Why Big Oil Looks to Be the Best Energy Bet for 2019

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Along with a vicious 20% decline and bear market status for the S&P 500, oil has taken even a bigger beating, at one point down 30% from highs posted earlier this year. Concerns touted by the oil bears include a glut of inventory in addition to slowing economic conditions. However, on the bright side, OPEC production cuts are expected to kick in early in 2019, and worldwide demand is expected to grow sharply over the next five years.

Given the massive drop in the sector, many investors are probably considering some of the mega-cap leaders. They do make sense, given they have diversified business silos and many have chopped costs and capital expenditures during the last downturn. Throw in the growing need for natural gas and natural gas liquids (NGLs), and the big boys make sense now.

We screened the Merrill Lynch energy research database looking for large-cap leaders rated Buy that also pay dividends. We found four that look like outstanding picks for 2019.

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 (LNG) and 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 and the Merrill Lynch team said this at the time:

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 1.96% dividend. The Merrill Lynch price target on the shares is $82, and the Wall Street consensus target price is $77.74. The stock closed trading on Thursday at $62.23 a share.

Exxon Mobil

This stock remains a top energy pick across Wall Street and 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.

The company posted strong third-quarter results, and the Merrill Lynch 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 are paid a very solid 4.76% dividend. Merrill Lynch has a price objective of $108, while the posted consensus target price is $87.09. The shares ended trading on Thursday at $68.94.