Energy

5 Merrill Lynch Top Large-Cap Energy Ideas to Buy With Earnings on Tap

Thinkstock

With the huge rally off the lows for spot oil pricing from this time last year, energy companies are starting the year in a much better position financially and psychologically. Most importantly, the proverbial herd has been thinned, as some of the weaker, more highly leveraged companies were forced out, or forced to merge or sell divisions to stay afloat. One area that survived as well as any was the large cap companies.

A new Merrill Lynch research report from Doug Leggate and his outstanding research team makes the case with companies ready to start reporting fourth-quarter numbers, the 2017 guidance may be more important than actual earnings in the final three months of 2016. The report also cites operational flexibility and oil service price inflation as the other key metrics that will be closely watched.

The company has five large-cap energy companies that rank as the analysts’ top ideas. All are rated Buy at Merrill Lynch.

Anadarko Petroleum

This top stock is still down a stunning 38% from the highs printed in 2014. Anadarko Petroleum Corp. (NYSE: APC) operates through three segments. The Oil and Gas Exploration and Production segment explores for and produces natural gas, oil, condensate and natural gas liquids (NGLs).

The Midstream segment provides gathering, processing, treating and transportation services to Anadarko and third-party oil, natural gas and NGLs producers, as well as owns and operates gathering, processing, treating and transportation systems in the United States. The Marketing segment markets oil, natural gas and NGLs in the United States; oil and NGLs internationally; and anticipated liquefied natural gas production from Mozambique.

The company’s asset portfolio includes U.S. onshore resource plays in the Rocky Mountains, the southern United States, the Appalachian basin and Alaska; the deepwater Gulf of Mexico; and in Mozambique, Algeria, Ghana, Brazil, Colombia, Côte d’Ivoire, Kenya, Liberia, New Zealand and other countries. As of December 31, 2015, it had approximately 2.1 billion barrels of oil equivalent of proved reserves.

Anadarko investors receive a miniscule 0.3% dividend. The Merrill Lynch price target is a whopping $110. The Wall Street consensus price objective is just $80.33. Shares closed Tuesday at $71.18.

ConocoPhillips

This company may offer investors solid upside potential despite the big dividend cut last year. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG) and NGLs worldwide. Conoco’s portfolio includes resource-rich North American tight oil and oil sands assets; lower-risk legacy assets in North America, Europe, Asia and Australia; various international developments; and an inventory of conventional and unconventional exploration prospects.

Many Wall Street analysts feel the company can accelerate growth from a reloaded portfolio depth in the Bakken and Eagle Ford, and with visibility on future growth from a sizable position in the Permian. The company remains one of the best values as short sellers circled after the dividend cuts and many still remain short the stock.

Merrill Lynch noted in a recent report:

Conoco has redefined its investment case with the highest free cash leverage to a recovery in oil prices among the big oils. Management has addressed key questions around portfolio resilience: maintenance capex drops to $4.5bn. Share buy backs prioritized over growth – 10% prospective free cash yield at $65 oil.

Investors receive a 2.0% dividend. Merrill Lynch has a $70 price target, and the consensus target is much lower at $57.73. Shares closed yesterday at $50.27.

Continental Resources

This company has a very large exposure to crude oil. Continental Resources Inc. (NYSE: CLR) is primarily a producer of onshore oil in the United States. The company has positioned itself in two growing hydrocarbon discoveries: the Bakken oil play in Montana and North Dakota and the Woodford shale in Oklahoma. That gives the company good growth opportunities for the next few years.

The analysts point out that the company was one of the best performing exploration and production stocks in 2016, and they see it as a “beat and raise” story for 2017. They also point out that while the company had among the highest returns in the lower 48 states last year, it can achieve its 300,000 barrels of oil equivalents set at the firm’s analysts’ day two years early and at lower prices and with fewer rigs than in the original plan.

Merrill Lynch has set its price target at $74, and the consensus target is $60.28. The stock closed yesterday at $52.05.

Devon Energy

This company is expected to have a substantial portion of its total 2017 production in natural gas, and it also resides on the Merrill Lynch US 1 list. Devon Energy Corp. (NYSE: DVN) an independent energy company, primarily engages in the exploration, development and production of oil, natural gas and NGLs in the United States and Canada. It operates approximately 19,000 wells. It also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensates through its natural gas pipelines, plants and treatment facilities.

Devon Energy’s third-quarter results set the tone for a very solid November after the company reported core earnings that were nearly double what Wall Street analysts were expecting. Fueling that result was the company’s continued ability to push down operating costs, which are now 37% below peak rates.

Shareholders receive a 0.5% dividend. The $61 Merrill Lynch price target compares with the consensus estimate of $52.89. The shares closed Tuesday at $46.59.

Hess

This top mid/large cap pick reported a loss this morning, but the numbers were better the analysts’ expectations. The stock is down a stunning 40% since highs printed in 2014 and is one of the Merrill Lynch top 10 first-quarter stock ideas. Hess Corp. (NYSE: HES) is an exploration and production company that develops, produces, purchases, transports and sells crude oil, NGLs and natural gas. It primarily operates in the United States, Denmark, Equatorial Guinea, the Joint Development Area of Malaysia/Thailand, Malaysia and Norway.

Hess is continuing a transition away from being an integrated oil and gas company. It is shifting its growth approach from high-impact exploration to a smaller, more focused exploration portfolio. Hess released a much lower capital expenditure budget for 2016, which highlights the company’s efforts for cost containment. The 2017 budget is also expected to be conservative.

Merrill Lynch thinks that at current trading levels, the stock could be as much as 30% undervalued, assuming long-term Brent crude pricing at $70 per barrel. The team cites the Liza discovery in Guyana, which they expect to be acknowledged by project final-investment decision or FID in the second quarter of 2017.

Hess investors receive a 1.75% dividend. Merrill Lynch has set its price objective at $80. The consensus target is $65.54, and shares closed Tuesday at $57.52.

These top stocks to Buy all make sense for long-term growth portfolios. Given the market levels, investors may want to consider partial positions here, and see if the market doesn’t come in some in the first quarter.

100 Million Americans Are Missing This Crucial Retirement Tool

The thought of burdening your family with a financial disaster is most Americans’ nightmare. However, recent studies show that over 100 million Americans still don’t have proper life insurance in the event they pass away.

Life insurance can bring peace of mind – ensuring your loved ones are safeguarded against unforeseen expenses and debts. With premiums often lower than expected and a variety of plans tailored to different life stages and health conditions, securing a policy is more accessible than ever.

A quick, no-obligation quote can provide valuable insight into what’s available and what might best suit your family’s needs. Life insurance is a simple step you can take today to help secure peace of mind for your loved ones tomorrow.

Click here to learn how to get a quote in just a few minutes.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.