When oil was trading around the $100 a barrel range, analysts said the price of the black gold was going higher, and the companies that were in the Permian Basin and the other shales had “must own” stocks. But all of that has changed with oil range bound between $45 and $50. The question for investors is an easy one: With many on the sell-side so bearish on the sector, isn’t it time to take a look?
In perusing our 24/7 Wall St. research database, we came across some very interesting data from the team at Jefferies in regards to the energy sector. We knew in advance that the energy sector was the only S&P 500 sector down in the first half, but some additional data points really stood out:
- Major firms on Wall Street are slashing their oil price targets, and some have even argued that oil could go below the $40 mark. Very bearish overall.
- Total U.S. petroleum inventories are declining on a year-over-year basis for the first time since early 2015.
- Total exploration and production capital expenditures have seen the deepest cuts since 1998 and 1999.
- The performance of the S&P energy sector relative to the S&P 500 is the worst in five years.
- The energy sector’s share of total market capitalization is now below the 2016 low.
While it’s not always good to be a contrarian just for the sake of being contrarian, it makes sense to look for values in a sector that is receiving absolutely zero love. We screened the Jefferies research database, and found four large cap stocks that all are rated Buy and pay outstanding dividends. Adding some shares now may be a great move.
Chevron
This integrated giant is a safer way for investors looking to stay or get long the energy sector, and it has big Permian Basin exposure. 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. Some on Wall Street estimate the company will have a compound annual growth rate of over 5% for the next five years.
The company reported solid earnings for the second quarter, and analysts have noted that the Permian Basin remains a key source of capital flexibility, and it is a key issue behind their relative preference for Chevron versus some of the other majors. The analysts noted in their report:
Permian production is running ahead of guidance with implications on reducing sustaining capital for the broader portfolio. Major project starts, led by Gorgon continue to drive an inflection in free-cash-flow with the cash breakeven trending below $50 by 2018.
Shareholders receive a 4.0% dividend. The Jefferies price target for the stock is $130, and the Wall Street consensus price objective is $116.38. Shares traded early Friday at $111.20.
ConocoPhillips
This stock may offer investors solid upside potential and the company could start growing the dividends again. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG) and natural gas liquids (NGLs) 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. Many Wall Street analysts feel the company can accelerate growth from a reloaded portfolio depth in the Bakken and Eagle Ford, and with visibility on future growth from a sizable position in the Permian.
Conoco has redefined its investment case with the highest free cash leverage to a recovery in oil prices among the big oil plays. Management has addressed key questions around portfolio resilience: maintenance capital expenditures have dropped to $4.5 billion and share buybacks have been prioritized over growth. In addition, ConocoPhillips has significantly improved its balance sheet and is committed to returning $6 billion via buybacks through 2019 in most realistic pricing scenarios.
Investors receive a 2.5% dividend. Jefferies has a $54 price target. The consensus target is $51.89, and shares were last seen at $44.95.
Marathon Petroleum
This top refiner has been on a nice roll, but it still trades well below highs posted in late 2015. Marathon Petroleum Corp. (NYSE: MPC) recently was added to the Franchise Picks List, and it has a diversified business that operates through Refining & Marketing, Speedway and Pipeline Transportation segments.
The company owns and operates seven refineries in the Gulf Coast and Midwest regions of the United States, which refine crude oil and other feedstocks, and it distributes refined products through barges, terminals and trucks, as well as purchases ethanol and refined products for resale.
The company announced in January its plans to significantly accelerate its dropdown of assets with an estimated $1.4 billion of master limited partnership eligible annual earnings before interest, taxes, depreciation and amortization being transferred to MPLX. The analysts noted in a report:
The company decided recently not to spin off its Speedway business which has 2,730 locations, spread across 21 states. In 2017, Marathon plans to invest $380 million into Speedway, by building new stores and remodeling others, the company’s officials have said.
Speedway also has seen success with its customer loyalty program as its had 5.7 million Speedy Rewards members last year. This has led to consistent growth in merchandise sales, which is key as the money made just from gasoline sales is minimal, experts have said.
Marathon shareholders receive a 3.1% dividend. Jefferies price target of $64 compares with the $63.12 consensus target. The stock was trading at $53.15 on Friday.
24/7 Wall St.Royal Dutch Shell
This company has survived the plunge in oil pricing as good as or better than any other major integrated stock. Royal Dutch Shell PLC (NYSE: RDS-A) operates as an independent oil and gas company worldwide through its Upstream and Downstream segments. The company explores for and extracts crude oil, natural gas and NGLs.
Royal Dutch Shell also converts natural gas to liquids to provide fuels and other products; markets and trades crude oil and natural gas; transports oil; liquefies and transports gas; extracts bitumen from mined oil sands and converts it to synthetic crude oil; and generates electricity from wind energy.
In addition, the company engages in the conversion of crude oil into a range of refined products, including gasoline, diesel, heating oil, aviation fuel, marine fuel, LNG for transport, lubricants, bitumen and sulphur; production and sale of petrochemicals for industrial customers; refining; trading and supply; pipelines and marketing; and alternative energy businesses.
The company generated 3.83 billion cubic feet per day of natural gas in the second quarter from its integrated gas operations and another 6.40 billion cubic feet per day from its upstream operations. The company posted solid results, and this was noted at the time:
Shell has organically covered the total cost of its dividend at $50 barrel over the last month – underlying free-cash-flow accretion from the BG Group plc takeover last year. With gearing down from 29% to 25% in the first half of 2017 already, the company remains on track to see gearing drop below 20% next year.
Investors receive a 5.78% dividend. The Jefferies price objective is $62.30, while the consensus price target is $62.99. The stock traded Friday morning at $56.75.
Four solid play for what may be a slow growth sector going forward. These companies are focused on free cash flow generation, and have continued to cut costs and unneeded capacity. In a pricey market, they make good sense for 2017 and the fact they are so out-of-favor makes them even more attractive.
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