OPEC and Russia Want Higher Oil Prices: Buy the Dip Now

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Even though many on Wall Street continue to maintain that both OPEC and Russia are ready to step in and make up for any production shortfalls from Iran due to sanctions and Venezuela due to it massive problems, the reality is both want $80 a barrel oil, especially OPEC. They have made that abundantly clear. So it is by no means a given they will cut production at the meeting at the end of June.

When you toss in the fact that there are bottleneck issues in some of the top shale plays, including the Permian, that are starting to affect U.S. production output and pricing, you have the ingredients for higher prices. With the price of West Texas Intermediate down more than 10% since May 21, it makes sense to buy the producers that are making the most money on current pricing.

We not only screened our 24/7 Wall St. research database but combed through additional energy research and sources looking for companies that are making solid money on current production. The Wall Street Journal recently reported that only five companies that are focused mainly on hydraulic fracking generated more cash than they spent in the first quarter.

We screened for companies with the highest reported cash flow and found five that look like they could be solid additions for investors looking to add energy now. All are rated Buy at Merrill Lynch.

Continental Resources

This company has very large exposure to crude oil. Continental Resources Inc. (NYSE: CLR) is primarily a producer of onshore U.S. oil and has positioned itself in two growing hydrocarbon discoveries in the country: 1) the Bakken oil play in Montana and North Dakota, and 2) the SCOOP/STACK in Oklahoma, giving the company good growth opportunities for years to come.

Many on Wall Street feel that the company’s investment thesis is virtually unmatched. Investors get core Permian-like acreage at a non-Permian valuation. Of greatest importance, Continental is one of few diversified large-cap stocks that offers investors exposure to low-cost oil outside of the Permian. With some anticipated growing pains in the Permian, diversification is important in the high-quality peer class.

Driven by significantly better 2016 and 2017 results when utilizing the high intensity completions, and having an unhedged 2018 and 2019 oil production profile, the company is estimated to generate a 5.4% and 5.6% free cash flow yield at the strip. Toss in an expansive low-cost oily resource inventory, which could provide decades of drilling locations.

The Merrill Lynch price target for the shares is $84, and the Wall Street consensus target is $70.90. Shares traded Tuesday morning at $64.00.

ConocoPhillips

This one may offer investors solid upside potential and could start growing its dividends again. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas and natural gas liquids 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 receive a 1.67% dividend. Merrill Lynch has an $80 price target, and the consensus target is $73.45. Conoco traded Tuesday morning at $67.95.