Even though many on Wall Street continue to maintain that both OPEC and Russia are ready to step in and make up for any production shortfalls from Iran due to sanctions and Venezuela due to it massive problems, the reality is both want $80 a barrel oil, especially OPEC. They have made that abundantly clear. So it is by no means a given they will cut production at the meeting at the end of June.
When you toss in the fact that there are bottleneck issues in some of the top shale plays, including the Permian, that are starting to affect U.S. production output and pricing, you have the ingredients for higher prices. With the price of West Texas Intermediate down more than 10% since May 21, it makes sense to buy the producers that are making the most money on current pricing.
We not only screened our 24/7 Wall St. research database but combed through additional energy research and sources looking for companies that are making solid money on current production. The Wall Street Journal recently reported that only five companies that are focused mainly on hydraulic fracking generated more cash than they spent in the first quarter.
We screened for companies with the highest reported cash flow and found five that look like they could be solid additions for investors looking to add energy now. All are rated Buy at Merrill Lynch.
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Continental Resources
This company has very large exposure to crude oil. Continental Resources Inc. (NYSE: CLR) is primarily a producer of onshore U.S. oil and has positioned itself in two growing hydrocarbon discoveries in the country: 1) the Bakken oil play in Montana and North Dakota, and 2) the SCOOP/STACK in Oklahoma, giving the company good growth opportunities for years to come.
Many on Wall Street feel that the company’s investment thesis is virtually unmatched. Investors get core Permian-like acreage at a non-Permian valuation. Of greatest importance, Continental is one of few diversified large-cap stocks that offers investors exposure to low-cost oil outside of the Permian. With some anticipated growing pains in the Permian, diversification is important in the high-quality peer class.
Driven by significantly better 2016 and 2017 results when utilizing the high intensity completions, and having an unhedged 2018 and 2019 oil production profile, the company is estimated to generate a 5.4% and 5.6% free cash flow yield at the strip. Toss in an expansive low-cost oily resource inventory, which could provide decades of drilling locations.
The Merrill Lynch price target for the shares is $84, and the Wall Street consensus target is $70.90. Shares traded Tuesday morning at $64.00.
ConocoPhillips
This one may offer investors solid upside potential and could start growing its dividends again. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas and natural gas liquids 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 recently noted this:
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.
Investors receive a 1.67% dividend. Merrill Lynch has an $80 price target, and the consensus target is $73.45. Conoco traded Tuesday morning at $67.95.
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EOG Resources
This leading energy company shows up well on many Wall Street screens. EOG Resources Inc. (NYSE: EOG) is one of the largest independent exploration and production companies operating in the United States, Canada, Trinidad, the United Kingdom and China.
The company has a big well in Loving County in the Delaware Basin. Top analysts say the well ranks as one of the best they have ever seen in the basin, and it could easily impact other companies drilling in the region. EOG’s average dollar gross per well on a yearly basis is a stunning $4.3 million, which ranks third among all operators.
The company reported a solid quarter in early May, and Merrill Lynch said this at the time:
EOG Resources posted an operationally solid quarter with greater clarity on Permian takeaway and corporate marketing which view as attractive vs peers. Fiscal year guidance unchanged, albeit the company continues to track above 5-year plan, resetting our operating outlook with price objective moving higher.
Shareholders receive just a 0.62% dividend. The $145 Merrill Lynch price target compares with the consensus target of $131.20. The stock traded at $115.30.
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Marathon Petroleum
This company is poised to be the largest refiner and is a more conservative way to play energy. Marathon Petroleum Corp. (NYSE: MPC) is currently one of the largest independent petroleum refining and marketing companies in the United States. It is based in Findlay, Ohio, and owns seven refineries in the United States with total throughput capacity of around 1.7 million barrels per day.
The company operates approximately 2,750 retail sites under the Marathon and Speedway brands. In addition, it operates a logistics network of pipelines, barges, trucks and terminals that store and transport crude and products.
Marathon Petroleum is in the beginning of the long process of completing a massive purchase of another refining giant. The company agreed to buy rival Andeavor for $23.3 billion in the biggest-ever deal for an oil refiner that would create the largest independent fuel maker in the United States.
Following the deal, Marathon will be the largest operator of refining capacity in the country and analysts believes that management can achieve the $1 billion in synergies it suggests. In addition, many on Wall Street give the company no credit for the possible International Maritime Organization change, which implies additional potential upside.
Shareholders receive a 2.22% dividend. The Merrill Lynch price target is $95. The consensus target is $90.38, and shares were last seen at $82.00.
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When oil was trading near $73 a short two weeks ago, you can bet that Russia and OPEC were willing to step right in and make up for the lost production. However, with the price for West Texas Intermediate down to $64.39, they may not be so anxious to let the market know they will make up the difference, as that could possibly push the price under the $60 level.
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