Even though oil has stayed above the critical $50 a barrel level, the energy sector has been a huge disappointment this year. While the S&P 500 is up almost 20% year to date, the energy sector, as measured by the Energy Select SPDR ETF (NYSE: XLE), is essentially flat. This despite the fact the sector has seen some price volatility premium moved in as Saudi Arabia had production capabilities bombed and Iran recently had a tanker attacked.
So what does this mean for investors? With the U.S. shale and production story slowing, and many companies now focused on free cash flow, what is the best move for investors who see value but remain cautious?
The best trade for 2020 looks to be going with the mega-cap integrated energy giants that pay solid dividends and already have solid cash flow stories in place. Even with only a mid-single-digit move higher in 2020, if you add in the dividends, plus the ability to write covered calls on positions, the total return outlook is outstanding. Plus, trading near 52-week lows makes the big boys attractive.
We screened the Merrill Lynch energy research universe and found five global giants that investors looking for energy exposure ought to consider. All are rated Buy at Merrill.
This one may offer solid upside potential and it just gave investors a massive dividend increase. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas and natural gas liquids 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 recently announced a quarterly dividend hike of a stunning 38% to $0.42 a share, and said it expects to buy back $3 billion of its shares in 2020. The increase means that investors now receive a 3.08% dividend.
The Merrill price target for the stock is $75, and the Wall Street consensus target is $68. Shares were last seen trading at $54.53.
This remains a top Wall Street energy pick and is a safer long-term play for conservative investors. 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. Note that Exxon has one of the highest paid American CEOs.
The company’s mixed second-quarter results did have some positive trends, and the Merrill team noted this:
Another quarter of heavy maintenance masks an emerging inflection in liquids growth, and expanding upstream cash margins. Cash flow continues to lag capital expenditures and dividends; we see no issue as spending to double cash flow does not match the timing of asset sales. Maintenance is transitory; the company is clear about preparedness to lean on the balance sheet until cash flow catches up.
Exxon raised its dividend earlier this year by a nickel to $0.87 per share, which now represents a 5.11% dividend. Merrill has a $100 price objective, while the consensus figure is just $83.92. Shares closed Thursday at $68.14.