Energy
International Oil Rig Count Lowest in 17 Years: 4 Incredible Stocks to Buy
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If any sector has been beaten down this year it is energy. While the trend is toward clean energy, the reality is it will be years before renewable sources can supply the huge demand. One remarkable sign for value investors to consider is that the international oil drilling rig count is at the lowest level since 2003, and that number most likely will continue to drop. Though there is still a massive supply to burn off, you can bet cooped up Americans will take to the road the rest of the summer.
With the stock market way overbought, and many investors looking for value ideas, beaten-down energy giants may be an outstanding idea now. It makes sense to stay with large-cap leaders, as many smaller exploration and production companies are expected to file bankruptcy, and the big players have multiple streams of income to get through the tough times.
We screened the BofA Securities energy research universe looking for large-cap energy stocks that are rated Buy and offer investors solid upside potential to the firm’s price target. Four fit the bill perfectly. It’s important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Exxon
This is another safer long-term play for conservative investors, and the energy giant is trading at 16-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 8.07% dividend, which probably will continue to be defended. The BofA Securities price target for the shares is $70, while the Wall Street consensus target is just $47.58. Exxon Mobil stock closed Wednesday at $43.14 a share.
Occidental Petroleum
This energy company may be offering investors the best total return potential. 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. Meanwhile, the chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.
The shares have underperformed since the Anadarko acquisition, but the company has 50% of 2020 production hedged, and the integration of Anadarko included planned synergies, noncore asset sales and conglomerate cash flows, providing downside protection through the current commodity weakness.
While the dividend has been effectively eliminated, senior management noted that these actions lower the company’s cash flow break-even level to the low $30s for West Texas Intermediate, which is currently around the $40 level.
BofA Securities has a $28 price target, which is well above the $15.10 consensus target. Occidental Petroleum stock closed Wednesday at $17.28.
Pioneer Natural Resources
Many Wall Street analysts love this stock for a pure crude oil play. Pioneer Natural Resources Co. (NYSE: PXD) operates a modern fleet of more than 24 top performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.Pioneer is a huge player in the Permian Basin and in the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second-largest oil reservoir in the Midland Basin. The company has updated 2020 and 2021 hedging adding $1.2 billion to cash flow estimates over next two years, and it added a new $900 million credit facility that further enhances liquidity. In addition, the Gulf coast marketing makes Pioneer less exposed to widening Midland differentials.
Top analysts believe there is much more room for this industry long stock to run as some forecast Pioneer’s 2021 free cash flow to handily top street estimates generating $800 million or more as the company maintains stable production while continuing to lower capital spending as a result of industry-leading costs (including low interest/other corporate expenses), efficiency gains and service cost deflation.
Investors receive a 2.28% dividend. The $121 BofA Securities target price compares with a $116.89 consensus target. Pioneers Natural Resources stock closed at $96.59 on Wednesday.
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 natural gas liquids.
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 oil major was hit hard in May as it cut its dividend for the first time since World War II, highlighting the scale of the economic damage being done by the coronavirus pandemic. The current dividend for investors is 4%.
BofA Securities has set a $48 price objective. The consensus figure is $43.70, and Royal Dutch Shell stock closed at $32.75.
There is no question that energy is a value trade now, and for sure a very contrarian stance. However, investors that can see past the current environment and the COVID-19 related problems and issues could make some solid money on these top companies that will survive and should continue to prosper in the future.
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