We have remained positive on the energy sector all year here at 24/7 Wall St., as the price of oil has continued to rise much faster than the price of energy stocks. In addition, with President Trump’s surprise move in not extending the waiver sanctions provided to some countries who import oil from Iran, the price took off yet again, now above the $65 a barrel level.
The biggest benefactors of rising oil prices are often the mega-cap integrated giants, as they have massive volumes in oil, natural gas, liquefied natural gas (LNG) and distillates. In addition, they offer investors the kind of safety and secure dividends that make them long-term holdings in growth and income portfolios.
Three top integrated leaders are rated Buy at Merrill Lynch and still offer very reasonable valuations and entry points for investors.
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 U.S.-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 LNG. Some on Wall Street estimate that the company will have a compound annual growth rate of over 5% for the next five years.
The company’s recently announced $33 billion purchase of Anadarko Petroleum Corp. (NYSE: APC) was a huge boost for the sector as the combined company could become the largest operator in the massive Permian Basin, which is located in West Texas and New Mexico. In addition, the takeover would place Chevron neck-and-neck with the oil and gas production of Exxon and Royal Dutch Shell, both of which have dominated Big Oil over the past decade. In fact, the combined company’s cash flow last year of $36.5 billion would have exceeded Exxon’s.
In a huge move on Wednesday, Occidental Petroleum Inc. (NYSE: OXY) entered a higher competing bid of $76 a share for Anadarko in a half-cash, half-stock offer that values the company at a stunning $57 billion.
Chevron shareholders receive a 3.91% dividend. The Merrill price target for shares is $150, and the Wall Street consensus target is $139.50. Shares closed Wednesday at $118.28, down over 3% on the news of the competing bid.
This remains a top Wall Street energy pick, and it has bounced back nicely from the December lows. 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.
Exxon 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.
For 75 years in a row, Exxon Mobil has raised its dividend. Thanks to its vertically integrated model in the oil and gas business, its profitability doesn’t suffer through commodity price swings like a company that’s a pure play in one segment of the value chain. Just this week the company raised the dividend from $0.82 to $0.87 per share.
Shareholders receive a 4.06% dividend after the increase. Merrill has a $105 price objective, while the consensus figure is just $83.99. The stock closed Wednesday at $84.63.
Royal Dutch Shell
This is a top international play for investors looking to add energy exposure and is yet another company that posted solid results. 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 natural gas liquids.
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.
Merrill remains bullish and noted this when earnings were released:
Fourth quarter 2018 saw solid earnings (8% beat vs. consensus) and $12.2 billion organic operating cash flow ahead of our already above-consensus estimate. $27 billion organic free cash flow in fiscal year 2018 significantly de-risks the company’s outlook for $25-30 billion in 2020 – funding $25 billion buybacks. Ongoing buybacks also underline continued capex discipline.
Investors receive a 6.01% dividend. The $69 Merrill price objective compares with the $78.55 consensus target. Shares closed at $63.46.
The big three of oil and gas that dominate much of the world’s exploration and production all remain on sale. They are solid choices for more conservative growth and income accounts looking for total return. Given that they have jumped from the lows, scaling money in on a 90-day basis may make sense now for investors looking to initiate or add to current positions.