Energy

Oil Massively Underperforms the S&P 500: Buy These 4 High-Yielding Giants

Lee Jackson

Published: August 6, 2019 7:35 am

Last Updated: January 30, 2020 5:43 pm

Even though the benchmark pricing for crude oil has remained at levels that allow most companies to make money, the industry as a whole has been eviscerated compared with the S&P 500 this year. In fact, Jefferies noted this week that the SPDR S&P Oil and Gas Exploration and Production ETF (NYSE: XOP) underperformance versus the S&P 500 is nearly back to historic highs.

Analysts also note that tracing back to the start of the exchange-traded fund, when you look at its rolling 12-month performance compared with the S&P 500, the SPDR S&P Oil and Gas Exploration and Production ETF is ostensibly pricing in the disaster that the energy sector suffered in 2015, when both supply and demand fell apart.

Despite the negative performance, some of the biggest players in the sector are reporting some solid results, and with tensions in the Middle East once again rising as Iran has seized yet another tanker, four high-yielding giants may be good contrarian plays now.

BP

This international giant posted solid results and may be the best value of all. BP PLC (NYSE: BP) is one of the world’s leading integrated energy companies, with operations in over 100 countries worldwide. Its operations are focused on a wide range of activities, including exploration and production of oil and gas, refining and marketing, chemicals, gas and power, and renewable energy.

With fundamentals improving, the stock is trading at the highest free cash flow yield relative to the firm’s supermajor competitors. Toss in the solid second-quarter performance, and the high dividend payout, which may be raised again by year’s end, and the stock looks like a value steal.

BP shareholders receive a massive 6.48% divided. Jefferies just moved the shares to a Buy rating, as well as raised the price target on the shares to $48.60 from $46.60. The consensus target across Wall Street is $50.26, and the stock closed at $37.66 on Monday.

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 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 and liquefied natural gas (LNG). 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, many analysts feel Chevron 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. Jefferies noted this when the company reported:

Chevron second quarter 2019 results were generally in line with expectations. The company resumed its share repurchase program in the quarter, and going forward total shareholder returns will annualize >6% including the dividend. Permian operations continue to improve; we expect Chevron will be near cash break-even in the Permian this year and generate >$1.2 billion in free cash flow next year.

Chevron shareholders receive an outstanding 4.01% dividend. The stock is on the Jefferies Franchise Picks list with a $144 price target. The consensus price target is lower at $137.67, and the shares closed most recently at $118.74.

Exxon Mobil

This remains a top Wall Street energy pick and is another safer long-term play for conservative investors. Exxon Mobil Corp. (NYSE: XOM) is the world’s largest international integrated oil and gas company. It explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa and elsewhere.

Exxon 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. Note that Exxon has one of the highest paid American CEOs.

The company reported mixed second-quarter results that did have positive trends, and Merrill Lynch noted this:

Another quarter of heavy maintenance masks an emerging inflection in liquids growth, and expanding upstream cash margins. Cash flow continues to lag capital expenditures and dividends; we see no issue as spending to double cash flow does not match the timing of asset sales. Maintenance is transitory; the company is clear about preparedness to lean on the balance sheet until cash flow catches up.

Exxon raised the dividend earlier this year by a nickel per share to $0.82. That now translates to a solid 4.95% dividend. The $100 Jefferies price objective is well above the $83.92 consensus target price. The stock closed on Monday at $70.28 per share.

Royal Dutch Shell

This is a top international play for investors looking to add energy exposure and is yet another company that posted solid results. Royal Dutch Shell PLC (NYSE: RDS-A) operates as an independent oil and gas company worldwide through its Upstream and Downstream segments. The company explores for and extracts crude oil, natural gas and natural gas liquids.

Royal Dutch Shell also converts natural gas to liquids to provide fuels and other products; markets and trades crude oil and natural gas; transports oil; liquefies and transports gas; extracts bitumen from mined oil sands and converts it to synthetic crude oil; and generates electricity from wind energy.

In addition, the company engages in the conversion of crude oil into a range of refined products, including gasoline, diesel, heating oil, aviation fuel, marine fuel, LNG for transport, lubricants, bitumen and sulphur; production and sale of petrochemicals for industrial customers; refining; trading and supply; pipelines and marketing; and alternative energy businesses.

Investors receive a huge 5.60% dividend. Jefferies has set its price objective at $78. The consensus figure is higher at $81.64, but the shares closed Monday at $57.07 apiece.

The Jefferies team also pointed out this week when noting the huge underperformance of oil this year that following the 2015 low in the sector, the SPDR S&P Oil and Gas Exploration and Production ETF delivered about 30% outperformance compared with the S&P 500 over the following four months. Should that happen again, those buying energy shares now may be in for a big win this fall.