The oil bears were out in full-force over the past month as OPEC compliance to the production cuts dropped to lows and supplies started to pile up. But with motorists driving more miles than ever, and major Middle East countries committed to even bigger cuts, the slide in the oil price deck has turned around, and it’s very possible it can go back over the $50 level for West Texas Intermediate.
In a series of new reports, RBC remains very positive on some top domestic and international energy stocks, many of which posted very strong second-quarter results. The analysts are cautiously optimistic on the rest of 2017, and feel that sticking with larger cap names makes good sense.
Anadarko Petroleum
This top company is still down a stunning 30% since January and is an outstanding Buy at current levels. 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 other segments are Midstream and Marketing.
The company remains a solid value play, and despite less than stellar second-quarter results, many on Wall Street are very positive on the story for the rest of 2017 and beyond. RBC noted this in the report:
We are updating our model following second quarter earnings. The most significant changes are lower production and capital spending. The reduced production mainly stems from an asset sale and the impact from the Colorado incidents earlier this year. Free-cash-flow deficit is $375 million for 2018 and $104 million for 2019. In aggregate, this is a lower outspend than our prior outlook owing to slightly higher upstream margins.
Shareholders receive a 0.43% dividend. RBC has a $62 price target. The Wall Street consensus target is $62.30. The shares closed Friday at $46.32.
Marathon Petroleum
This top refiner has been on a nice roll, but it still trades well below highs posted in late 2015. Marathon Petroleum Corp. (NYSE: MPC) recently was added to the Franchise Picks List, and it has a diversified business that operates through Refining & Marketing, Speedway and Pipeline Transportation segments.
The company owns and operates seven refineries in the Gulf Coast and Midwest regions of the United States, which refine crude oil and other feedstocks, and it distributes refined products through barges, terminals and trucks, as well as purchases ethanol and refined products for resale.
The company announced in January its plans to significantly accelerate its dropdown of assets with an estimated $1.4 billion of master limited partnership eligible annual earnings before interest, taxes, depreciation and amortization being transferred to MPLX. The analysts noted in the report:
Marathon Petroleum plans on releasing its findings from its Speedway review by the end of the third quarter, though we do not expect the company to spin off the business. Drop timing to MPLX has been updated, with a smaller drop coming later in the third quarter and the bulk of EBITDA likely waiting until the first quarter of 2018. This should support out sized repurchases in the first half of 2018, which should unlock value with or without a Speedway spin.
Investors receive a 2.91% dividend. The RBC price target is $71, and the consensus price objective is $63.35. The stock closed Friday at $54.98.
Royal Dutch Shell
This company has survived the plunge in oil pricing as good as or better than any other major integrated stock. Royal Dutch Shell PLC (NYSE: RDS-A) operates as an independent oil and gas company worldwide through its Upstream and Downstream segments. The company explores for and extracts crude oil, natural gas and NGLs.
Royal Dutch Shell also converts natural gas to liquids to provide fuels and other products; markets and trades crude oil and natural gas; transports oil; liquefies and transports gas; extracts bitumen from mined oil sands and converts it to synthetic crude oil; and generates electricity from wind energy.
In addition, the company engages in the conversion of crude oil into a range of refined products, including gasoline, diesel, heating oil, aviation fuel, marine fuel, liquefied natural gas (LNG) for transport, lubricants, bitumen and sulphur; production and sale of petrochemicals for industrial customers; refining; trading and supply; pipelines and marketing; and alternative energy businesses.
The company generated 3.83 billion cubic feet per day of natural gas in the second quarter of this year from its integrated gas operations and another 6.40 billion cubic feet per day from its upstream operations. The research report noted:
Shell’s fourth consecutive quarter of dividend coverage at lower oil prices helps reaffirm the positive investment case. Earnings continue to surprise to the upside, while we see much more running room on the company’s cost reduction targets. Management was tight-lipped about upgrading its guidance despite this progress, however we believe this is likely to come at Shell’s Management day in November.
Investors receive a 5.73 % dividend. The $60 RBC price target is less than the consensus target of $62.09. The shares closed Friday at $55.74.
Suncor Energy
This is a top Canadian energy play for investors to consider. Suncor Energy Inc. (NYSE: SU) operates as an integrated energy company. It primarily focuses on developing petroleum resource basins in Canada’s Athabasca oil sands; explores, acquires, develops, produces and markets crude oil and natural gas in Canada and internationally; transports and refines crude oil; markets petroleum and petrochemical products primarily in Canada; and markets third-party petroleum products.
The company reported so-so second-quarter results, but RBC stays positive on it as the firm sees new growth on the horizon. The report noted:
Our bullish stance towards Suncor Energy remains intact despite mixed second-quarter results. The company’s growth initiatives at Fort Hills and Hebron remain on-track, which should support rising free cash flow generation that we peg at $3.1 billion (before dividends) in 2018 (US$50 WTI). Suncor raised its common dividend by 10% with its 2016 year-end results—and is well positioned to do so again as its upstream growth continues
Suncor investors receive a 3.17% dividend. RBC has set its price target at $45, while the consensus target is $38.16. Shares closed trading Friday at $32.46.
Total
This is another giant European energy giant, this one based in France. Total S.A. (NYSE: TOT) is a global integrated energy producer and provider, a leading international oil and gas company, and the world’s second-ranked solar energy operator with SunPower.
The company operates through three segments. The Upstream segment explores and produces oil and gas; ships, trades and markets natural gas, liquefied natural gas and liquefied petroleum gas (LPG); generates power; and mines and markets coal.
The Refining & Chemicals segment refines and produces petrochemicals and provides sealing, insulation, fluid transfer and transmission and transportation solutions, as well as offers chemical processes and services for electronics, surface finishing and semiconductor manufacturing. It is also involved in trading and shipping crude oil and petroleum products.
The Marketing & Services segment supplies and markets petroleum products, including automotive fuels, biofuels, home heating oil and heavy fuel oil, lubricants, asphalt, aviation fuel, additives and special fuels and special fluids through service stations for light vehicles and trucks.
The company reported solid results, and the analysts said this:
Total’s strong delivery now leaves it with the lowest gearing among the European integrateds, and in line with US peers. We expect incremental guidance upgrades at the company’s September 2017 capital markets day, which should be taken positively. That said, we believe investors are focused on companies removing dilutive scrip dividends, and peers appear to have much stronger rhetoric in this regard.
Investors receive a 4.42% dividend. The RBC price objective is $52. The consensus target is $50.58, and shares closed last Friday at $50.61.
These five companies all offer solid upside and total return potential for investors. Energy was the only sector in the S&P 500 in the first half that was down, and it may offer among the best potential upside going forward.
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