Clearly the sell-off back to the low $40s in oil is making many people across Wall Street feel that a true high-low range has been put in. In fact, some are now calling the energy trade as buy $40 and sell $50. The reality is production in the United States has plummeted and there have been some rumblings that OPEC or the Saudis could announce a production cut as early as this week’s meeting on Friday.
In a new research report, Deutsche Bank notes that despite the production decline, prices for stocks in the sector have had trouble gaining ground. The report focused on four top companies that should fight their way through the current stagnant environment and come out in fine shape. These four “Top Picks” are all rated Buy.
Devon Energy
This company is expected to have 48% or more of its total 2015 production in natural gas. Devon Energy Corp. (NYSE: DVN) is an independent driller primarily active in the United States. More than 70% of its U.S. reserves are in natural gas, with most of that lying in Texas’ Barnett Shale. The company plans to invest a total of more than $1.1 billion in the Eagle Ford shale and drill more than 200 wells. Daily production is just under 2 billion cubic feet. The company is also the second-largest oil producer among North American onshore independents, so this is a very balanced play for investors.
Devon’s extensive and very diversified portfolio is primarily composed of unconventional resources and reflects significant long-term growth potential. Consistent investments made by the company over time are helping it to sustain its strong performance despite, like many energy giants, having to lower exploration and production budgets for 2015.
Devon investors receive a 2.15% dividend. The Deutsche Bank price target for the stock is $60. The Thomson/First Call consensus price target is lower at $58.27. Shares closed Friday at $44.87.
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EOG Resources
This leading energy company shows up well on the Deutsche Bank screens. EOG Resources Inc. (NYSE: EOG) is the top producer in the Eagle Ford shale and it has solid positions in both the Bakken and Permian Basin, making it a perfect fit for an integrated looking to expand in those areas, should a purchase or merger make sense. EOG has come up in takeover chatter this year.
This is also a stock that hedge fund guru Kyle Bass owns. He is known for having an extremely keen eye when it comes to balance sheets, so it’s no surprise that this stock resides in the Hayman Capital portfolio.
As of the end of last year, EOG reported total estimated net proved reserves of 2,497 million barrels of oil equivalent, including 1,140 million barrels (MMBbl) crude oil and condensate reserves, 467 MMBbl natural gas liquid reserves and 5,343 billion cubic feet of natural gas reserves.
EOG investors receive a small 0.92% dividend. The Deutsche Bank price target is $92, and the consensus target is $93.49. Shares closed on Friday at $82.02.
Marathon Oil
This company is a leading integrated oil and gas firm with extensive upstream operations. Marathon Oil Corp. (NYSE: MRO) business is organized into three segments: North America Exploration and Production, International Exploration and Production, and Oil Sands Mining. It already has projected that total 2015 capital expenditures will be about 20% or more below 2014 spending. Some Wall Street analysts think the number could be even greater, and some also do not expect any share repurchasing this year.
Top analysts cite the company’s higher multiple businesses, and the upstream cash margins have room to move up as shale production increases and oil prices recover. They also point out the stock trade at a very attractive discount to net asset value relative to industry peers.
Marathon investors are paid a 3.1% dividend. The Deutsche Bank target price is $25. The consensus estimate is $23.33. The stock closed Friday at $17.44.
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Occidental Petroleum
This is one of the higher yielding domestic stocks in the energy sector. Occidental Petroleum Corp. (NYSE: OXY) is an international oil and gas exploration and production company with operations in the United States, Middle East region and Latin America. It is one of the largest U.S. oil and gas companies, based on equity market capitalization. The company’s midstream and marketing segment gathers, processes, transports, stores, purchases and markets hydrocarbons and other commodities in support of Occidental’s businesses. In addition, the wholly owned subsidiary OxyChem manufactures and markets chlor-alkali products and vinyls.
The company posted surprising third-quarter numbers that beat analyst expectations, and it also announced that it would be leaving the Bakken shale after posting very heavy losses there.
Occidental also announced recently a deal with Ecopetrol to invest up to $2 billion over the next decade to increase production at the La Cira-Infantas oil field in Colombia. According to Reuters, the new round of investments will increase production in the region by more than 200 million barrels.
Occidental shareholders receive an outstanding 4% dividend. The $85 Deutsche Bank price target is well above the consensus of $79.84. The stock closed on Friday at $75.19.
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These larger cap leaders are the best way to play the energy sector now. While lower production and output will ultimately lead to higher pricing, 2016 could be a transition year for the sector and these companies make sense going forward for growth portfolios.
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