Even though oil has stayed above the critical $50 a barrel level for some time now, the energy sector has been a big disappointment this year. While the S&P 500 is up over 20% this year, and the major indexes have all hit an all-time high, the energy sector, as measured by the Energy Select SPDR ETF (NYSE: XLE), is essentially flat. This comes despite the fact the sector has seen some price premium moved in as Saudi Arabia had production capabilities bombed, Iran had a tanker attacked and tensions in the Middle East continue to rise.
So what does this mean for investors? The bigger story, which has been the support for a recent underlying stealth rally in oil, is that the crude supply is weakening as production growth rates slow and imports remain low. In fact, despite a surprise build in crude supplies this week, spot benchmark prices held pretty solid. Some in the industry feel if the current trend continues, it is very possible we could witness a major drop in inventories over the next year.
In addition, U.S. exports have continued to grow since export legalization began in 2016, and despite the fact that crude production has grown since then, we actually have seen a major slowdown over the past year. In addition, many of the top companies are now laser-focused on free cash flow. Given all the potential positives for the sector, and don’t forget a possible trade deal with China, the best trade for 2020 looks to be going with the mega-cap integrated energy giants that pay solid dividends and that already have the cash flow story in place.
Merrill Lynch is very positive on three mega-cap domestic companies that offer not only a degree of stability but outstanding dividends. All are rated Buy and make sense for more conservative accounts looking for growth and income.
This stock may offer solid upside potential, and the company 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 announced in October that it was raising the quarterly dividend by a stunning 38% to $0.42 a share, and it also said it expects to buy back $3 billion of its shares in 2020. The increase means that investors are now receiving a 2.92% dividend.
The Merrill Lynch price target for the shares is a massive $75, which compares to the Wall Street consensus target of $72.62. The stock was last seen on Wednesday trading at $57.63 per share.
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.