The conventional wisdom, which is often neither conventional nor wise, has been that if OPEC and Russia start to increase production to offset the Iran and Venezuela production drop, that price will continue to go lower. While oil prices have dropped significantly since the end of May, the reality is that production worldwide has dropped overall, and we could be poised for higher, not lower prices.

In a new research report, Jefferies is of the opinion that prices are indeed going higher, and while the differential between Brent and West Texas Intermediate should stay in place, the firm is raising its price target on both higher. Analyst Jason Gammel noted this in the report:

The oil market is tight and we believe that supply side risks are likely to drive oil prices higher during 2018. Commercial inventories are being rapidly depleted and the market is beginning to price in further supply risks with US sanctions on Iran looming, Venezuelan production in free-fall and even US shale showing signs of limitations to how fast it can grow. Price elasticity of demand is a concern particularly given the recent devaluation of many emerging market currencies, but we believe that generally robust global economic conditions can compensate for the increase in oil price.

The analysts upgraded one top U.S. company and have two others that trade in dollars rated Buy. All three make good additions to growth portfolios looking for energy exposure.

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 Corporation (NYSE: CVX) is a US-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 that the company will have a compound annual growth rate of over 5% for the next five years.

With Permian production and asset disposals targets reset, the company can raise the dividend 20% and buyback 15% of shares. Many analysts view the strategy update as appropriately conservative for one of the more oil-levered majors. The Chevron strategy through 2020 is focused on discipline, enabled by step change in capital efficiency driven by doubling Permian production.

The analysts noted this in a recent report:

We believe the Chevron portfolio is the most strategically advantaged in the super-major sector, with visible growth and an industry leading Permian position. A progressive dividend remains Chevron’s #1 financial priority, but we also expect the company will generate sufficient discretionary cash flow to fund a $26 billion repurchase program from 2018-2020. The company expects an annual capital program of $18b-20b will be sufficient to fund cash flow and production growth and to replace reserves.

Chevron shareholders are paid an outstanding 3.61% dividend. The Jefferies price target was raised to $157 from $149, and the Wall Street consensus price target is $145.18. The shares closed Friday’s trading at $124.04.

Occidental Petroleum

This is one of the highest yielding domestic stocks in the energy sector. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals. The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. The chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.

With a rock-solid balance sheet and a commitment to dividend coverage, investors look safe for now. Occidental has paid quarterly cash dividends continuously since 1975, and it has increased its dividend each year since 2002.

Jefferies raised the stock from Hold to Buy and noted this in the report:

We upgrade Occidental to Buy from Hold and increase our target price. We believe that the company’s firm transportation commitments leave it well positioned to reap the benefits of what could be a prolonged wide differential between Midland and US gulf coast crude prices. Occidental has firm transportation commitments of 470,000 barrels per day from Midland to the Gulf Coast, about 19.5% of total capacity, which provides full flow assurance on its own Permian production as well as arbitrage opportunity on third party volumes.

Shareholders receive a 3.70% dividend. The $87 Jefferies price target was raised to $98. The consensus target is $91.52, and the stock closed trading Friday at $83.33.

Royal Dutch Shell

This company has survived the seesaw in oil pricing as good as or better than any other major integrated. 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 natural gas liquids.

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.

The Jefferies analysts have remained bullish on the company and noted this:

We believe Shell has one of the most sustainable business models in the sector, capable of fully funding the dividend with free cash flow when oil prices are at the bottom of the cycle but also generating strong free cash flow in a moderate oil price environment. The balance sheet is on a path to reach 20% net debt/capitalization in 2018, and we expect the company to begin repurchasing shares in the second half of 2017 with a target of $25 billion in total repurchases through 2020. Shell’s well-covered dividend remains the highest in the sector.

Investors are paid a huge 4.75 dividend. The Jefferies price objective is $88.60, while the consensus figure is $79.78. The stock closed Friday at $67.24.

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Three of the biggest and best companies in the energy sector, some of which have all taken a good hit over the past month, though all are well liked on Wall Street. As they pay good dividends and distributions, they make sense for long-term growth portfolios that also value consistent income and that seek energy exposure.

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