Energy

RBC Out With First Global Energy Best Ideas Picks for 2019

Lee Jackson

Published: January 9, 2019 8:00 am

Last Updated: January 31, 2020 2:20 am

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

In a new research report, the energy team at RBC makes some beginning-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 we found five top companies that look like outstanding choices for investors looking to add energy stocks to portfolios that have strong potential for gains in 2019. All are rated Outperform at RBC.

Anadarko Petroleum

This top stock is still down a stunning 30% from highs printed in October, and it is a new addition to the Best Ideas list. Anadarko Petroleum Corp. (NYSE: APC) operates through three segments. The Oil and Gas Exploration and Production segment explores for and produces natural gas, oil, condensate and natural gas liquids (NGLs). The other segments are Midstream and Marketing.

Anadarko is expected to maintain the capacity to sustain planned stock buybacks at current levels, providing support to close a current perceived value gap. The company presented its 2019 strategy at the end of the year, which revealed plans to invest $4.3 billion to $4.7 billion on capital projects in 2019, slightly below the $4.5 billion to $4.8 billion spent the previous year. The company will be able to finance this investment with the cash flows produced from $50 a barrel oil.

Anadarko Petroleum shareholders are paid a 2.53% dividend. The RBC price target for the shares is $74, and that figure compares with the Wall Street consensus price objective of $78.02. The stock closed trading Tuesday at $47.34 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 5.57% dividend. RBC has a strong $90 price target on the stock, and the posted consensus price objective is much lower at $71.04. The shares closed at $51 in Tuesday’s trading.

Matador

This company has been mentioned recently as a potential takeover target, and it is another new member of the Best Ideas list. Matador Resources Co. (NYSE: MTDR) is an independent energy company that engages in the exploration, development, production and acquisition of oil and natural gas resources in the United States.

The company primarily holds interests in the Wolfcamp and Bone Spring plays in the Delaware Basin in Southeast New Mexico and West Texas. It also operates the Eagle Ford shale play in South Texas and the Haynesville shale and Cotton Valley plays in Northwest Louisiana and East Texas.

Since its IPO, Matador has grown its Permian acreage by more than tenfold as a result of acquisitions, and it has 2,151 net horizontal locations across multiple prospective zones.

The $31 RBC price target compares with the $32 consensus figure. The shares closed most recently at $18.90 apiece.

ONEOK

The volatile price of natural gas over the past year has weighed some on this top energy company. ONEOK Inc. (NYSE: OKE) primarily engages in natural gas transportation, storage and natural gas and 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 the RBC team feels 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.

ONEOK investors are paid a huge 5.81% dividend. RBC has set its price objective at $79. The consensus target was last seen at $72.16, and the shares closed trading on Tuesday at $58.87, up over 2% on the day.

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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 5.47% dividend. The RBC price target is $36. The posted consensus target price is $32.40, and the shares were last seen trading at $24.87 apiece.

These are five outstanding ideas from the team at RBC, and three of them are decidedly more conservative. Given their strong and consistent dividends, they all offer investors excellent total return potential and a safer way to play energy in 2019.