The laws of supply and demand have been the guiding force for pricing since trade began, and if any commodity and sector is being influenced by those laws now it is energy. Despite OPEC and Russia agreeing to raise production, and the U.S. president imploring Saudi Arabia to increase it as well, demand has increased on a worldwide basis, and reserves are not being filled as quickly as in the past.
A new RBC research report raises the firm’s benchmark pricing for oil. West Texas Intermediate estimates for 2018 and 2019 go from $63 and $65 to $68 and $76, respectively. The Brent forecast goes from $67 and $69 to $76 and $86, respectively, for the same period.
The analysts noted this concerning the increase in free cash flow in their report:
Free-cash-flow generation of $9 billion in 2018 could be dwarfed by $20 billion in 2019. We think Permian infrastructure limitations and capital discipline limit spending through most of 2019. Companies may increasingly be challenged by investors on best ways to deploy FCF. We expect large caps to focus on shareholder returns with stock buybacks a priority, but plenty of room for higher sustainable dividends exists. Large caps now yield around 1% and that could improve by 50%.
These six companies are top stock picks at RBC and all are rated Outperform.
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. The other segments are Midstream and Marketing.
The company reported impressive first-quarter results, helped by lower depreciation, depletion and amortization and strong oil production that topped guidance, led by the U.S. 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, many on Wall Street believe Anadarko can reload share buybacks after the program concludes.
Anadarko shareholders are paid a 1.33% dividend. The RBC price target was recently raised to $88 from $79. The Wall Street consensus price objective is $81.76, and the shares closed Monday at $75.18.
This company recently bought RSP Permian for $9.5 billion, and most on Wall Street like the deal. Concho Resources Inc. (NYSE: CXO) is an independent oil and natural gas company engaged in the acquisition, development and exploration of oil and natural gas properties.
It offers investors a unique combination of investment themes, including valuation, rate-of-change and resource expansion themes. The company is the largest acreage holder of the publicly traded Permian large-caps and provides investors peer-leading exposure to three of the most impactful catalysts across the Delaware Basin, including the Wolfcamp XY, Wolfcamp D and Bone Spring Shale.
RBC boosted its price target from $190 to $200, and the consensus target is $180.55. The stock closed Monday at $145.41 a share.