Energy Short Interest Highest Ever: Stick With 3 Large Cap Dividend Leaders in 2016

By Lee Jackson Updated Jan 13, 3:38PM EST · Published Dec 29, 8:35AM EST

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Energy Short Interest Highest Ever: Stick With 3 Large Cap Dividend Leaders in 2016 — © Thinkstock

Even after a brutal 2015 that saw the energy sector just get absolutely hammered, the vultures continue to circle the flock looking for the weaklings that may be forced out of business as 2016 hedges come off. SunTrust Robinson Humphrey notes that the short interest group average is now the highest on record at 16%. While oil prices are expected to be higher by this time next year, the short term could remain rocky.

We screened our institutional research database and found three companies rated Buy that should be able to maintain their high dividends and fight through to the end of the downturn.

Chevron

This stock is very solid story for investors looking to stay long 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). Some Wall Street analysts estimate the company will have a compound annual growth rate of over 5% for the next five years, and the stock trades at a modest valuation discount to some of its mega-cap peers.
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Chevron management is aggressively pursuing cost saving initiatives and has already completed over 2,200 supplier engagements, with more in progress. Cost savings and improving investor sentiment may be a key for the mega-cap integrated as it has struggled mightily over the past year. While many on Wall Street concede that the oil market could be oversupplied for longer than most thought, massive overseas demand and a production slowdown should help pricing into 2016.

Cowen makes the case that the company’s Permian Basin assets are a goldmine and that the Australian LNG business will transition from a yearly $8 billion capital consumption drag to being a $2 billion to $3 billion contributor. Combined with the much lower overall capital spending for the 2016 to 2018 period, the company is poised to not only hang around, but end the sector slump in a much better position.

Chevron investors receive a hefty 4.75% dividend. The Cowen price target for the shares is $122 The Thomson/First Call consensus target is $99.55. Shares closed trading on Monday at $90.36.
ConocoPhillips

This may offer investors among the best total return possibilities for 2016 and is a member Merrill Lynch US 1 list. ConocoPhillips (NYSE: COP) is the self-described world’s largest independent exploration and production company, based on production and proved reserves. Headquartered in Houston, ConocoPhillips has operations and activities in 25 countries and has spent the past five years divesting assets. Although it is cash rich, the company has somewhat dampened earnings and growth expectations all year long.

Many Wall Street analysts feel Conoco can accelerate growth from reloaded portfolio depth in the Bakken and Eagle Ford, with visibility on future growth from a newly disclosed sizable position in the Permian. The company lowered its 2015 spending target in response to the lingering slump in crude prices.

Chairman and CEO Ryan Lance said recently that Conoco expects oil prices to start to move higher late next year, but it is significantly reducing capital and operating costs, while maintaining its commitment to safety and asset integrity. He also said the company retains the flexibility to adjust capital spending in response to market factors. The 2016 capital budget was announced recently at $7.7 billion. Merrill Lynch feels that with the capital spending below $8 billion and additional asset sales that the dividend should remain safe, a key reason for investors to consider the stock.

Investors are paid a very strong 6.24% dividend. The Merrill Lynch price target is a whopping $77. The consensus target is much lower at $60.95. Conoco closed Monday at $47.19 per share.

Exxon Mobil

This company is one of Merrill Lynch’s top picks for 2016. The Merrill Lynch analysts are very positive on Exxon Mobil Corp. (NYSE: XOM) long term as the overall corporate strength of the massive integrated giant plays a significant part in the company’s usually solid earnings reporting pattern.

The company’s global downstream chemical segment plays a huge part for Exxon. It may be a part that many others on Wall Street don’t fully appreciate as the segment contributes an estimated 16% of overall total revenue. Some very solid reasons for adding the stock to a long-term growth portfolio are that the company consistently has demonstrated disciplined investing, operational excellence and technological innovation.

The company recently appointed the head of its refining business as its new president, which makes him the probable successor to CEO Rex Tillerson, a move that was designed to avoid raising eyebrows on Wall Street. The new president, Darren Woods, is a 23-year company veteran who should keep the Goliath on the steady path for growth and progress.

Exxon investors receive a 3.72% dividend. The Merrill Lynch target price is $100. The consensus price objective is lower at $83.52. Shares closed Monday at $78.74, down almost 15% for the year.
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Oil won’t stay this low forever. Eventually somebody will blink and cut production. In the meantime, it just makes sense for investors to stay with the large cap leaders that have survived these market downturns in the past.

About the Author Lee Jackson →

Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad and diverse career, which included a stint as the creative services director at the NBC affiliate in Austin, Texas, gives him unique insight into the financial industry and world.

Lee Jackson's journey in the financial industry spans over 30 years, with nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career was marked by his presence on the sell side during pivotal Wall Street events, from the dot.com rise and bubble to the Long Term Capital Management debacle, 9/11, and the Great Recession of 2008. This is a testament to his resilience and adaptability in the face of market volatility.

Lee Jackson’s practical financial industry experience, acquired from a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing on various platforms. This unique combination allows him to shed light on the intricacies and workings of Wall Street in a way that only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.

Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.