If there is one bit of good news for the beleaguered energy sector, which has the potential in 2016 to have an almost unprecedented fourth year of underperformance, we may have found it. A new research report from Merrill Lynch takes a long backward historical look at what sectors perform the best during after the first Federal Reserve rate hike, and energy was the winner.
The Merrill Lynch analysts examined six rate tightening cycles from 1983 through 2004. The strongest sector is ranked 1 with the weakest ranked 10. Energy did the best one to 12 months into a Fed tightening cycle and was ranked 1 or 2 during the 12 months after Fed liftoff, based on average price returns over the period.
We screened the Merrill Lynch stock research database universe for the energy stocks the firm has ranked with Buy rating. We looked for the candidates that could provide the best total return and found four outstanding companies.
The Merrill Lynch team like this stock on the steep pullback in price over the last month. Anadarko Petroleum Corp. (NYSE: APC) is one of the world’s largest independent exploration and production companies, with exploration or production work in all major domestic drilling areas, as well as in South America, Africa, Asia and New Zealand. As of year-end 2014, the company had approximately 2.86 billion barrels-equivalent of proved reserves, making it one of the top non-integrated companies.
The company reported very solid earnings numbers on stronger production and lower exploration costs. It posted revenue of $2.64 billion in the period, surpassing Wall Street forecasts of $2.57 billion. Anadarko reported a second-quarter profit of $61 million, and $0.12 per share. With liquids growing as a greater percentage of the overall business, and savings being redeployed to add more wells, the analysts feel the stock remains a compelling buy.
Anadarko investors are paid a 1.65% dividend. The Merrill Lynch price target on the stock is a very impressive $96. The Thomson/First Call consensus target is lower at $92.67. The stock closed Friday at $65.65.
This may offer investors some of the best total return possibilities, and the Merrill Lynch analysts see it as a top yield play. ConocoPhillips (NYSE: COP) is a large integrated that has spent the past five years divesting assets. Although it is cash rich, the company has somewhat dampened earnings and growth expectations all year long. With oil looking for a bottom, and the market watching events in the Middle East, many analysts may feel more comfortable with the stock. And the company’s big production ability in the Eagle Ford could bode well for the future.
The Merrill Lynch analysts feel Conoco can accelerate growth from reloaded portfolio depth in the Bakken and Eagle Ford with visibility on future growth from a newly disclosed sizable position in the Permian. The analyst applauds the company’s recent positive earnings report, cuts in unnecessary spending and the possibility of increased sales of non-core assets.
Investors are paid a very strong 6.25% dividend. The $74 Merrill Lynch price target is higher than the consensus target of $64.71. Conoco closed Friday at $50.34.
This is the world’s largest international integrated oil and gas company, and it just reported better second-quarter revenue numbers than expected, but earnings came in below Wall Street estimates. Exxon Mobil Corp. (NYSE: XOM) is an energy sector play that the Merrill Lynch analysts are very positive on long term, as its overall corporate strength plays a significant part in the company’s usually solid earnings reporting pattern.
The Merrill Lynch team has stressed in the past the company’s global downstream chemical segment plays a huge part for Exxon. It may be a part that many others on Wall Street do not fully appreciate as the segment contributes an estimated 16% of overall total revenue. A very solid reason for adding the stock to a long-term growth portfolio is the fact that the company has consistently demonstrated disciplined investing, operational excellence and technological innovation.
Exxon investors are paid a very respectable 4.06% dividend. The Merrill Lynch price target is $100. The consensus price objective is lower at $86.65. Shares closed trading on Friday at $72.69, down almost 22% for the year.
This top refiner has had an up-and-down trading year, and any pullback may be the time to buy or add shares, like Warren Buffett recently did in a big way. Phillips 66 (NYSE: PSX) is a diversified energy manufacturing and logistics company. With a portfolio of midstream, chemicals, refining, and marketing and specialties businesses, the company processes, transports, stores and markets fuels and products globally. Phillips 66 Partners, the company’s master limited partnership, is an integral asset in the portfolio. The company has $50 billion of assets as of June 30, 2015.
The company is geographically diversified and the 15 refineries spread around the country enable it to participate in various location specific market opportunities and also provide an advantage over region-specific competitors. Phillips 66’s refineries are integrated with transportation, marketing and commercial operations that provide crude supply flexibility. These refineries benefit from strong margins due to low feedstock costs thanks to higher proportion of onshore crude sources, which are substantially cheaper than seaborne crudes. Phillips 66 also owns or has interests in three refineries in Europe and one in Asia.
Phillips 66 investors are paid a solid 2.78% dividend. The Merrill Lynch price target is $91. The consensus target is higher at $94.17. The stock closed Friday at $80.60.
The energy sector is nowhere close to being out of the woods yet, and prices could remain volatile. However, with the bullish rising rate history as a sector leader, combined with outstanding dividends and the lowest prices in years, patient investors may want to scale buy shares of some of these large cap leaders now.
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