Oil Massively Underperforms the S&P 500: Buy These 4 High-Yielding Giants
Even though the benchmark pricing for crude oil has remained at levels that allow most companies to make money, the industry as a whole has been eviscerated compared with the S&P 500 this year. In fact, Jefferies noted this week that the SPDR S&P Oil and Gas Exploration and Production ETF (NYSE: XOP) underperformance versus the S&P 500 is nearly back to historic highs.
Analysts also note that tracing back to the start of the exchange-traded fund, when you look at its rolling 12-month performance compared with the S&P 500, the SPDR S&P Oil and Gas Exploration and Production ETF is ostensibly pricing in the disaster that the energy sector suffered in 2015, when both supply and demand fell apart.
Despite the negative performance, some of the biggest players in the sector are reporting some solid results, and with tensions in the Middle East once again rising as Iran has seized yet another tanker, four high-yielding giants may be good contrarian plays now.
This international giant posted solid results and may be the best value of all. BP PLC (NYSE: BP) is one of the world’s leading integrated energy companies, with operations in over 100 countries worldwide. Its operations are focused on a wide range of activities, including exploration and production of oil and gas, refining and marketing, chemicals, gas and power, and renewable energy.
With fundamentals improving, the stock is trading at the highest free cash flow yield relative to the firm’s supermajor competitors. Toss in the solid second-quarter performance, and the high dividend payout, which may be raised again by year’s end, and the stock looks like a value steal.
BP shareholders receive a massive 6.48% divided. Jefferies just moved the shares to a Buy rating, as well as raised the price target on the shares to $48.60 from $46.60. The consensus target across Wall Street is $50.26, and the stock closed at $37.66 on Monday.
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 liquefied natural gas (LNG). Some on Wall Street estimate that the company will have a compound annual growth rate of over 5% for the next five years.
With Permian production and asset disposals targets reset, many analysts feel Chevron can raise the dividend 20% and buyback 15% of shares. Many analysts view the strategy update as appropriately conservative for one of the more oil-levered majors. The Chevron strategy through 2020 is focused on discipline enabled by step change in capital efficiency driven by doubling Permian production. Jefferies noted this when the company reported:
Chevron second quarter 2019 results were generally in line with expectations. The company resumed its share repurchase program in the quarter, and going forward total shareholder returns will annualize >6% including the dividend. Permian operations continue to improve; we expect Chevron will be near cash break-even in the Permian this year and generate >$1.2 billion in free cash flow next year.
Chevron shareholders receive an outstanding 4.01% dividend. The stock is on the Jefferies Franchise Picks list with a $144 price target. The consensus price target is lower at $137.67, and the shares closed most recently at $118.74.