While most of us as consumers love seeing falling prices at the pump, especially as we close in on the holidays, investors in the big dividend-paying energy sector leaders have had a very difficult start to the fourth quarter. Top analysts have blamed the weakness on a number of factors, including the strong U.S. dollar, stock market volatility and weakness, the escalating trade dispute between the United States and China, and rising global supply.
While some of those factors could remain in place, it is important to remember that President Trump is looking to try to settle the trade disputes, especially with China, as he knows that would provide a lift to the market and the economy. With the G-20 summit set for this month, any announcement of improvement in trade differences could launch some of the battered oil leaders.
We screened the Merrill Lynch energy research universe looking for dividend-paying energy stocks and found four that look like solid plays for the rest of 2018 and next year as well.
ConocoPhillips
This stock may offer investors solid upside potential and could start growing its dividends again. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas and natural gas liquids (NGLs) worldwide.
Conoco’s portfolio includes resource-rich North American tight oil and oil sands assets; lower-risk legacy assets in North America, Europe, Asia and Australia; various international developments; and an inventory of conventional and unconventional exploration prospects. Many Wall Street analysts feel the company can accelerate growth from a reloaded portfolio depth in the Bakken and Eagle Ford, and with visibility on future growth from a sizable position in the Permian.
The company posted better-than-expected quarterly profits last week, and the Merrill Lynch team said this:
The broader market pullback creates an attractive entry point with 25% upside to our revised $85 PO. Free cash leverage to oil is still underappreciated after revisiting a 2014 Alaska tax change muted through the downturn. Free cash flow at current strip prices suggests the current buyback program can expand 50% before planned asset sales.
Conoco investors are paid a 1.77% dividend. The Merrill Lynch price target for the shares is $85, while the Wall Street consensus price target is$80.05. The stock closed trading on Monday at $69.03 per share.
Exxon Mobil
This remains a top Wall Street energy pick, and it 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.
When the company posted strong third-quarter results, the analysts noted this:
Solid quarter with earnings and cash flow beat on the downstream segment. Production beat looks like it is on Permian growth which we view as underappreciated aspect to the company’s story. All-in-all, we see the quarter as a welcome start to management plans to double cash flow by 2025 and retain our Buy rating.
Shareholders of Exxon are paid a very solid 4.02% dividend. Merrill Lynch has a price objective of $110, and the posted consensus target was last seen at $89.85. The shares ended Monday trading at $81.64.
Occidental Petroleum
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.
Occidental shareholders are paid a sizable 4.46% dividend. The $103 Merrill Lynch price target compares with a $94.18 consensus target and the most recent close at $69.95 a share.
24/7 Wall St.Royal Dutch Shell
This is a top international play for investors looking to add energy exposure. 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 NGLs.
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, LNG 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.
The Merrill Lynch team remains bullish on the stock and noted this when earnings were released:
The company delivered $4.2 billion excess free cash flow in the third quarter and announced buyback acceleration in the fourth quarter. This signals managements confidence in free cash flow momentum despite a slight third quarter net income miss. We believe Royal Dutch Shell will deliver sector-leading 2020 free cash flow yield above 16%.
Investors are paid a huge 5.04% dividend. Merrill Lynch has set its price objective at $85. The consensus figure was last seen at $83.67, and the stock closed at $63.39 a share on Monday.
With oil prices hovering near 2018 lows, these stocks are outstanding long-term buys for growth portfolios looking for income as well. With the sanctions on Iran fully in place, demand could soar, which could lift benchmark prices as we close out the year.
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