It’s one thing to call a sector’s turn way in advance. It’s quite another to become bullish when the underlying commodity of the sector is hitting highs not seen in almost four years. That is exactly what is trending on Wall Street and has been for the past couple of months. Energy horribly underperformed for years, and even though the commodity price was rising, the stocks in many cases didn’t trade up near as much. Importantly, one of the main metrics of the sector, which is production, was actually starting to slow, but few seemed to notice.

One company that we cover here at 24/7 Wall St. that has been right on this sector with its calls for some time is Jefferies. The firm made the case long before the United States backed out of the Iran deal that demand was picking up and supply was staying flat. Toss in the fact that, like gold, oil is a cheap inflation hedge, and you have all the makings of a continued rally.

Needless to say, $100 a barrel will put a crimp in the economy, and at current prices, it is estimated that energy could absorb as much as one-third of the benefits derived from the tax overhaul. Simply put though, energy may be the best bet through the summer and the rest of 2018.

We screened through the top picks at Jefferies, which include exploration and production companies, master limited partnerships (which as measured by the Alerian MLP index are still down 5% this year following a 14% decline in 2017), large cap integrateds and oilfield services companies. We found seven stocks that look like great additions for growth portfolios.

Chevron

This integrated giant is a safer way for investors looking to stay or get long the energy sector, and it has big Permian Basin exposure. Chevron Corporation (NYSE: CVX) is a US-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 and liquefied natural gas. Some on Wall Street estimate that the company will have a compound annual growth rate of over 5% for the next five years.

With Permian production and asset disposals targets reset, the company can raise the dividend 20% and buyback 15% of shares. Many analysts view the strategy update as appropriately conservative for one of the more oil-levered majors. The Chevron strategy through 2020 is focused on discipline, enabled by step change in capital efficiency driven by doubling Permian production.

The analyst report noted this:

We believe the Chevron portfolio is the most strategically advantaged in the super-major sector, with visible growth and an industry leading Permian position. A progressive dividend remains Chevron’s #1 financial priority, but we also expect the company will generate sufficient discretionary cash flow to fund a $26b repurchase program from 2018-2020. The company expects an annual capital program of $18b-20b will be sufficient to fund cash flow and production growth and to replace reserves.

Chevron shareholders receive a 3.45% dividend. The Jefferies price target for the shares is $149, and the Wall Street consensus target is $139.53. The stock closed Tuesday at $129.74.

Callon Petroleum

This is one of the small cap stocks that Jefferies feels comfortable about currently. Callon Petroleum Co. (NYSE: CPE) is an independent oil and natural gas company engaged in the exploration, development, acquisition and production of oil and natural gas properties. It focuses on the acquisition and development of unconventional oil and natural gas reserves in the Permian Basin.

The company’s drilling activity focuses on the horizontal development of various prospective intervals in the Midland Basin, including multiple levels of the Wolfcamp formation and the Lower Spraberry shale. It owns additional immaterial properties in Louisiana. As of December 31, 2016, Callon had owned leaseholds in 39,570 net acres in the Permian Basin, all of which was located in the Midland Basin.

The analyst’s report said this:

Callon Petroleum is delivering some of the best well performance across the Midland Basin and has been much closer to the leading edge of completion intensity relative to peers, which could lead to further separation from the pack. The company has been spotty on meeting Wall Street expectations over the past couple years, but that should prove a thing of the past, as infrastructure investments should drive a more predictable manufacturing story in Howard County, and eventually in the Delaware Basin.

Jefferies has an $18 price target, and the consensus target is $16.72. The shares closed Tuesday at $13.70.

Enterprise Products Partners

This is one of the largest publicly traded partnerships and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) provides a wide variety of midstream energy services, including gathering, processing, transportation and storage of natural gas, natural gas liquids (NGLs) fractionation, import and export terminaling, and offshore production platform services.

One reason why many analysts may like the stock might be its distribution coverage ratio. That ratio is well above one-times, making it relatively less risky in its sector. The company’s distributions have grown for several quarters, and last year Enterprise Products announced that the board of directors of its general partner declared an increase in the quarterly cash distribution paid to partners to $0.4225 per common unit, or $1.70 on an annualized basis.

The investors receive 6.13% distribution. The $31 Jefferies price target is in line with the $31.17 consensus target. Shares closed Tuesday at $27.89.

Golar LNG

This is the premier company in the world for liquefied natural gas (LNG) distribution. Golar LNG Ltd. (NASDAQ: GLNG) is one of the world’s largest independent owners and operators of LNG carriers and floating storage and regas units (FSRUs). The company has 14 vessels in its fleet, three LNG carriers slated for floating LNG platform (FLNG) conversion, 10 LNG carriers and one FSRU.

Collectively with Golar Partners and Golar Power, the fleet has 16 LNG carriers, three FLNGs/candidates and eight FSRUs. GLNG is the general partner for Golar LNG Partners. Its joint ventures, Golar Power and OneLNG, are focused on FSRU conversions and FLNG projects.

The analysts noted this:

Golar’s first FLNG project, the Hilli, is currently producing LNG and has already loaded its first export cargo, so customer acceptance then final drawdown of the debt facility is imminent. As such, with Hilli’s dropdown to GMLP likely in the coming weeks Fortuna FLNG final investment decision likely to be announced in 2Q18, and Tortue LNG final investment decision likely to be announced in the fourth quarter of 2018, we believe there are at least three big catalysts for Golar in the coming months.

Jefferies has set its price target at $35. The consensus price objective is $36.05, and shares closed Tuesday at $33.73.

Halliburton

This stock is still down over 20% from highs printed in January, and it remains a top large cap oil services pick on Wall Street. Halliburton Co. (NYSE: HAL) is one of the world’s largest providers of products and services to the energy industry. It serves the upstream oil and gas industry throughout the life cycle of the reservoir, from locating hydrocarbons and managing geological data to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.

Halliburton is the second-largest provider of oil services and the number one player in pressure pumping services worldwide. For investors looking for an oilfield services company to add, this is arguably the best, and analysts feel it will be a huge benefactor as the frac market has tightened significantly and prices are 20% to 30% off the lows.

The company just reported first-quarter 2018 results that were handily higher than a year ago and were in line with Wall Street expectations.

Halliburton shareholders receive a 1.37% dividend. The Jefferies price target is $60. The consensus target is $61.24, and shares closed Tuesday at $52.72.

Marathon Petroleum

With a big acquisition deal in place, this company is poised to be the biggest refiner in the United States. Not only is Marathon Petroleum Corp. (NYSE: MPC) the newest member of the Franchise List, but it is a returning member. Also, the company has begun the long process of completing a massive purchase of another refining giant. Marathon agreed to buy rival Andeavor for $23.3 billion in the biggest-ever deal for an oil refiner. That would create the largest independent fuel maker in the United States.

The offer, payable in either cash or shares, values Andeavor at about $152.27 a share, the companies said in a statement last week. That represents a 24% premium over the closing price the prior to the announcement. Jefferies loves the deal and noted this in a recent research piece:

Recently, we added Marathon Petroleum back to the Franchise Picks list. Pro-forma for the deal, analyst Corey Goldman estimates the company trades at about a 20% discount to peers. Following the deal, Marathon will be the largest operator of refining capacity in the US and he believes that management can achieve the $1 billion in synergies that they suggest. In addition, Corey gives the company no credit for the possible International Maritime Organization change, which implies additional potential upside.

Shareholders receive a 2.38% dividend. The $95 Jefferies price target compares with the consensus target of $86.56 and the most recent close at $77.29.

Patterson-UTI Energy

This remains a top oil services pick across Wall Street. Patterson-UTI Energy Inc. (NASDAQ: PTEN) 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 United States and western Canada. Universal Pressure Pumping and Universal Well Services 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.

Jefferies has stayed positive on the company and cites this:

We expect the company’s drilling fleet-wide EBITDA to improve over the next 12-24 months as the US rig count continues to move higher and high-end AC rig day rates continue to strengthen (Patterson and the wider industry is currently nearly fully sold out of such high-end “super-spec” AC drilling rigs).

Investors receive a 0.4% dividend. Jefferies has a $25 price target. The consensus price objective is $25.53, and shares closed Tuesday at $22.98.

Get Our Free Investment Newsletter

I have read, and agree to the Terms of Use

As noted, the top picks at Jefferies are based on a long-view bullish stance on the industry, as well as work the analysts have been compiling for months. These seven top companies are solid choices for long-term growth portfolios looking to add energy.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.