Energy

RBC Sees Potential Huge Oil Supply Gap Coming: 4 Big Oil Stocks to Own Forever

Lee Jackson

Published: September 21, 2016 9:55 am

Last Updated: January 13, 2020 3:20 am

It was inevitable, and when benchmark West Texas Intermediate (WTI) crude slid all the way to $26 back in February, you can just imagine the production projects that were based on cash-flows from 2011 to 2014 that got cancelled. In fact, based on current capital spending outlooks, the analysts at RBC estimate that energy producers in the firm’s energy coverage group will be spending about 92% of cash flow in 2016, and they maintain that under-investment could ultimately lead to a big supply issues by 2019.

So the question is how do investors exploit a production gap that could ultimately lead to higher prices and profits two and a half years out? Buy the top players in the industry that can hold their ground as oil stays range bound between $40 and $50 the rest of this year and gradually begins moving higher in 2017. We think four industry leaders may be the ticket.

Chevron

This stock is very solid story for investors looking to stay long the energy sector, and it is a preferred U.S. company to own now. Chevron Corp. (NYSE: CVX) is an integrated oil and gas company with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals. It sports a sizable dividend and has a solid place in the sector when it comes to natural gas and liquefied natural gas (LNG). Some on Wall Street estimate the company will have a compound annual growth rate of over 5% for the next five years.

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, the company is poised to not only hang around, but end the sector slump in a much better position. The analysts note the Permian acreage is profitable at $40 a barrel.

CEO John Watson has made it clear that preserving the dividend for investors is the top priority. Wall Street analysts point out that although the company trades in line with its peers, the growth potential and solid balance sheet deserve a 10% premium.

Chevron investors are paid a massive 4.38% dividend. The Wall Street consensus price target for the stock is $111.33. Shares closed trading on Tuesday at $97.70.

ConocoPhillips

This company may offer investors solid upside potential, with little threat of an additional dividend cut after the one earlier this year. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, 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.

The company remains the one of the best values as short sellers circled after the dividend cut and many growth and income managers sold shares. JPMorgan notes that the company has underperformed this year versus its peer group and is offering investors solid value at current trading levels.

Conoco investors are paid a 2.56 % dividend. The consensus price target is posted at $52.27. The stock closed Tuesday at $39.01 a share.

Exxon Mobil

This company remains a top Wall Street energy pick. Exxon Mobil Corp. (NYSE: XOM) explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa, Asia, Australia and Oceania. It also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas, and petroleum products.

Top Wall Street analysts are very positive on the long term as the overall corporate strength of this massive integrated giant plays a significant part in the company’s usually solid earnings reporting pattern and in maintaining dividend coverage.

Exxon is also a very strong company from a financial standpoint. It has an AA+ credit rating and an outstanding debt-to-equity ratio of 0.23. It is free cash flow positive, with the company reporting free cash flow of $6.5 billion in 2015 and management cutting the capital expenditures budget for 2016. This is a sound investment to buy and hold forever.

Exxon investors receive a very sizable 3.63% dividend. The consensus price objective is $89.63, and the shares closed on Tuesday at $82.54.

Pioneer Natural Resources

Many Wall Street analysts love this stock for a pure crude oil play, and it recently was upgraded by Deutsche Bank and Citigroup. Pioneer Natural Resources Co. (NYSE: PXD) engages in the exploration and production of oil and gas in the United States. The company produces and sells oil, natural gas and NGLs. It has operations primarily in the Permian Basin, Eagle Ford Shale and West Panhandle field in the Texas Panhandle.

Pioneer is a huge player in the Permian basin and the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second largest oil reservoir in the Midland Basin. With a stellar balance sheet, the company is poised to remain the number one player in the Permian as it expects to deliver production growth of 12% or more in 2016, compared to the company’s previous production growth target of 10%. The higher forecast growth rate reflects improving Spraberry/Wolfcamp well productivity.

Investors are paid a tiny 0.05% dividend. The $205.60 consensus price target is well above the closing price on Tuesday of $175.75.

The way to play the RBC supply gap ahead of time is to own the biggest and the best. The best trading suggestion may be to buy partial positions here and see if the market doesn’t sell off some after the election.