Energy
Wall Street Analysts Bullish on Energy as Oil Surges to 3-Year Highs
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Despite what President Trump said on Friday about oil being stored in ships and everywhere, the fact of the matter is the oil glut that has plagued the industry for years is almost gone, and with the OPEC production cuts holding firm, and demand still very high, the price of the black gold has surged to levels not seen in over three years.
At 24/7 Wall St. we cover all the top brokerage firms and investment banks, and slowly but surely, they are all coming around to the fact that exploration and production stocks, the large integrated giants and oilfield services companies are all cheap, having lagged the S&P 500 for years, and may be offering investors some of the best values around despite the big run-up in oil.
We screened our research calls for the top picks around Wall Street, and investors have a wide variety of companies to look at now. From mega-cap integrateds to small-cap exploration and production companies, there is something for everybody to like in the energy sector now.
Chevron
This integrated giant is a safer way for investors looking to stay or get long the energy sector, and it has a 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 (LNG). Some on Wall Street estimate that the company will have a compound annual growth rate of over 5% for the next five years.
The company’s production from the Permian Basin continues to exceed trajectory, and it provided investors with a reasonable bullish update at the March 6 investors day. The Merrill Lynch team noted this after the presentation:
With Permian production and asset disposals targets reset, we believe the company can raise the dividend 20% and buyback 15% of shares. We view the strategy update as appropriately conservative for one of the more oil levered majors. The Chevron strategy thru 2020 is focused on discipline enabled by step change in capital efficiency driven by doubling Permian production.
Chevron shareholders are paid an outstanding 3.9% dividend. The Merrill Lynch price target for the stock is $138, and the Wall Street consensus price target is $135.88. The shares closed trading on Friday at $122.31.
ConocoPhillips
This one may offer investors solid upside potential and could start growing the dividend again. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, LNG and natural gas liquids (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.
Merrill Lynch has grown progressively more positive on the shares and noted in a recent report:
Based on updated cash flow sensitivities we suggest operating operating cash flow could top $11 billion at $64 Brent, drawing more buybacks. With advantaged leverage to Brent and little production sharing contracts entitlement effects, we view Conoco as a strong free cash ‘yield’ name.
Conoco investors are paid a 1.92% dividend. Merrill Lynch has a $72 price target on the shares. The posted consensus price target is lower at $67.05. Conoco closed trading at $65.79 on Friday.
Diamondback Energy
This is a top Permian Basin play for more aggressive accounts and is a top pick across Wall Street. Diamondback Energy Inc. (NASDAQ: FANG) is an independent oil and natural gas company headquartered in Midland, Texas, and focused on the acquisition, development, exploration and exploitation of unconventional, onshore oil and natural gas reserves in the Permian Basin in West Texas.
Diamondback’s activities are primarily focused on the horizontal exploitation of multiple intervals within the Wolfcamp, Spraberry, Clearfork and Cline formations.
Wall Street analysts have noted in the past the company’s top-tier asset base, solid accretive additions and financial discipline, which they think allows for not only continued solid cash flow, but could put the company in play as a takeover target. Diamondback continues to drill some of the most economical wells in the United States as efficiencies improve, costs decrease and activity remains in the better regions.
The $165 SunTrust price target is well above the consensus price objective of $155.82. The shares closed most recently at $128.40 apiece.
24/7 Wall St.Energen
This lesser known company is a solid play for those looking for Permian Basin exposure at a reasonable price. Energen Corp. (NYSE: EGN) is a pure-play Permian operator with 147,000 net acres in the basin. The majority of its development activity targets the Midland and Delaware Basin, where the company holds 87,000 and 60,000 net acres respectively. Energen also holds an 84,000 net acre position in the Platform area where minimal capital investment is expected.
Top analysts feel that Energen is a rare breed, with strong debt-adjusted growth, inventory depth from a quality and blocky Permian footprint, balance sheet and value. Recent Generation 3 completions show promise for a step-change in well productivity, and none of that appears baked into guidance or street estimates.
SunTrust has its price target at $85, while the consensus target was last seen at $71.93. The share price as of Friday’s close was $67.72.
Exxon Mobil
This remains a top Wall Street energy pick though it is down over 15% in the past month, and it is the preferred pick at Merrill Lynch. 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 and elsewhere.
The company 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 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 are paid a 4.2% dividend. The Merrill Lynch price objective is $100. The consensus target is much lower at $85.98, and the stock closed most recently at $79.00 per share.
Halliburton
This company is still down over 20% from highs printed in January, and it remains a top large-cap oil services pick at SunTrust. Halliburton Co. (NYSE: HAL) is one of the world’s largest providers of products and services to the energy industry. It serves the upstream oil and gas industry throughout the life cycle of the reservoir, from locating hydrocarbons and managing geological data to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.
Halliburton is the second-largest provider of oil services and the number one player in pressure pumping services worldwide. For investors looking for an oilfield services company to add, this is arguably the best, and analysts feel it will be a huge benefactor as the frac market has tightened significantly and prices are 20% to 30% off the lows.
The company posted solid fourth-quarter results that topped analysts’ estimates, driven by better pricing and increased activity in every reporting region. Earnings per share beat the highest consensus estimates on robust review, with particular strength internationally.
Halliburton shareholders are paid a 1.53% dividend. The whopping $65 RBC price target compares with a $62.69 consensus estimate. The shares were last seen changing hands at $51.96 apiece.
ONEOK
The volatile price of natural gas over the past year has weighed some on this top energy stock. ONEOK Inc. (NYSE: OKE) primarily engages in natural gas transportation, storage and natural gas and NGLs gathering, processing and fractionation in the Bakken, Mid-Continent and Permian. The company recently closed the roll-up of its underlying master limited partnership, ONEOK Partners.
The company has a strong presence in the Oklahoma SCOOP/STACK (NGL gathering/takeaway system, G&P), the Williston Basin (G&P, NGL takeaway) and the Permian Basin (NGL gathering, NGL takeaway, natural gas takeaway), which RBC feels provides high-return growth opportunities.
The analysts are also positive on the company’s primarily fee-based earnings, which account for 90% of the total earnings.
Investors are paid a very solid 5.26% dividend. While the RBC price objective was listed as $70, the posted consensus target is $64.24. The shares closed trading at $59.54 on Friday.
24/7 Wall St.Parsley Energy
This is smaller capitalization stock for aggressive investors to consider. Parsley Energy Inc. (NYSE: PE) is an oil and gas producer with 227,000 net acres in the Permian Basin. The majority of acreage sits on the Midland side of the basin, but the company also holds a small acreage position in the Delaware Basin.
The company had 222 million barrels of oil equivalent of proved reserves at the end of 2016, of which 61% was oil. Through strategic acquisitions and acreage swaps, it has grown its acreage position since its initial public offering and has over 7,900 horizontal locations across multiple prospective zones.
The company is catalyst rich and a Permian Basin pure play. Parsley Energy has some of the strongest wells in the basin, generating returns that are among the best in the industry. It is also rapidly de-risking its drilling inventory and is well-positioned to continue to beat its strong growth projections.
The RBC price target is $36, versus the consensus price target of $30.39. The stock closed trading on Friday at $30.13.
Patterson-UTI Energy
This one remains a top oil services pick across Wall Street. Patterson-UTI Energy Inc. (NASDAQ: PTEN) is the second-largest land driller in North America and a large pressure pumping provider. Its operations are particularly focused in the Marcellus and in Texas.
Patterson-UTI and its subsidiaries operate land-based drilling rigs in oil and natural gas producing regions of the continental United States and western Canada. Universal Pressure Pumping and Universal Well Services provide pressure pumping services primarily in Texas and the Appalachian region. For the three months ended September 30, 2017, the company had an average of 161 drilling rigs operating.
The company remains the fifth largest Pressure Pumper with a 1.5 million HHP frac fleet (currently 83% utilized) with exposure to ancillary rental equipment business through Great Plains Oilfield Rental. The recent acquisition of MS Energy (directional drilling) complements its contract drilling business and provides attractive growth opportunities for investors.
Investors are paid a small 0.4% dividend. The Merrill Lynch price target of $27 a share compares with a consensus price objective of $24.85 and the most recent closing price of $19.99.
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.
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 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.
Investors are paid a huge 5.51% dividend. The Merrill Lynch price objective is $74. The consensus figure is $77.64, and the stock closed Friday at $70.65 a share.
These 10 top companies, covered by some of the best firms on Wall Street, are all offering investors great entry points and the potential for solid upside. Plus, they run the risk gamut, and more conservative accounts can always go with the big dividend integrateds while aggressive growth investors can go with the hot exploration and production plays from the Permian Basin.
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