Merrill Lynch Very Cautious on Oil Stocks: 5 Defensive Picks to Buy Now

Energy

Published: February 5, 2020 7:15 am

When 2020 started, things were looking pretty solid for oil and the energy sector. Then to make things even spicier, a little geopolitical volatility was tossed into the mix when U.S. forces killed Iranian Major General Qasem Soleimani. That quickly spiked benchmark West Texas Intermediate crude close to $63 a barrel. In less than a month, though, the price has dropped a stunning 18%.

Despite the excitement over the electric vehicle revolution and the constant chatter about climate change, the world continues to need fossil fuels. The time may be right for some selective buying in the sector.

A new and comprehensive Merrill Lynch report makes the case that, just one month into 2020, the outlook for oil looks bleak with the possibility of a major China slowdown risking significant revisions to global growth. The analysts do cite the strong possibility of OPEC cutting production levels again, and with U.S. production slowing, a backstop may be put in place for oil prices around the $50 level.

Merrill said this regarding the prospects for oil:

We continue to believe slowing US oil growth is an overlooked aspect of the global macro outlook. We already expected a material slowdown in growth from 2019 into 2020, and further into 2021. With this latest oil correction, our expectation is that growth plans for many of the US oils slows even further.

The analysts suggested that investors look at more defensive companies in the sector, and these five stand out. All are rated Buy at Merrill and make sense for long-term growth investors with some risk tolerance.

ConocoPhillips

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.

On Tuesday, the company reported profits of $0.76 per share, which was 37 cents lower than in the same quarter last year. Earnings of $0.80 per share for the quarter were anticipated by 19 analysts providing estimates. The company also reported revenue of $8.14 billion, which was higher than the estimated $7.71 billion.

Investors receive a 2.85% dividend. The Merrill price target for the stock is a massive $80, while the Wall Street consensus target is $72.63. ConocoPhillips stock closed Tuesday at $56.49, down almost 5% on the earnings results.

Exxon

This is a safer long-term play for conservative investors, and the energy giant is trading at stunning 10-year 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. Note that Exxon has one of the highest paid American CEOs.

The company reported fourth-quarter results that did have some positive trends. The Merrill report noted this:

Fourth quarter 2019 reflects a difficult margin environment, amplified by the company’s greater leverage to chemicals/downstream vs the peer group. But nothing broken here. Cash-flow at a $32 billion run rate in a cyclical trough leaves the goal of doubling cash-flow by 2025 intact. We still see Exxon’s counter-cyclical investment underpinning rate-able dividend growth that separates it from other majors.

Exxon pays investors a 5.80% dividend. Merrill has a $100 price objective, and the consensus target price is just $83.92. Exxon Mobil stock closed at $59.97 on Tuesday.