The conventional wisdom, which is often neither conventional nor wise, has been that if OPEC and Russia start to increase production to offset the Iran and Venezuela production drop, that price will continue to go lower. While oil prices have dropped significantly since the end of May, the reality is that production worldwide has dropped overall, and we could be poised for higher, not lower prices.
In a new research report, Jefferies is of the opinion that prices are indeed going higher, and while the differential between Brent and West Texas Intermediate should stay in place, the firm is raising its price target on both higher. Analyst Jason Gammel noted this in the report:
The oil market is tight and we believe that supply side risks are likely to drive oil prices higher during 2018. Commercial inventories are being rapidly depleted and the market is beginning to price in further supply risks with US sanctions on Iran looming, Venezuelan production in free-fall and even US shale showing signs of limitations to how fast it can grow. Price elasticity of demand is a concern particularly given the recent devaluation of many emerging market currencies, but we believe that generally robust global economic conditions can compensate for the increase in oil price.
The analysts upgraded one top U.S. company and have two others that trade in dollars rated Buy. All three make good additions to growth portfolios looking for energy exposure.
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 analysts noted this in a recent report:
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 $26 billion 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 are paid an outstanding 3.61% dividend. The Jefferies price target was raised to $157 from $149, and the Wall Street consensus price target is $145.18. The shares closed Friday’s trading at $124.04.