Less than a month ago, something that seemed impossible actually occurred. The front month oil futures contract for May, which expired in mid-April, actually traded negative. Traders were forced to sell at a loss as those holding contracts on expiration have to take physical delivery, and with no storage space available, had to sell at a loss.
What a difference a month can make for energy investors. On Monday, the benchmark pricing for West Texas Intermediate crude shot up to $33.10, up almost 14% from the Friday close. Oil traders seemed to be focused down the road, with futures markets for both overseas-benchmark Brent and West Texas Intermediate barrels for December delivery having the highest open interest, or total number of options and outstanding contracts.
What that means for investors is that while the front month contract for June, which expires this week, is the current price point, many traders think the biggest money can be made later this year, as the combination of production cuts and renewed consumption kicks in. For investors looking for energy stocks to buy, the prices now are still very reasonable.
We screened the BofA Securities energy research universe looking for companies with Buy ratings that have kept the dividend intact. We stay with the larger cap leaders, as they have the ability and balance sheet to stay in the game when prices become extremely volatile.
This company was long considered an industry leader but its stock has been absolutely battered. Apache Corp. (NYSE: APA) is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids (NGLs). The company has operations in onshore assets located in the Permian and Midcontinent/Gulf Coast onshore regions, and offshore assets situated in the Gulf of Mexico region. It also holds onshore assets in Egypt’s Western desert and offshore assets in the North Sea region, including the United Kingdom.
Apache also has an offshore exploration program in Suriname. As of December 31, 2019, it had total estimated proved reserves of 551 million barrels of crude oil, 186 million barrels of NGLs, and 1.6 trillion cubic feet of natural gas. The company remains an acquirer/exploiter/explorer and a fiscally conservative company that has grown its reserves and production consistently via acquisitions and organic projects.
Apache posted a good first quarter, and the analysts said this:
Earnings per share beats; but COVID response on production dents otherwise solid quarter. No new guidance yet. … but with recent cost and spending cuts we see Apache doing enough to be free cash positive in the second half of 2020. Debt metrics are high but resilient; Apache value is anchored on Suriname’s and the strength of Total’s balance sheet.
The company pays a small 0.85% dividend. BofA Securities has a gigantic $22 price target, which compares to the surprisingly lower Wall Street consensus target of $10.57. Apache stock closed trading on Monday at $11.92, up over 12% on the day.
This integrated leader is a safer way for investors looking to be positioned in the energy sector. 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.
Chevron, which is among the companies with the largest corporate debt, recently became the latest major oil company to slash spending after halting its $5 billion-a-year share buyback and halving spending in the Permian Basin, which means a large decrease in projected output from America’s biggest shale region.
The California-based oil giant has said that it would lower projected 2020 capital spending by 20%, or $4 billion. The Permian will account for the largest single element of that reduction, translating into 125,000 fewer barrels of oil equivalent per day than previously forecast, a quantity equal to about 2.5% of the basin’s total current production.
The analysts are positive and noted this after the recent earnings report:
Chevron earnings beat reflects operational momentum, but we see stress tested guidance as the key takeaway from the quarter. With uncertainty ahead, Chevron top in class balance sheet and capital flexibility stand out, w/ $30 billion in liquidity to navigate a downturn. New guidance on sustaining capital – below our prior estimate, raises our price objective. Retain Buy as a top defensive name.
Shareholders receive a 5.87% dividend, which the analysts feel will remain at current levels. BofA Securities raised its price target to $97, well above the $90.71 consensus target. Chevron stock closed at $92.55, after rising 5.35% on Monday.