If there is one sector that looks like a great play for the rest of 2017 and into next year, it is energy, and with good reason. Energy has horribly underperformed the S&P 500, which is up over 16% his year, and all signs point to the supply/demand equation to be in much better balance going forward. Toss in the possibility that OPEC may continue its production cutbacks, and the outlook seems much brighter.
When covering recent Barron’s articles, the research team at Stifel noted that while increases in energy dividends are coming in at a slow pace, they are at least consistent. They also pointed to five companies that were not master limited partnerships (MLPs) that rank among the highest in the energy sector for dividend safety.
We cross-referenced the five against our 24/7 Wall St. research database looking for Wall Street firms that have Buy ratings on the companies. We found them, and they all make good sense for long-term growth and income accounts.
Exxon Mobil
This company remains a top Wall Street energy pick and is still down over 15% in 2017. Exxon Mobil Corp. (NYSE: XOM) is the world’s largest international integrated oil and gas company. It 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.
For 75 years in a row, Exxon Mobil has raised its dividend on a split-adjusted basis. Thanks to the company’s vertically integrated model in the oil and gas business, its profitability doesn’t suffer through commodity price swings like a company that’s a pure play in one segment of the value chain.
Shareholders receive a nifty 3.7% dividend. Merrill Lynch has a $90 price objective for the shares, while the Wall Street consensus target price is $83.40. The stock closed Tuesday at $83.24 per share.
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Valero Energy
Only 17% of institutional funds currently own this Wall Street and RBC favorite. Valero Energy Corp. (NYSE: VLO) is the largest independent petroleum refining and marketing company in the United States. It is based out of San Antonio, owns 13 refineries in the United States, Canada and Europe, and has total throughput capacity of around 2.5 million barrels per day.
RBC analysts lifted their 2017 estimated earnings to $5.88 per share from $3.49, while the 2018 estimate went from $4.29 to a gigantic $8.18, an increase of a stunning 91%.
Investors of Valero Energy are paid a 3.62% dividend. The $77 RBC price target was raised to a whopping $88, and the posted consensus target is lower at $80.29. The shares closed most recently at $77.40 apiece.
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Cabot Oil and Gas
Given the potential for shortages, this top natural gas play also could be a very timely pick. Cabot Oil & Gas Corp. (NYSE: COG) produces mostly natural gas in the United States, with operations primarily in Appalachia and an ancillary position Eagle Ford. The company has lined up very high-quality growth assets in the Marcellus Shales and is aggressively moving to develop these fields. Production and reserves are 96% natural gas.
U.S. energy firms are scrambling to finish a slew of pipelines that will unleash rich reserves of shale gas in Pennsylvania, West Virginia and Ohio as the nation prepares to become one of the world’s top natural gas exporters. Cabot figures to be a big player in this evolution and offers solid value and current trading levels.
Cabot shareholders are paid a small 0.8% dividend. The $32 Merrill Lynch price objective for the shares compares with the posted consensus price target of $29.64. The stock closed trading on Tuesday at $25.23.
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Marathon Petroleum
This top refiner has been on a nice roll but still trades well below highs posted in late 2015. It also is the top pick at RBC. 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 a report:
The company decided recently not to spin off its Speedway business which has 2,730 locations, spread across 21 states. In 2017, Marathon plans to invest $380 million into Speedway, by building new stores and remodeling others, the company’s officials have said.
RBC analysts raised their 2017 estimated earnings to $3.44 per share from $2.04. The full-year 2018 estimate rose from $3.80 to a massive $5.54 a share.
Marathon shareholders are paid a 2.84% dividend. The RBC price target was recently raised to $74 from $71. The consensus target is $64.94, and the stock closed Tuesday’s trading at $56.34 a share.
Phillips 66
This extremely diversified energy company has a long and successful operating history. Phillips 66 (NYSE: PSX) operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties. The company holds many of these assets within its master limited partnership, Phillips 66 Partners.
The company is able to benefit from the tax-advantaged structure while still operating a more diversified operating business that also contains many assets that aren’t ideal MLP assets, such as its fast-growing chemical manufacturing business and its super-profitable refined products marketing business.
And note that the company has tripled the quarterly dividend since being spun out in 2012 from ConocoPhillips and remains a safe haven for investors.
Phillips 66 investors are paid a 3.07% dividend. Goldman Sachs has placed a $109 price target on the shares. That compares with the consensus target of $94.31. The shares were last seen trading at 91.24.
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These five companies offer very safe dividends and the potential for upside price appreciation. That makes them all great total return candidates, and in an expensive market, good ideas for the rest of 2017 and next year.
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