Why Top Oil Stocks Could Be the Best Second-Half 2018 Trades

Print Email

Anytime you have a major headline issue overhanging an entire sector, it’s going to cause trouble, and at the very least keep things on hold for a while. That was the case with the energy sector, as investors waited for some time to see just what the Organization of the Petroleum Exporting Countries (OPEC) countries and Russia intended to do to make up for the lost production from Iran and Venezuela. We got the answer last Friday, and it was pretty positive for the entire sector.

While it still seems somewhat vague what the actual production increases will be, most estimates and analysts say the agreement is likely to add around 600,000 to 800,000 barrels a day to the market, helping to tame oil prices that have soared to multiyear highs recently. While there was no surprise there was an increase, that amount is far less than many estimated, as some bearish analysts expected as much a 2 million barrels per day.

Oil shot higher last Friday, with West Texas Intermediate up almost 5% to $68.58, and Tuesday morning it was trading at $68.15. Given the uncertainty due to the trade and tariff issues, and with the busy summer driving season underway, big oil stocks look like solid picks for the third quarter and the rest of 2018.

We screened the Merrill Lynch energy research universe and found five stocks that could be great selections now, all are rated Buy.

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.

A progressive dividend remains Chevron’s top financial priority, but analysts expect the company will generate sufficient discretionary cash flow to fund a $26 billion repurchase program through 2020. The company expects an annual capital program of $18 billion to $20 billion will be sufficient to fund cash flow and production growth and to replace reserves.

Chevron shareholders receive a 3.58% dividend. The Merrill Lynch price target for the stock is $150, and the Wall Street consensus target is $145.68. The shares closed Monday at $122.61.

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 1.72% dividend. Merrill Lynch has an $80 price target, and the consensus target is $75.45. Conoco closed Monday at $66.14 a share.