If any sector has been beaten down this year it is energy. While the trend is toward clean energy, the reality is it will be years before renewable sources can supply the huge demand. One remarkable sign for value investors to consider is that the international oil drilling rig count is at the lowest level since 2003, and that number most likely will continue to drop. Though there is still a massive supply to burn off, you can bet cooped up Americans will take to the road the rest of the summer.
With the stock market way overbought, and many investors looking for value ideas, beaten-down energy giants may be an outstanding idea now. It makes sense to stay with large-cap leaders, as many smaller exploration and production companies are expected to file bankruptcy, and the big players have multiple streams of income to get through the tough times.
We screened the BofA Securities energy research universe looking for large-cap energy stocks that are rated Buy and offer investors solid upside potential to the firm’s price target. Four fit the bill perfectly. It’s important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
This is another safer long-term play for conservative investors, and the energy giant is trading at 16-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.
Earlier this year Exxon announced plans for spending cuts amid the coronavirus outbreak that caused a price slide significantly aggravated by Saudi Arabia’s decision to start raising oil production. Exxon’s budget for this year and every year until 2025 was set at between $30 billion and $35 billion. Many on Wall Street feel that could be cut 10% to 20% or more. Note that Exxon has one of the highest paid American CEOs.
The analysts remain very positive and said this when Exxon reported:
Despite some confusion on the company’s reported earnings, we contend that on a peer to peer comparison the first quarter is a clean beat versus the street. COVID-19 is the great equalizer. All majors will lean on the balance sheets, but Exxon can reduce spending as needed with growth in the recovery. The second quarter promises more sticker shock but Exxon’s yield pays investors to wait through this downturn with growth beyond.
The company pays investors a huge 8.07% dividend, which probably will continue to be defended. The BofA Securities price target for the shares is $70, while the Wall Street consensus target is just $47.58. Exxon Mobil stock closed Wednesday at $43.14 a share.
This energy company may be offering investors the best total return potential. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals.
The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. Meanwhile, the chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.
The shares have underperformed since the Anadarko acquisition, but the company has 50% of 2020 production hedged, and the integration of Anadarko included planned synergies, noncore asset sales and conglomerate cash flows, providing downside protection through the current commodity weakness.
While the dividend has been effectively eliminated, senior management noted that these actions lower the company’s cash flow break-even level to the low $30s for West Texas Intermediate, which is currently around the $40 level.
BofA Securities has a $28 price target, which is well above the $15.10 consensus target. Occidental Petroleum stock closed Wednesday at $17.28.