Sometimes when it’s the most obvious trade in the world, it’s the most difficult one to put on. Everybody senses that energy will turn around, but the question really isn’t if, but when. Plenty of people have been burned getting in too early, and the key is sticking with the top companies that can fight through the downturn and still be around when the sector moves higher.
In a new report from Cowen, Sam Margolin, the firm’s well-respected energy analyst, makes the case for the biggest and the best, and with good reason. With deep pockets and superb assets, these three companies make good sense for investors looking to play an energy rebound in 2016 and beyond.
Chevron
This stock is very solid story for investors looking to stay long the energy sector. 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. Some Wall Street analysts estimate Chevron will have a compound annual growth rate of over 5% for the next five years, and the stock trades at a modest valuation discount to some of its mega-cap peers.
Chevron management is aggressively pursuing cost-saving initiatives and already has completed over 2,200 supplier engagements, with more in progress. Cost savings and improving investor sentiment may be a key for the mega-cap integrated as it has struggled mightily over the past year. While many on Wall Street concede that the oil market could be oversupplied for longer than most thought, massive overseas demand and production slowdowns should help pricing into 2016.
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Cowen makes the case that the company’s Permian Basin assets are a goldmine and that the Australian LNG business will transition from a yearly $8 billion capital consumption drag to a $2 billion to $3 billion contributor. Combined with the much lower overall capital spending for the 2016 to 2018 period, Chevron is poised to not only hang around, but end the sector slump in a much better position.
Chevron investors receive a massive 4.61% dividend. The Cowen price target on the stock is boosted to $122 from $95. The Thomson/First Call consensus target is $97.90 Shares closed on Tuesday at $92.76.
Exxon Mobil
This leading energy company reported better third-quarter revenue numbers than expected, but they were way down from the year-ago period. Cowen analysts are very positive on Exxon Mobil Corp. (NYSE: XOM) long term as the overall corporate strength of the world’s largest international integrated oil and gas company plays a significant part in its usually solid earnings reporting pattern.
The company’s global downstream chemical segment plays a huge part for Exxon. It may be a part that many others on Wall Street don’t 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 that the company has consistently demonstrated disciplined investing, operational excellence and technological innovation.
Exxon recently appointed the head of its refining business as its new president, which makes him the probable successor to Chief Executive Officer Rex Tillerson, a move that was designed to avoid raising eyebrows on Wall Street. The new president, Darren Woods is a 23-year company veteran who should keep the goliath on the steady path for growth and progress.
Exxon investors receive a very sizable 3.7% dividend. Cowen has a $92 price target. The consensus price objective is lower at $83.85. Shares closed Tuesday at $79.43, down almost 15% for the year.
Total
Based in France, Total S.A. (NYSE: TOT) is a global integrated energy producer and provider, a leading international oil and gas company, and the world’s second-ranked solar energy operator with SunPower. Its Upstream segment explores and produces oil and gas; ships, trades and markets natural gas, liquefied natural gas and liquefied petroleum gas (LPG); generates power; and mines and markets coal.
The Refining & Chemicals segment refines and produces petrochemicals and provides sealing, insulation, fluid transfer and transmission and transportation solutions, as well as offers chemical processes and services for electronics, surface finishing and semiconductor manufacturing. It is also involved in trading and shipping crude oil and petroleum products.
The Marketing & Services segment supplies and markets petroleum products, including automotive fuels, biofuels, home heating oil and heavy fuel oil, lubricants, LPG, asphalt, aviation fuel, additives and special fuels and special fluids through service stations for light vehicles and trucks.
The company continues to generate solid revenues despite the massive downturn in price over the past year. In fact, Total earned $1.07 billion, or $0.45 per share, in the third quarter of 2015, down from the $3.53 billion, or $1.52 per share, earned in the third quarter of 2014. Over the first nine months of 2015, the company’s net income was $8.4 billion. The main drivers behind the company’s ability to stay profitable include an increase in oil and gas manufacturing and strong growth in the company’s very profitable refining division.
Total investors receive a strong 4.93% dividend. The Cowen price target is $58, and the consensus target is $54.86. The stock closed on Tuesday at $46.14.
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The Cowen plan is simple and genius. Buy huge integrateds that pay outsized dividends, have good assets and production, and be patient. The other good thing is the overall safety of these leaders makes them suitable for almost all accounts.
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