In a year in which many sectors have enjoyed outsized positive performance despite the effects of the pandemic, the energy sector has been a distinct laggard. In fact, bearishness is so high in the sector that the weighting for energy in the S&P 500 is the lowest it has been in years. While clean energy and electric vehicles (EVs) generate a huge buzz, the reality is that it will probably be 50 years before there is a complete move to EVs and perhaps hydrogen vehicles, and in the meantime, cars, sport utility vehicles, trucks and vans will still depend on going to the pump for gasoline.

In a new RBC research report, the energy team remains realistic and notes that the near-term outlook for oil prices looks flat, with a floor probably near where the benchmark West Texas Intermediate (WTI) is trading, around $40 per barrel. The good news for weary energy investors is they see a move higher in 2021.

RBC sees WTI averaging $46 to $48 a barrel in 2021 and the price moving into the low $50s in late 2021, or a 25% move from here. The key for investors is that some of the top companies in the sector have been bludgeoned to the point of near extinction and are offering incredible entry points for investors with a long-term horizon.

Since the RBC report was more big picture, we screened the BofA Securities energy research universe looking for stocks rated Buy that also paid dividends, and found five that offer solid potential. While all are rated Buy at BofA Securities, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Chevron

This integrated leader is a safer way for investors looking to be positioned in the energy sector. 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).

Chevron, which is among the companies with the largest corporate debt, recently became the latest major oil company to slash spending after halting its $5 billion-a-year share buyback and halving spending in the Permian Basin, which means a large decrease in projected output from America’s biggest shale region.

The California-based oil giant has said that it would lower projected 2020 capital spending by 20%, or $4 billion. The Permian will account for the largest single element of that reduction, translating into 125,000 fewer barrels of oil equivalent per day than previously forecast, a quantity equal to about 2.5% of the basin’s total current production.

Investors receive a 7.00% dividend, which still appears to be safe. BofA Securities has a giant $96 target price on the shares, while the Wall Street consensus target is $97.13. Chevron stock traded early Thursday at $74.25.

Exxon

The energy giant has been removed from the Dow Jones industrial average, and there has been concern the long-standing dividend may be cut. 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.

This was an outstanding short earlier in the year, especially when oil futures cratered to literally below zero, but one would think hedge funds are keeping a close eye on this position because if the economy opens up even some, the benchmark price could go back above the $50 level or higher, as the RBC team feels it can in a year.

Investors receive a 10.39% dividend, which probably will continue to be defended but remains very vulnerable. The BofA Securities price target is $77, much higher than the $45.72 consensus stock. Exxon stock traded Thursday morning at $34.30.

This top pick is still down a stunning 35% this year and actually could be a takeover target. Hess Corp. (NYSE: HES) is an exploration and production company that develops, produces, purchases, transports and sells crude oil, natural gas liquids and natural gas.

The company primarily operates in the United States, Denmark, Equatorial Guinea, the Joint Development Area of Malaysia/Thailand, Malaysia and Norway. It continues to make solid discoveries, and the analysts noted this:

We feel that two more discoveries at Redtail & Yellowtail 2 have been looked passed over by the market – but incremental exploration success has value. In our view, it offers low cost tieback opportunities. Including just two at Liza 2 and Payara and our price objective moves up. At current levels, value dislocation looks unsustainable with Hess having just scratched the surface of exploration potential.

Holders of Hess stock receive a 2.65% dividend. The stunning $70 BofA Securities price target compares to the $57.36 consensus target and the recent share price of $38.35.

Marathon Petroleum

This is a solid way for more conservative investors to play the energy sector. Marathon Petroleum Corp. (NYSE: MPC) is one of the largest independent petroleum refining and marketing companies in the United States.

Until just recently, the company operated approximately 2,750 retail sites under the Marathon and Speedway brands. In addition, it operates a logistics network of pipelines, barges, trucks and terminals that store and transport crude and products.

In August, the company announced it would sell Speedway to 7-11 in an all-cash deal valued at $21 billion, or $16.5 billion after-tax. The sale transforms the company’s balance sheet and creates options to revisit the corporate structure of MPLX. Many across Wall Street feel that with Speedway removed, the dislocation in refining value becomes even more transparent as the company trades much cheaper than its industry peers do.

Shareholders receive a 7.94% dividend. BofA Securities has set a whopping $66 price target. The consensus target is $46.00, and Marathon Petroleum stock was trading at $29.60 a share.

Pioneer Natural Resources

Many Wall Street analysts love this stock for a pure crude oil play. Pioneer Natural Resources Co. (NYSE: PXD) operates a modern fleet of more than 24 top performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.

Pioneer is a huge player in the Permian Basin and in 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 updated 2020 and 2021 hedging adding $1.2 billion to cash flow estimates over next two years, a new $900 million credit facility further enhances liquidity. In addition, the Gulf coast marketing makes Pioneer less exposed to widening Midland differentials.

Top Wall Street analysts feel that by owning Pioneer, investors have access to a Permian growth and corporate free-cash-flow story, but with better asset level and corporate level operating/financial metrics. Some also feel that Pioneer could have an improved dividend if the cycle improves given the introduction of its variable dividend framework.

Pioneer Natural Resources stock investors receive a 2.47% dividend. The BofA Securities price target is $122. The posted consensus figure is up at $132.50, and shares were trading at $89.75 on Thursday.

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While oil has had a sparkling run off the lows back in the spring, WTI is still just barely at the $40 level. That noted, any sustained reopening of the economy and a return to normal easily could spike the price as much as 25% or more. All these companies are solid ways for investors to play an upswing in oil and an improving 2021 economy. Plus, with each paying seemingly dependable dividends, patient investors will be paid to wait.

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