on lower DD&A and strong oil production that topped guidance led by the US onshore. Half of Permian production is exposed to basis in 2018, but Enterprise and Cactus 2 should leave the company fully covered by 2019. With oil prices at current levels we believe Anadarko can reload share buybacks after the program concludes by mid year.

Anadarko shareholders receive a 1.48% dividend. Merrill Lynch recently raised its price target to $95 from $87. The Wall Street consensus price objective is $79.97, and shares were up marginally early Tuesday at $67.45.

Chevron

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.

Shareholders receive a 3.67% dividend. The Merrill Lynch price target for the shares is $150, and the consensus target is $144.89. Shares traded at $120.95 Tuesday morning.

ConocoPhillips

This one 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 (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.

Merrill Lynch has grown progressively more positive on the shares and recently noted this:

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 are paid a 1.92% dividend. Merrill Lynch has an $80 price target, and the consensus target is $73.45. Conoco traded at $64.60.

Exxon

This remains a top Wall Street energy pick and is on the US 1 list 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.

Recently, Exxon announced estimated first-quarter 2018 earnings of $4.7 billion, or $1.09 per share assuming dilution, compared with $4.0 billion a year earlier. Cash flow from operations and asset sales was $10 billion, including proceeds associated with asset sales of $1.4 billion.

During the quarter, the corporation distributed $3.3 billion in dividends to shareholders. Capital and exploration expenditures were $4.9 billion, up 17% from the prior year.

In addition, the company recently raised its dividend by a nickel to $0.82 per share, which now translates to a nifty 4.2% dividend.

The $110 Merrill Lynch price objective is well above the $87.26 consensus estimate. The stock was last seen trading at $78.65.

24/7 Wall St.
Crude Oil Pipeline Capacity Out of the Permian Basin Is Vanishing

Royal Dutch Shell

This company has survived the seesaw in oil pricing as good as or better than any other major integrated. 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 5.51% dividend. Merrill Lynch has set its price objective at $82. The consensus figure is $78.51, and shares traded at $67.55.

These are five of the biggest and best companies in the energy sector, and their shares have taken a good hit over the past week. All are also top picks from the Merrill Lynch energy analysts. As they pay good dividends and distributions, they make sense for long-term growth portfolios that also value consistent income.