Any way you slice it, the going will stay rough for the energy sector through 2016. While oil prices may start to bottom at current levels, there is no reason to think we will see any huge upside movement, unless the situation in the Middle East really deteriorates or the dollar weakens drastically versus the euro.
The analysts at Merrill Lynch are very cautious going forward, and they are doing what smart teams on Wall Street do when a sector is dicey. They stay with large cap companies that have solid track records, and are well positioned to weather the storm, even if it takes a couple of years. With that in mind, they prefer being early to the party, but with big sector players
Here are the four top large cap picks for 2016.
ConocoPhillips
This one may offer investors among the best total return possibilities for 2016, and it 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, Conoco 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 recently.
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 has said that the company expects oil prices to start to rise late this year, but it is significantly reducing capital and operating costs, while maintaining its commitment to safety and asset integrity. The 2016 capital budget was announced recently at $7.7 billion. Lance also said Conoco retains the flexibility to adjust capital spending in response to market factors. Merrill Lynch feels that with the spending below $8 billion and additional asset sales, the dividend should remain safe, a key reason for investors to consider.
Conoco investors receive a very strong 6.31% dividend. The Merrill Lynch price target is a whopping $77. The Thomson/First Call consensus price target is $60.95. Shares closed Tuesday at $47.40.
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Hess
This is another top large cap pick with big upside possibilities for patient investors. Hess Corp. (NYSE: HES) is an exploration and production company that develops, produces, purchases, transports and sells crude oil, natural gas and natural gas liquids. The company primarily operates in the United States, Denmark and Norway, Equatorial Guinea and the Joint Development Area of Malaysia/Thailand.
Hess has again emerged as the subject of takeover speculation. With the market capitalization falling to just over $13 billion, it could fall prey to larger integrated as a quick bolt-on acquisition to boost growth. Hess is undergoing somewhat of a transition from an integrated oil and gas company to a predominantly exploration and production entity. The company is shifting its growth approach from high-impact exploration to a smaller, more-focused exploration portfolio.
Hess investors receive a 2.12% dividend. The $85 Merrill Lynch price objective is much higher than the consensus target of $67.75. The stock closed most recently at $48.07.
Occidental Petroleum
This is one of the higher yielding domestic stocks in the energy sector. Occidental Petroleum Corp. (NYSE: OXY) is an international oil and gas exploration and production company with operations in the United States, Middle East region and Latin America. It is one of the largest U.S. oil and gas companies, based on equity market capitalization. The company’s midstream and marketing segment gathers, processes, transports, stores, purchases and markets hydrocarbons and other commodities in support of Occidental’s businesses. In addition, the wholly owned subsidiary OxyChem manufactures and markets chlor-alkali products and vinyls.
The company posted surprising third-quarter numbers that beat analyst expectations, and it also announced that it would be leaving the Bakken shale after posting very heavy losses there.
Occidental also announced recently a deal with Ecopetrol to invest up to $2 billion over the next decade to increase production at the La Cira-Infantas oil field in Colombia. The new round of investments reportedly will increase production in the region by more than 200 million barrels.
Occidental shareholders are paid an outstanding 4.48% dividend. Merrill Lynch has a gigantic $95 price target, while the consensus estimate is $79.92. The stock closed on Tuesday at $68.53.
Pioneer Natural Resources
Many Wall Street analysts love this one for a pure crude oil play and a capital gains trade. Pioneer Natural Resources Co. (NYSE: PXD) was the ultimate shale-oil growth story for the past five years and has been eviscerated in the sell-off that started over a year ago. The stock had rebounded nicely since the summer but was hit hard recently and could be offering aggressive investors a potential entry point that could be very timely.
Pioneer is a huge player in the Permian basin and 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. Wall Street analysts were very positive on the third-quarter results and noted that the company reiterated annual production growth guidance of more than 15% while cutting the number of rigs expected to operate.
Pioneer investors receive a tiny 0.06% dividend. The Merrill Lynch price target is a large $190. The consensus figure is lower at $167.05. The stock closed trading on Tuesday at $125.17 but was trading down big in the premarket Wednesday after the company priced a secondary offering.
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There is still a long way to go for the energy sector, and the sledding may remain tough the rest of this year. Investors willing to carve out some capital and plan on holding positions for up to 18 months could be well rewarded.
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