Energy

5 RBC Global Energy Best Ideas Could Be Big 2019 Winners

Lee Jackson

Published: December 12, 2018 7:45 am

Last Updated: January 11, 2020 1:50 pm

The pounding the energy sector has taken since early October, over 30%, is enough to make many investors run and hide. Many of top energy companies have been beaten back to levels they were at this time last year. Investors with a little dry powder and a longer time horizon now have the opportunity to take positions in some of the top companies at much cheaper valuations.

In a new research report, the energy team at RBC makes some end-of-the-year changes to the firm’s well-respected Global Energy Best Ideas list. We screened the list for the top U.S.-based picks in both energy and oilfield services and found five top companies that look like outstanding choices for investors looking to add now for potential gains in 2019. All are rated Outperform at RBC.

Baker Hughes

General Electric announced recently it will be divesting a large part of its interests in Baker Hughes, a GE Company (NYSE: BHGE), and this could provide a new life to the shares. Baker Hughes is a provider of integrated oilfield products, services and digital solutions. The company’s products and services include upstream, midstream, downstream, industrial solutions and digital transformation.

The company’s upstream, which includes evaluation, drilling, completions and production. Midstream enables the power and compression efficiency for liquefied natural gas and pipeline and storage. Downstream builds reliability and safety into process operations that include refining and petrochemical and fertilizer solutions.

Baker Hughes industrial solutions offers power generation to advanced control systems and sensing technology that power industrial facilities. Digital transformation integrates data on an open platform with security and scale. The digital transformation enables field services with real-time insights.

Shareholders are paid a 3.38% dividend. The RBC price target for the shares is $40, and the Wall Street consensus target is lower at $35.80. The stock closed Tuesday’s trading at $21.29 a share.

Helmerich & Payne

This large-cap sector leader is perhaps a safer and more conservative play. Helmerich & Payne Inc. (NYSE: HP) is the largest U.S. land driller and provides onshore drilling services primarily in the United States. It also offers land rigs internationally, as well as offshore platform rigs in the Gulf of Mexico.

The company provides drilling rigs, equipment, personnel and camps on a contract basis to explore for and develop oil and gas from onshore areas and fixed platforms, tension-leg platforms, and spars in offshore areas. Its contract drilling business operates through three reportable segments: U.S. Land, Offshore and International Land.

The analysts cite the big price drop over the past two months as unwarranted, and they also note the company has the best U.S. land drilling rigs, the most upgradeable rigs, the best capital structure and a 47-year history of dividend increases.

Helmerich & Payne investors are paid a very big 4.73% dividend. RBC has a strong $90 price target, while the posted consensus price objective is much lower at $72.08. The stock closed at $60 on Tuesday.

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ONEOK

The volatile price of natural gas over the past year has weighed some on this top energy company, but recently prices have jumped. 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.

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

Investors are paid a very solid 5.8% dividend. The $79 RBC price objective compares with the $72.89 consensus target price. The shares were last seen trading at $58.98 apiece.

Pioneer Natural Resources

Many Wall Street analysts love this stock for a pure crude oil play. Pioneer Natural Resources Co. (NYSE: PXD) operates a modern fleet of more than 24 top performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.

Pioneer is a huge player in the Permian Basin and the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second-largest oil reservoir in the Midland Basin. With a stellar balance sheet, the company is poised to remain a top player in the Permian as it expects to deliver solid production growth in 2019 and beyond.

The company’s unmatched depth of low-cost inventory and balance sheet allow it to compete favorably in both mild and moderate recovery case scenarios. In addition to asset and financial strength, many analysts feel that Pioneer offers the second highest multiple contraction among the large-cap Permian pure-play peers, as well as the highest free-cash-flow yield.

Pioneer investors are paid a small 0.23% dividend. RBC has set its price target at $245. The consensus price figure is below that level at $236.81, and Pioneer closed trading on Tuesday at $128.67 per share.

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Williams Companies

This top energy company is also a solid pick for more conservative accounts. Williams Companies Inc. (NYSE: WMB) is now largely a pure-play domestic natural gas infrastructure company that recently completed the merger with its underlying master limited partnership, Williams Partners.

The company has a lower risk, fee-based business model with some volume sensitivity. Natural gas demand continues to be driven by LNG exports, power generation and industrial needs. In addition to steady demand growth, Marcellus production and associated gas in the Permian are expected to continue to be primary supply drivers.

Shareholders are paid a very sizable 5.59% dividend. The RBC price target is $36. The posted consensus target is $32.71, and the shares closed most recently at $23.93.

Three of these five outstanding ideas from the energy team at RBC are decidedly more conservative. Given their strong and consistent dividends, they offer investors excellent total return potential, and with many positive catalysts on the horizon, the sector could rebound in 2019.