Oil has taken a beating lately as the black gold has suffered from a rising dollar, though it has had a strong run off of the lows posted in 2016. One thing that has hurt some of the larger capitalization integrated companies, in addition to the recent decline in oil pricing, was some pretty poor second-quarter results, which made some investors jettison the shares.
In a new Jefferies research report, the analysts acknowledge the disappointing results but also note that while the near term is still somewhat rocky, the long-term picture remains positive.
The report said:
Operational performance was affected by heavy maintenance, but we note that production guidance was then broadly raised. That said, we do find cash generation encouraging, with every company covering its full dividend with free-cash-flow and share repurchases accelerating. We remain constructive on the broader oil macro and expect it to help support the integrateds. The stocks are trading with free-cash-flow on 2019 of nearly 9% and we remain constructive on the oil macro.
The analysts are bullish on three of the top integrated stocks, and all are rated Buy at Jefferies.
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 Corp. (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.
Chevron missed second-quarter earnings expectations, but a share buyback resumption and solid operating outlook largely wiped away concerns. The company is estimated by some to be able to generate $30 billion in free cash flow in 2020. After that, Portfolio oil leverage allows Chevron to grow the dividend and expand share buybacks.
Chevron shareholders are paid an outstanding 3.83% dividend. The Jefferies price target for the shares is $157, and the Wall Street consensus target was last seen at $146.92. The stock closed trading on Wednesday at $116.82 a share.
This is one of the highest yielding domestic stocks in the energy sector. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals. The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. The chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.
With a rock-solid balance sheet and a commitment to dividend coverage, investors look safe for now. Occidental has paid quarterly cash dividends continuously since 1975, and it has increased its dividend each year since 2002.