4 Mega-Cap Energy Stocks to Buy as Oil Blows Through $50

By Lee Jackson Updated Jan 12, 7:48AM EST · Published Sep 26, 9:55AM EDT

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4 Mega-Cap Energy Stocks to Buy as Oil Blows Through $50 — © Thinkstock

The International Energy Agency has been raising its oil demand forecasts recently, and it looks as though investors are starting to take the increases to heart. After being the worst performing sector in the S&P 500 in the first half of 2017, energy is moving higher, and with good reason. Here is what the IEA said recently:

The International Energy Agency estimates in its September Oil Market Report that global oil demand grew by 2.3 million barrels a day in the second quarter of 2017, the largest quarterly jump in demand in two years, while oil inventories in Economic Co-Operation and Development countries continued declining in August toward the historic five-year average.

The bottom line? While oil prices may not break above $60 for some time, getting through the psychological $50 mark is huge. We screened the Merrill Lynch research universe and found four top integrated giants that still look like outstanding plays now. All are rated Buy at Merrill Lynch.

Chevron

This integrated giant is a safer way for investors looking to stay or get long the energy sector, and it has big Permian Basin exposure. Chevron Corp. (NYSE: CVX) is a U.S.-based 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. Some on Wall Street estimate the company will have a compound annual growth rate of over 5% for the next five years.

The company reported solid earnings for the second quarter, and analysts have noted that the Permian Basin remains a key source of capital flexibility, and it is a key issue behind their relative preference for Chevron versus some of the other majors.

Chevron shareholders receive a 3.66% dividend. The Merrill Lynch price target for the stock is $120, and the Wall Street target is $115.77. Shares closed Monday at $117.99.

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ConocoPhillips

This stock may offer investors solid upside potential and the company could start growing the dividends again. 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.

Conoco has redefined its investment case with the highest free cash leverage to a recovery in oil prices among the big oil plays. Management has addressed key questions around portfolio resilience, and share buybacks have been prioritized over growth.

Investors receive a 2.12% dividend. Merrill Lynch has a $58 price target, while the consensus target is $50.42. Shares closed Monday at $49.98.

Exxon

The world’s largest international integrated oil and gas company remains a top Wall Street energy pick. Exxon Mobil Corp. (NYSE: XOM) explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa, Asia, Australia and Oceania. It also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas, and petroleum products.

The company posted some messy second-quarter results, and Merrill Lynch feels the stock is still an outstanding place for investors to put money now. The team also cites the ability of the company to maintain and cover the cash dividend at lower oil prices as a key positive, and a recent report said this:

Management could do a better job of highlighting unusual items; on review the second quarter met consensus in contrast with a perceived miss. Analysis of operating cash flow suggests Exxon had a second quarter cash break-even of $35 although capex is running 33% below guidance. With $2 billion of free cash in the second quarter before working capital, the company remains a low risk strategic route to reweighting energy portfolios.

Shareholders receive a 3.8% dividend. The $90 Merrill Lynch price objective compares with the consensus target price of $82.79 and the most recent close at $80.98.

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Royal Dutch Shell

This company has survived the seesaw 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.

Shell’s fourth consecutive quarter of dividend coverage at lower oil prices helps reaffirm the positive investment case for the company. Earnings have continued to surprise Wall Street to the upside, and analysts are bullish on the company’s cost reduction targets.

Investors receive a 5.35% dividend. The Merrill Lynch price objective is $66. The consensus figure is $63.65, and shares closed Monday at $59.87.

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These top mega-cap integrated companies have shown strong moves from the levels that were printed in the summer. Despite the strength, they all still make sense for investors looking to add energy. The fact they all pay good dependable dividends is another big positive.

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.