Merrill Lynch Says No Value in Energy: Only 2 Dividends Safe Now

By Lee Jackson Updated Jan 13, 1:27PM EST · Published Feb 9, 8:20AM EST

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Merrill Lynch Says No Value in Energy: Only 2 Dividends Safe Now — © Thinkstock

You knew it was coming, and last week brought the very unpleasant truth. ConocoPhillips (NYSE: COP) announced a wider-than-expected quarterly loss and revealed plans to slash its dividend to $0.25 per share from $0.74. The stock was absolutely shredded, as many angry investors sold shares. While the cut ends up being far from a total surprise given the decline in energy prices, it is extremely disappointing given management’s insistence, as recently as December, that the dividend was secure. The shares actually rallied on Monday.

Now the reality is setting in, given the “lower for longer” scenarios for oil, and the question becomes whether any dividend is safe after the Conoco cut? A very extensive set of reports from Merrill Lynch note that with Moody’s using a $43 price deck through 2018 and inhibiting access to credit, the risk to large-caps oil companies raising equity are higher than ever. In fact with the exception of two companies, Merrill Lynch lowers the dividend outlook for all large cap U.S. oil stock in the firm’s research coverage universe.

The two companies that Merrill Lynch feel could be safe from dividend reduction are both rated Buy and offer long-term investors looking to add an energy allocation to portfolios now very attractive entry points.

Exxon Mobil

This company is one of Merrill Lynch’s top 10 picks for 2016. Exxon Mobil Corp. (NYSE: XOM) is an energy sector play that Merrill Lynch is very positive on 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 and in maintaining its dividend coverage.

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. Very solid reasons for adding the stock to a long-term growth portfolio include that it consistently has demonstrated disciplined investing, operational excellence and technological innovation.
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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 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 sizable 3.87% dividend. The Merrill Lynch target for the stock is $95. The consensus price objective from Thomson/First Call is $79.86. Shares closed on Monday at $81.16.

Occidental Petroleum

This top energy stock is one of the higher yielding domestic ones 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 and Latin America. It is one of the largest U.S. oil and gas companies, based on equity market capitalization. Its midstream and marketing segment gathers, processes, transports, stores, purchases and markets hydrocarbons and other commodities in support of its businesses. Furthermore, the wholly owned subsidiary OxyChem manufactures and markets chlor-alkali products and vinyls.

Last week Occidental reported a deeper-than-expected adjusted net loss for its fourth quarter. But Merrill Lynch notes that the company continues to deliver capital expenditure cuts, and the expected total of $3 billion for this year is a mind numbing cut of 50% versus 2015 expenditures. With a rock solid balance sheet, and a commitment to dividend coverage, investors look safe for now. The company ended 2015 $4.4 billion in cash and expects $1.2 billion more is a settlement and asset sales.

Occidental investors receive a very rich, by current standards, 4.52% dividend. Merrill Lynch has an $85 price objective, and the consensus target is $73.65. Shares ended Monday at $66.19.

Everybody has heard the expression “only the strong survive.” In the case of oil companies, it couldn’t be more apropos. Investors looking for safety may want to consider moving to these two top companies to ride out the rest of the storm.

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.