Even though oil has stayed above the critical $50 a barrel level for some time now, the energy sector has been a big disappointment this year. While the S&P 500 is up over 20% this year, and the major indexes have all hit an all-time high, the energy sector, as measured by the Energy Select SPDR ETF (NYSE: XLE), is essentially flat. This comes despite the fact the sector has seen some price premium moved in as Saudi Arabia had production capabilities bombed, Iran had a tanker attacked and tensions in the Middle East continue to rise.

So what does this mean for investors? The bigger story, which has been the support for a recent underlying stealth rally in oil, is that the crude supply is weakening as production growth rates slow and imports remain low. In fact, despite a surprise build in crude supplies this week, spot benchmark prices held pretty solid. Some in the industry feel if the current trend continues, it is very possible we could witness a major drop in inventories over the next year.

In addition, U.S. exports have continued to grow since export legalization began in 2016, and despite the fact that crude production has grown since then, we actually have seen a major slowdown over the past year. In addition, many of the top companies are now laser-focused on free cash flow. Given all the potential positives for the sector, and don’t forget a possible trade deal with China, the best trade for 2020 looks to be going with the mega-cap integrated energy giants that pay solid dividends and that already have the cash flow story in place.

Merrill Lynch is very positive on three mega-cap domestic companies that offer not only a degree of stability but outstanding dividends. All are rated Buy and make sense for more conservative accounts looking for growth and income.

ConocoPhillips

This stock may offer solid upside potential, and the company just gave investors a massive dividend increase. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas and natural gas liquids 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 announced in October that it was raising the quarterly dividend by a stunning 38% to $0.42 a share, and it also said it expects to buy back $3 billion of its shares in 2020. The increase means that investors are now receiving a 2.92% dividend.

The Merrill Lynch price target for the shares is a massive $75, which compares to the Wall Street consensus target of $72.62. The stock was last seen on Wednesday trading at $57.63 per share.

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 reported better third-quarter results that did have some positive trends, and the Merrill Lynch team noted this in a report:

ExxonMobil’s third quarter is underlined by momentum towards a target to double cash-flow by 2025 with visible growth in exploration and production leading the way. Project execution remains strong while peer leading balance sheet allows for countercyclical investment at advantaged costs. With asset sales set to close any deficit in cash-flow, the company’s strategy clears the way for future rateable dividend growth.

The company raised its dividend earlier this year by a nickel per share to $0.87. That now translates to a solid 4.87% dividend.

Merrill Lynch has a price objective of $100, while the posted consensus target price is much lower at $79.27. The stock closed most recently at $71.49 a share.

Occidental Petroleum

This energy company made huge news earlier this year 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. The Merrill Lynch analysts noted this when the company reported its third-quarter results:

A messy quarter was expected with all the moving parts around the Anadarko integration, but underlying cash-flow remained solid. 2020 capital expenditures lowered significantly with minimal production growth; Occidental looks to prioritize deleveraging over any growth. We see de-rating overdone, with catalysts to reset absolute yield on simple execution already in motion through the third quarter.

Shareholders of Occidental receive a massive 7.98% dividend. The huge $80 Merrill Lynch price target is well above the posted consensus target last seen at $52.84. The stock closed trading at $39.16 on Wednesday.

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These three domestic oil giants all make sense for total return accounts. The large dividends that each pays will help investors should the sector stay flat in the near term. Note that all these stocks are at some of the best entry prices in years, and they could offer big-time upside in 2020 if crude prices do indeed take off.

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