Energy

5 Must-Own Energy Stocks as Oil Heads Toward $80 a Barrel

Lee Jackson

Published: July 2, 2018 8:00 am

Last Updated: January 11, 2020 9:36 pm

The Organization of the Petroleum Exporting Countries (OPEC) and Russia may start rethinking the oil production output levels they recently agreed on as oil ended trading last Friday at $74.15 a barrel. While the assumed agreed on total of 600,000 to 800,000 barrels is expected to help, the bottom line is that the overall worldwide production is dropping and reserves are not being filled up anywhere close to former levels.

The question for many investors now may be whether they are too late to the party, and the answer is probably no. While oil has shot higher fast, the price has swung dramatically over the past six weeks, causing the price gains of many of the top companies to remain limited.

We screened the Merrill Lynch energy universe and found five companies that are leaders in their specific energy areas and look like tremendous buys now. All are rated Buy at Merrill Lynch.

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 3.54% dividend. The Merrill Lynch price target for the shares is $150, and the Wall Street consensus target is $145.68. The shares closed Friday at $126.43.

Energy Transfer Partners

This company merged with Sunoco Logistics Partners last year. Energy Transfer Partners L.P. (NYSE: ETP) engages in the natural gas midstream and intrastate transportation and storage businesses in the United States.

The company’s Intrastate Transportation and Storage segment transports natural gas from various natural gas producing areas, and through ET fuel system and HPL system. It owns and operates 7,500 miles of natural gas transportation pipelines, as well as three natural gas storage facilities in Texas. Its Interstate Transportation and Storage segment provides natural gas transportation and storage services, it owns and operates approximately 12,300 miles of interstate natural gas pipeline, and it has interests in various natural gas pipelines.

The Midstream segment gathers, compresses, treats, blends, processes and markets natural gas. It owns and operates 35,000 miles of in service natural gas, 31 natural gas processing plants, 21 natural gas treating facilities and four natural gas conditioning facilities.

The unitholders receive an 11.87% distribution. Merrill Lynch has a $21 price target, but the consensus target is $23.95. Shares closed Friday at $19.04.

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Exxon Mobil

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.

Exxon posted first-quarter 2018 earnings of $4.7 billion, 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.

The company recently raised the dividend by a nickel to $0.82 per share, which now translates to a 3.96% dividend. The $100 Merrill Lynch price objective is well above the $87.79 consensus estimate. Shares closed Friday at $81.51.

Halliburton

This stock is down over 15% since late May and remains a top large cap oil services pick at Merrill Lynch. Halliburton Co. (NYSE: HAL) is one of the world’s largest providers of products and services to the energy industry. It serves the upstream oil and gas industry throughout the life cycle of the reservoir, from locating hydrocarbons and managing geological data to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.

Halliburton is the second-largest provider of oil services and the number one player in pressure pumping services worldwide. For investors looking for an oilfield services company to add, this is arguably the best, and analysts feel it will be a huge benefactor as the frac market has tightened significantly and prices are 20% to 30% off the lows.

The company just reported first-quarter 2018 results that were handily higher than a year ago and were in line with Wall Street expectations.

Shareholders receive a 1.5% dividend. The Merrill Lynch price target is $59. The consensus target is $61.44, and shares closed Friday at $45.06.

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 natural gas liquids.

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 $78. The consensus figure is $80.81, and shares closed Friday at $69.23.

Five top stocks to pick from that have been hammered: three integrated giants (including one from Europe), a leading energy master limited partnership (with a massive distribution payout) and one of the top oilfield services companies in the world. All these stocks make good choices for investors looking to add energy at a reasonable valuation level.