Along with a vicious 20% decline and bear market status for the S&P 500, oil has taken even a bigger beating, at one point down 30% from highs posted earlier this year. Concerns touted by the oil bears include a glut of inventory in addition to slowing economic conditions. However, on the bright side, OPEC production cuts are expected to kick in early in 2019, and worldwide demand is expected to grow sharply over the next five years.
Given the massive drop in the sector, many investors are probably considering some of the mega-cap leaders. They do make sense, given they have diversified business silos and many have chopped costs and capital expenditures during the last downturn. Throw in the growing need for natural gas and natural gas liquids (NGLs), and the big boys make sense now.
We screened the Merrill Lynch energy research database looking for large-cap leaders rated Buy that also pay dividends. We found four that look like outstanding picks for 2019.
ConocoPhillips
This stock 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 (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.
The company posted better-than-expected quarterly profits and the Merrill Lynch team said this at the time:
The broader market pullback creates an attractive entry point with 25% upside to our revised $85 PO. Free cash leverage to oil is still underappreciated after revisiting a 2014 Alaska tax change muted through the downturn. Free cash flow at current strip prices suggests the current buyback program can expand 50% before planned asset sales.
Conoco investors are paid a 1.96% dividend. The Merrill Lynch price target on the shares is $82, and the Wall Street consensus target price is $77.74. The stock closed trading on Thursday at $62.23 a share.
Exxon Mobil
This stock remains a top energy pick across Wall Street and is on the US 1 list 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.
The company posted strong third-quarter results, and the Merrill Lynch analysts noted this:
Solid quarter with earnings and cash flow beat on the downstream segment. Production beat looks like it is on Permian growth which we view as underappreciated aspect to the company’s story. All-in-all, we see the quarter as a welcome start to management plans to double cash flow by 2025 and retain our Buy rating.
Shareholders are paid a very solid 4.76% dividend. Merrill Lynch has a price objective of $108, while the posted consensus target price is $87.09. The shares ended trading on Thursday at $68.94.
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 also 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. Meanwhile, 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.
Occidental shareholders are paid a sizable 5.13% dividend. The $100 Merrill Lynch price target is well above the consensus target of $84.66. The stock closed at $60.76 per share on Thursday.
Royal Dutch Shell
This is a top international play for investors looking to add energy exposure. 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, LNG 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 Merrill Lynch team remains bullish on the stock and noted this when third-quarter earnings were released:
The company delivered $4.2 billion excess free cash flow in the third quarter and announced buyback acceleration in the fourth quarter. This signals managements confidence in free cash flow momentum despite a slight third quarter net income miss. We believe Royal Dutch Shell will deliver sector-leading 2020 free cash flow yield <16%.
Investors in Royal Dutch Shell are paid a huge 5.53% dividend. Merrill Lynch has set its price objective at $70. That compares with the $79.27 consensus figure, as well as the most recent close at $57.80.
With oil hovering near 2018 lows, these stocks are outstanding long-term buys for growth portfolios looking for income as well. With the sanctions on Iran fully in place, and the OPEC cuts coming soon, if we also see positive trade deal negotiations these top companies could take off.
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