Energy

5 Jefferies Energy Franchise Picks to Buy for the Rest of 2018

Lee Jackson

Published: July 16, 2018 9:55 am

Last Updated: January 11, 2020 8:58 pm

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.

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 (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.

Diamondback Energy

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.

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Golar LNG

This is the premier company in the world for LNG distribution. Golar LNG Ltd. (NASDAQ: GLNG) is one of the world’s largest independent owners and operators of LNG carriers and floating storage and regas units (FSRUs). The company has 14 vessels in its fleet, three LNG carriers slated for floating LNG platform (FLNG) conversion, 10 LNG carriers and one FSRU.

Collectively with Golar Partners and Golar Power, the fleet has 16 LNG carriers, three FLNGs/candidates and eight FSRUs. GLNG is the general partner for Golar LNG Partners. Its joint ventures, Golar Power and OneLNG, are focused on FSRU conversions and FLNG projects.

The $40 Jefferies price target compares with the posted consensus price objective of $36.06. The stock traded at $27.80.

Marathon Petroleum

With a big deal in place, this company is poised to be the biggest refinery in the United States. Marathon Petroleum Corp. (NYSE: MPC) is one of the newest members of the Jefferies Franchise List, and it is at the beginning of the long process of completing a massive purchase of another refining giant. The company agreed to buy rival Andeavor for $23.3 billion in the biggest-ever deal for an oil refiner.

The offer, payable in either cash or shares, values Andeavor at about $152.27 a share. That represents a 24% premium over the closing price the prior to the announcement. Following the deal, Marathon will be the largest operator of refining capacity in the United States, and most on Wall Street believe that management can achieve the $1 billion in synergies it has suggested.

Shareholders are paid a 2.56% dividend. Jefferies has set its price target at $95 a share. The posted consensus target is $97.62, and the shares were last seen trading at $71.25.

ONEOK

Despite the volatile price of natural gas over the past year, this stock has been on a roll. ONEOK Inc. (NYSE: OKE) primarily engages in natural gas transportation, storage and natural gas and natural gas liquids (NGLs) gathering, processing and fractionation in the Bakken, Mid-Continent and Permian. The company recently closed the roll-up of its underlying master limited partnership, ONEOK Partners.

The company has a strong presence in the Oklahoma SCOOP/STACK (NGL gathering/takeaway system, G&P), the Williston Basin (G&P, NGL takeaway) and the Permian Basin (NGL gathering, NGL takeaway, natural gas takeaway), which analysts feel provides high-return growth opportunities.

Jefferies is also positive on the company’s primarily fee-based earnings, which account for 90% of the total earnings.

ONEOK investors are paid a very solid 4.45% dividend. The Jefferies price objective is $67. The consensus target price is $68.38, and the shares traded above both levels on Monday at $70.65.

These five top companies with distinctly different businesses offer investors a variety of ways to play the energy sector, from aggressive exploration and production to LNG, large-cap integrated and natural gas. While they vary greatly in risk, they all make sense for long-term investors looking to be in the sector.