The S&P 500 since 2010 has tended to perform well in earnings months, and the main reason is simple: Since 2010 earnings have been good for the most part. With the overall markets flat to slightly down for the year, and expectations dampened pretty well, the parade of earnings that starts this week may be able to to put some oomph into things if numbers come in good.
In an interesting research note from T.J. Thornton, outstanding Jefferies U.S. Product Management guru, he points out that not only is April usually a solid month, up 1% or more on average, but energy tends to be particularly strong, beating the other nine sectors and outperforming the overall S&P 500. Energy had an outstanding Friday, and we noted some of the reasons why.
We screened the Jefferies research universe for energy stocks the firm has rated Buy that could catch some of the solid April outperformance.
Chevron
This is very solid story for investors looking to stay long the energy sector, and it’s a preferred U.S. company to own now. Chevron Corp. (NYSE: CVX) is an 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.
Chevron management continues to 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 Chevron 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 the rest of the year.
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 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 massive 4.44% dividend. The Jefferies price target for the stock is $110, and the Thomson/First Call consensus price target is $98.34. Shares ended last week at $96.33.
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Encana
This top stock has been absolutely mauled, down a gigantic 84% since the summer of 2014. Encana Corp. (NYSE: ECA) engages in the development, exploration, production and marketing of natural gas, oil and natural gas liquids (NGLs) in Canada and the United States. The company owns interests in plays, such as the Montney in northern British Columbia and northwest Alberta; Duvernay in west central Alberta; Clearwater in central and southern Alberta; Deep Panuke in offshore Nova Scotia; Cadomin/Doig in northeast British Columbia; Horn River in northeast British Columbia; and Granite Wash/Doig in northwest Alberta.
Jefferies is bullish on Encana, and earlier this year elevated the stock to its Franchise Picks portfolio, which represents the highest conviction stocks at the firm. The company reported better-than-expected fourth-quarter 2015 earnings on improved crude volumes. The bottom line was also better than first quarter 2015. The stock is a favorite at Goldman Sachs too, especially if oil stays in the mid-$30s range.
The $8 Jefferies price target is higher than the consensus target of $7.20. The shares closed Friday at $5.99.
Gulfport Energy
This is one of the favorites around Wall Street among the smaller more nimble companies, and it is also a member of the Jefferies Franchise Picks portfolio. Gulfport Energy Corp. (NASDAQ: GPOR) is an independent oil and natural gas exploration and production company with its principal producing properties located in the Utica Shale of Eastern Ohio and along the Louisiana Gulf Coast. In addition, Gulfport holds a sizable acreage position in the Alberta Oil Sands in Canada through its 24.9% interest in Grizzly Oil Sands.
Gulfport is a favorite of hedge fund managers. According to Insider Monkey, 36 hedge funds owned positions in the stock late last year. The shares hit some weakness on gas prices and a lower growth outlook, a move lower many believe is overdone, and recent stock movement seems to have confirmed. With a multiple in line with peers and an expected ramp-up in production this year, the stock may be a great value at current levels, despite last week’s big rally.
Jefferies has a $33 price target, but the consensus target is $34.18. The stock closed Friday at $28.55.
Noble Energy
This top stock was hit hard recently when Israel’s high court blocked the government’s proposal to regulate the natural gas industry in a decision that could stall the development of a major oil field by the company. Noble Energy Inc. (NYSE: NBL) is independent energy company that engages in the acquisition, exploration and production of crude oil, natural gas, and NGLs worldwide. Its principal projects are located in DJ Basin, Marcellus Shale, Eagle Ford Shale and Permian Basin in the United States; deepwater Gulf of Mexico; offshore Eastern Mediterranean; and offshore West Africa. As of December 31, 2015, the company had approximately 1,421 million barrels oil equivalent of total proved reserves.
Noble announced a large debt tender back in January that dramatically increased the financial flexibility at the company. Using a new three-year term loan agreement with seven lending institutions for a principal amount of up to $1.4 billion, the company announced tender offers for three separate debt issuance issues. This should provide annual interest savings of up to $50 million and substantially enhance deleveraging flexibility.
Jefferies analysts met with the company’s management recently, and they feel that there is significant “trapped” value in the Israeli offshore gas asset and the ability to balance spending within internally generated cash flow. The company believes it can sanction Leviathan perhaps by year end, which could provide monster upside potential.
Noble investors receive a 1.26% dividend. The $38 Jefferies price target is essentially in line with the consensus figure of $38.25. Nobel closed trading Friday at $31.76.
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History shows that April and energy make good partners, and given some of the issues that are affecting the sector, the rally we saw on Friday could continue as we head further into the month.
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