Merrill Lynch Makes Huge Energy Changes to US 1 List

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With the latest earnings season all but over, many of the top companies we follow on Wall Street are making some changes to the lists of their high-conviction stock picks for clients. With the market rallying strong after the correction, it makes sense to examine the lists and make some changes as the rest of the year could have additional volatility as the political and world landscape looks to remain unsettled.

A recent Merrill Lynch research note makes a big move by swapping out one top energy stock, Patterson-UTI Energy Inc. (NASDAQ: PTEN), and adding another, Schlumberger Ltd. (NYSE: SLB), to the firm’s well respected US 1 list of stocks to buy, which is the firm’s highest conviction ideas. We cover the changes, and the three highest yielding stocks in the portfolio.

Added to the Merrill Lynch US 1 list, Schlumberger is the world’s largest provider of services and equipment used in drilling, evaluation, completion, production and maintenance of oil and natural gas wells. Revenues in 2017 totaled $30.4 billion, and EBITDA was $6.9 billion.

The company operates in the oilfield service markets through three groups: Reservoir Characterization, Drilling and Production. Reservoir Characterization Group consists of the principal technologies involved in finding and defining hydrocarbon resources. These include WesternGeco, Wireline, Testing Services and Schlumberger Information Solutions.

Merrill Lynch recently upgraded the stock to Buy prior to adding it to the US 1 list, citing the slower North American growth and looking for greater international exposure that Schlumberger provides.

Shareholders receive 3.0% dividend. The Merrill Lynch price objective for the stock is $75, but the consensus target price is $82.62. The stock ended Tuesday’s trading at $66.91.

Although Patterson-UTI was removed from the US 1 list, it remains Buy-rated at Merrill Lynch. It is the second-largest land driller in North America and a large pressure pumping provider. Its operations are particularly focused in the Marcellus and in Texas.

Patterson-UTI and its subsidiaries operate land-based drilling rigs in oil and natural gas producing regions of the continental U.S. and western Canada. Universal Pressure Pumping, Inc. and Universal Well Services, Inc. provide pressure pumping services primarily in Texas and the Appalachian region. For the three months ended September 30, 2017, the company had an average of 161 drilling rigs operating.

The company remains the fifth largest Pressure Pumper with a 1.5 million HHP frac fleet (currently 83% utilized) with exposure to ancillary rental equipment business through Great Plains Oilfield Rental. The recent acquisition of MS Energy (directional drilling) complements its contract drilling business and provides attractive growth opportunities for investors.

Investors receive just 0.4% dividend. Merrill Lynch has a $27 price target, and the consensus target is $25.15. Shares closed Tuesday at $18.98.

The following are the three highest yielding stocks in the Merrill Lynch US 1 portfolio.

American Electric Power

This industry leader is a solid dividend payer and remains a top utility pick in the Merrill Lynch US 1 list. American Electric Power Co. Inc. (NYSE: AEP) is one of the largest electric utilities in the United States, delivering electricity to more than 5.3 million customers in 11 states.

The company ranks among the nation’s largest generators of electricity, owning nearly 38,000 megawatts of generating capacity in the United States. It also owns the nation’s largest electricity transmission system, a more than 40,000-mile network that includes more 765-kilovolt extra-high voltage transmission lines than all other U.S. transmission systems combined.

Shareholders receive a 3.7% dividend. The $75 Merrill Lynch price objective compares with a $73.13 consensus target. Shares closed on Tuesday at $65.95.

Coca-Cola European Partners

The former Coca-Cola Enterprises reported solid earnings and is a very safe play for investors. Coca-Cola European Partners PLC (NYSE: CCE) is the leading Western European marketer, producer and distributor of nonalcoholic ready-to-drink beverages and one of the world’s largest independent Coca-Cola bottlers.

The company is the sole licensed bottler for products of Coca-Cola in Belgium, continental France, Great Britain, Luxembourg, Monaco, the Netherlands, Norway and Sweden. It operates with a local focus and has 17 manufacturing sites across Europe, where the company manufactures nearly 90% of its products in the markets in which they are consumed.

In 2016 the company merged Coca-Cola Erfrischungsgetränke in Germany and Coca-Cola Iberian Partners, which serves Spain and Portugal. Based on revenues, the company is the world’s largest independent Coca-Cola bottler. It serves over 300 million consumers across Western Europe.

Investors receive a 3.36% dividend. Merrill Lynch has set its price target at $48. The consensus target is $44.87, and shares closed at $38.15 on Tuesday.

DowDupont

Some thought this was a blockbuster merger would run into regulatory headwinds in 2017, but it has emerged bigger and stronger. DowDupont Inc. (NYSE: DWDP) is a diversified chemical company with $73 billion in sales in 2016, and it was formed as a result of the merger of Dow and DuPont in 2017.

The company is organized in three principal divisions of Agriculture (20% of EBITDA), Material Science (55%) and Specialty Products (25%), and it intends to separate into these three public entities by 2020.

Shareholders receive a 2.1% dividend. The Merrill Lynch price objective is $88. The consensus price target is $83.75, and shares closed Tuesday at $72.36.

The US 1 list has outperformed the S&P 500 since inception by a large margin. The stocks are among the highest conviction picks at Merrill Lynch and make good additions to any growth portfolio.