Even though oil has stayed above the critical $50 a barrel level, the energy sector has been a huge disappointment this year. While the S&P 500 is up almost 20% year to date, the energy sector, as measured by the Energy Select SPDR ETF (NYSE: XLE), is essentially flat. This despite the fact the sector has seen some price volatility premium moved in as Saudi Arabia had production capabilities bombed and Iran recently had a tanker attacked.
So what does this mean for investors? With the U.S. shale and production story slowing, and many companies now focused on free cash flow, what is the best move for investors who see value but remain cautious?
The best trade for 2020 looks to be going with the mega-cap integrated energy giants that pay solid dividends and already have solid cash flow stories in place. Even with only a mid-single-digit move higher in 2020, if you add in the dividends, plus the ability to write covered calls on positions, the total return outlook is outstanding. Plus, trading near 52-week lows makes the big boys attractive.
We screened the Merrill Lynch energy research universe and found five global giants that investors looking for energy exposure ought to consider. All are rated Buy at Merrill.
ConocoPhillips
This one may offer solid upside potential and it just gave investors a massive dividend increase. ConocoPhillips (NYSE: COP | COP Price Prediction) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas and natural gas liquids worldwide.
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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 recently announced a quarterly dividend hike of a stunning 38% to $0.42 a share, and said it expects to buy back $3 billion of its shares in 2020. The increase means that investors now receive a 3.08% dividend.
The Merrill price target for the stock is $75, and the Wall Street consensus target is $68. Shares were last seen trading at $54.53.
Exxon Mobil
This remains a top Wall Street energy pick and is a 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’s mixed second-quarter results did have some positive trends, and the Merrill team 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 its dividend earlier this year by a nickel to $0.87 per share, which now represents a 5.11% dividend. Merrill has a $100 price objective, while the consensus figure is just $83.92. Shares closed Thursday at $68.14.
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Occidental Petroleum
This company made huge news with a Warren Buffett backed purchase of Anadarko Petroleum. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals.
The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. Meanwhile, the chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.
The shares have underperformed since the Anadarko acquisition was announced, but the investment case anchored by yield has not changed. With a rock-solid balance sheet and a commitment to dividend coverage, investors look safe for now. Occidental has paid quarterly cash dividends continuously since 1975 and has increased its dividend each year since 2002.
Shareholders receive a 7.84% dividend. The huge $80 Merrill price target compares with the $54.85 consensus target and the most recent closing price of $40.33.
Royal Dutch Shell
This is a top international play for investors looking to add energy exposure worldwide. 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, liquefied natural gas 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 5.50% dividend. Merrill has set an $80 price objective. The consensus estimate is $78.13, and shares closed at $58.16 on Thursday.
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Total
This is another giant European energy giant, this one based in France. Total S.A. (NYSE: TOT) is a global integrated energy producer and provider, and a leading international oil and gas company. It operates through three segments.
The Upstream segment explores and produces oil and gas; ships, trades and markets natural gas, liquefied natural gas and liquefied petroleum gas; generates power; and mines and markets coal.
The Refining & Chemicals segment refines and produces petrochemicals; provides sealing, insulation, fluid transfer and transmission and transportation solutions; and 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, liquefied petroleum gas, asphalt, aviation fuel, additives and special fuels, and special fluids through service stations for light vehicles and trucks.
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 offers investors a 4.66% dividend. The $61 price target at Merrill is well above the $54.31 consensus target. Shares closed most recently at $51.52.
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These three domestic and two European oil giants make sense for total return accounts. The large dividends that each pays will help investors if the sector stays flat. One thing is for sure: These stocks are at some of the best entry prices in years and could offer solid upside for shareholders in 2020 and beyond.
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