In a year in which many sectors have enjoyed outsized positive performance despite the effects of the pandemic, the energy sector has been a distinct laggard. In fact, bearishness is so high in the sector that the weighting for energy in the S&P 500 is the lowest it has been in years. While clean energy and electric vehicles (EVs) generate a huge buzz, the reality is that it will probably be 50 years before there is a complete move to EVs and perhaps hydrogen vehicles, and in the meantime, cars, sport utility vehicles, trucks and vans will still depend on going to the pump for gasoline.
In a new RBC research report, the energy team remains realistic and notes that the near-term outlook for oil prices looks flat, with a floor probably near where the benchmark West Texas Intermediate (WTI) is trading, around $40 per barrel. The good news for weary energy investors is they see a move higher in 2021.
RBC sees WTI averaging $46 to $48 a barrel in 2021 and the price moving into the low $50s in late 2021, or a 25% move from here. The key for investors is that some of the top companies in the sector have been bludgeoned to the point of near extinction and are offering incredible entry points for investors with a long-term horizon.
Since the RBC report was more big picture, we screened the BofA Securities energy research universe looking for stocks rated Buy that also paid dividends, and found five that offer solid potential. While all are rated Buy at BofA Securities, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
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 (LNG).
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.
Investors receive a 7.00% dividend, which still appears to be safe. BofA Securities has a giant $96 target price on the shares, while the Wall Street consensus target is $97.13. Chevron stock traded early Thursday at $74.25.
The energy giant has been removed from the Dow Jones industrial average, and there has been concern the long-standing dividend may be cut. 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.
This was an outstanding short earlier in the year, especially when oil futures cratered to literally below zero, but one would think hedge funds are keeping a close eye on this position because if the economy opens up even some, the benchmark price could go back above the $50 level or higher, as the RBC team feels it can in a year.
Investors receive a 10.39% dividend, which probably will continue to be defended but remains very vulnerable. The BofA Securities price target is $77, much higher than the $45.72 consensus stock. Exxon stock traded Thursday morning at $34.30.
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