Less than a month ago, something that seemed impossible actually occurred. The front month oil futures contract for May, which expired in mid-April, actually traded negative. Traders were forced to sell at a loss as those holding contracts on expiration have to take physical delivery, and with no storage space available, had to sell at a loss.
What a difference a month can make for energy investors. On Monday, the benchmark pricing for West Texas Intermediate crude shot up to $33.10, up almost 14% from the Friday close. Oil traders seemed to be focused down the road, with futures markets for both overseas-benchmark Brent and West Texas Intermediate barrels for December delivery having the highest open interest, or total number of options and outstanding contracts.
What that means for investors is that while the front month contract for June, which expires this week, is the current price point, many traders think the biggest money can be made later this year, as the combination of production cuts and renewed consumption kicks in. For investors looking for energy stocks to buy, the prices now are still very reasonable.
We screened the BofA Securities energy research universe looking for companies with Buy ratings that have kept the dividend intact. We stay with the larger cap leaders, as they have the ability and balance sheet to stay in the game when prices become extremely volatile.
Apache
This company was long considered an industry leader but its stock has been absolutely battered. Apache Corp. (NYSE: APA) is an independent energy company that explores for, develops and produces natural gas, crude oil and natural gas liquids (NGLs). The company has operations in onshore assets located in the Permian and Midcontinent/Gulf Coast onshore regions, and offshore assets situated in the Gulf of Mexico region. It also holds onshore assets in Egypt’s Western desert and offshore assets in the North Sea region, including the United Kingdom.
Apache also has an offshore exploration program in Suriname. As of December 31, 2019, it had total estimated proved reserves of 551 million barrels of crude oil, 186 million barrels of NGLs, and 1.6 trillion cubic feet of natural gas. The company remains an acquirer/exploiter/explorer and a fiscally conservative company that has grown its reserves and production consistently via acquisitions and organic projects.
Apache posted a good first quarter, and the analysts said this:
Earnings per share beats; but COVID response on production dents otherwise solid quarter. No new guidance yet. … but with recent cost and spending cuts we see Apache doing enough to be free cash positive in the second half of 2020. Debt metrics are high but resilient; Apache value is anchored on Suriname’s and the strength of Total’s balance sheet.
The company pays a small 0.85% dividend. BofA Securities has a gigantic $22 price target, which compares to the surprisingly lower Wall Street consensus target of $10.57. Apache stock closed trading on Monday at $11.92, up over 12% on the day.
Chevron
This integrated leader is a safer way for investors looking to be positioned in the energy sector. 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.
Chevron, which is among the companies with the largest corporate debt, recently became the latest major oil company to slash spending after halting its $5 billion-a-year share buyback and halving spending in the Permian Basin, which means a large decrease in projected output from America’s biggest shale region.
The California-based oil giant has said that it would lower projected 2020 capital spending by 20%, or $4 billion. The Permian will account for the largest single element of that reduction, translating into 125,000 fewer barrels of oil equivalent per day than previously forecast, a quantity equal to about 2.5% of the basin’s total current production.
The analysts are positive and noted this after the recent earnings report:
Chevron earnings beat reflects operational momentum, but we see stress tested guidance as the key takeaway from the quarter. With uncertainty ahead, Chevron top in class balance sheet and capital flexibility stand out, w/ $30 billion in liquidity to navigate a downturn. New guidance on sustaining capital – below our prior estimate, raises our price objective. Retain Buy as a top defensive name.
Shareholders receive a 5.87% dividend, which the analysts feel will remain at current levels. BofA Securities raised its price target to $97, well above the $90.71 consensus target. Chevron stock closed at $92.55, after rising 5.35% on Monday.
Exxon Mobil
This is another safer long-term play for conservative investors, and the energy giant is trading at 17-year lows. 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.
Exxon 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.
Earlier this year Exxon announced plans for spending cuts amid the coronavirus outbreak that caused a price slide significantly aggravated by Saudi Arabia’s decision to start raising oil production. Exxon’s budget for this year and every year until 2025 was set at between $30 billion and $35 billion. Many on Wall Street feel that could be cut 10% to 20% or more. Note that Exxon has one of the highest paid American CEOs.
The analysts remain very positive and said this when Exxon reported:
Despite some confusion on the company’s reported earnings, we contend that on a peer to peer comparison the first quarter is a clean beat versus the street. COVID-19 is the great equalizer. All majors will lean on the balance sheets, but Exxon can reduce spending as needed with growth in the recovery. The second quarter promises more sticker shock but Exxon’s yield pays investors to wait through this downturn with growth beyond.
The company pays investors a huge 8.29% dividend, which probably will be defended as well. The $70 BofA Securities price objective is well above the $47.27 Wall Street consensus. Exxon Mobile stock closed Monday up almost 8% to $45.34.
24/7 Wall St.Marathon Petroleum
This is another solid way for more conservative accounts to play the energy sector. Marathon Petroleum Corporation (NYSE: MPC) is currently one of the largest independent petroleum refining and marketing companies in the United States. The company operates approximately 2,750 retail sites under the Marathon and Speedway brands. In addition, Marathon Petroleum operates a logistics network of pipelines, barges, trucks and terminals that store and transport crude and products.
Despite a plan to spin-off Speedway, the company announced in late February it would invest $550 million in the chain. The investment will focus primarily on converting convenience stores the company added to its portfolio through several acquisitions over the past two years — notably, its strategic combination with San Antonio-based Andeavor in the fall of 2018 — to Speedway’s branding and systems.
First-quarter results were very solid and the analyst said this looking forward:
First quarter with new CEO Hennigan sees free cash flow right sized to cover a sector leading dividend yield. While proposed as a response to COVID-19, the ongoing review may have longer term implications. Top refining pick: deep value with underappreciated cash flow capacity and refining leverage from an advantaged system.
Shareholders receive a 6.64% dividend, but this one may be trimmed. The BofA Securities price target is $56. The consensus target is $46.14, and Marathon Petroleum stock closed at $34.95, up a stunning 15% on Monday.
We stayed with exploration and production companies and a refiner, avoiding oilfield services due to the continued potential for domestic and foreign production cuts and shut-ins. The energy sector will remain volatile, but scale buying shares now and being patient could bring some solid gains for investors. With the country opening back up, and the busy summer driving and vacation season all but upon us, demand looks to move substantially higher.
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