Despite the efforts of OPEC and Russia, and the prodding of President Trump, oil prices continue to hover above the $70 level, with West Texas Intermediate closing Friday at $71.01 a barrel and Brent North Sea Crude at $75.30. While oil traded down Monday morning, levels are still higher than anticipated when we started 2018. Production levels remain steady in the United States, but reserves are not being replenished as demand has increased. The bottom line is that oil could trade between $70 and $80 for the next year or longer.
We screened the Jefferies Franchise Picks List, which contains the firm’s highest conviction stocks, for energy companies and found five that excel in vastly different areas. All are rated Buy and make good sense for investors looking to add or increase 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 (LNG). 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 are paid an outstanding 3.61% dividend. The Jefferies price target for the shares is $157, and the Wall Street consensus price target is $146.03. The shares were trading early Monday at $123.05 apiece.
This is a top Permian Basin play for more aggressive accounts. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian in West Texas.
Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.
Wall Street analysts have noted in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow, but could put the company in play as a takeover target. Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.
Jefferies has a $183 price target on the stock, while the consensus target is lower at $161.82. The shares traded at $129.90 Monday morning.