The markets were absolutely crumbling in Monday’s trading session, with the Dow down near 1,000 points and the S&P down around 90 points. At the same time, crude oil prices are down more than 3% to the $39 mark. Despite this fall, one key analyst is taking a positive view on big oil, while accounting for the correction in the markets.

Merrill Lynch believes elevated market and sector risk demands lower risk exposure to energy. The firm’s core sector position remains anchored on a “house view” that oil prices are unsustainable at current levels. Its sector strategy since the start of the year has avoided knee-jerk reactions that risked selling energy at the lows.

In a coverage universe in which Merrill Lynch groups the “majors” alongside “large cap E&Ps,” this means greater emphasis on yield, where balance sheet strength, asset depth and ultimately consolidation opportunities provide a seat at the table through a test of conviction on the longer term view. Exxon Mobil Corp. (NYSE: XOM) remains the preferred “big oil,” but ConocoPhillips (NYSE: COP) replaces Occidental Petroleum Corp. (NYSE: OXY) as the top sector pick, with options on material asset restructuring from its undeveloped exploration and production assets. Merrill Lynch closed its negative view on Chevron Corp. (NYSE: CVX), acknowledging yield at a five-year high and what its views as an approaching inflection point in cash flexibility. Note all price objectives have been lowered for these stocks to reflect the change in sector risk.

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The new price objectives are as follows:

• ConocoPhillips has a Buy rating but its price objective was lowered to $74 from $85.
• Chevron was upgraded to Neutral and had its price objective lowered to $100 from $104.
• Occidental has a Buy rating and saw its price objective lowered to $95 from $101.
• Exxon has a Buy rating and saw its target price lowered to $100 from $106.

Merrill Lynch explained why it picked ConocoPhillips as the top sector pick:

Of all the ‘yield’ plays, ConocoPhillips has been hardest hit by the recent downturn. In our view this reflects unjustifiable concerns on ConocoPhillips’ dividend. We believe this also overlooks a step change in capital flexibility in 2015 as major capital spending rolls off, but the tailwind from associated projects start up over the next year. Management’s estimates that ConocoPhillips can cover its dividend below ‘strip’ prices are sound in our view. Option value comes from a whole-sale rethink of an exploration strategy where an outright sale could release $5bn without impacting future cashflow. At strip prices ConocoPhillips’ upside is second only to Exxon. But with a yield above 6% and ‘torque’ to our base case, we believe ConocoPhillips represents the best balance of risk / reward in the sector while being paid to wait.

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Shares of ConocoPhillips were down 5.5% to $42.89 on Monday morning. The stock has a consensus analyst price target of $69.25 and a 52-week trading range of $41.10 to $81.47.

Chevron shares were down 2.2%, at $74.08 in its 52-week trading range of $69.58 to $129.53. The stock has a consensus price target of $104.22.

Shares of Occidental were down 4.2%, at $66.38 in its 52-week trading range of $64.95 to $100.27. The consensus analyst price target is $82.22.

Exxon shares were down 3% at $69.97. The consensus price target is $89.53 and the 52-week range is $66.55 to $100.31.

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