Despite a huge rally off the summer lows, sentiment for the energy sector still remains very weak, and oil prices have been in one of the most volatile periods in the last ten years. While all of that seems counter intuitive given the price increase, most of the top portfolio managers have been underweight energy until just recently. Toss in the current backwardation, which is a state when spot prices are higher than prices for futures contracts, creating a downward-sloping curve for futures prices, and the picture remains cloudy.
According to a new research report from Merrill Lynch and their outstanding energy analyst Doug Leggate, the sector will enjoy an earnings tailwind heading into 2018.
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While energy has suffered at the hands of unprecedented commodity risk, the gap between a sector discounting $48 oil on average is no longer a function of a subjective commodity outlook, given that oil is already above our base case. While sustainability of the current oil curve remains central to the debate, three years of underinvestment and continued demand strength leads us to maintain the ‘stale’ constructive sector view.
The Merrill Lynch team has seven top ideas. We focus on the four that have the highest upside potential.
This top company is still down a stunning 30% since January and is an outstanding Buy at current levels. Anadarko Petroleum Corporation (APC) operates through three segments: Oil and Gas Exploration and Production; Midstream; and Marketing. The Oil and Gas Exploration and Production segment explores for and produces natural gas, oil, condensate, and natural gas liquids (NGLs).
The company reported third quarter numbers that missed on what they said was another round of exploration charges related to prior period write offs; EBITDA did beat consensus. Compounding the messy quarter, the company lowered the fourth quarter production guidance citing some storm impact, but predominantly asset sales.
Looking past the current issues, momentum from focused oil growth into 2018 remains intact, with stock buybacks set to accelerate in this quarter which should push the shares higher. Top Wall Street analysts forecast Anadarko generating aggregate free cash flow of $2.1 billion in 2018-2019.
Shareholders are paid a small 0.4% dividend. Merrill Lynch has a huge $80 price target. The Wall Street consensus is at $61.89. The shares closed Friday at $48.15.
This company may offer investors solid upside potential and could finally start growing the dividend again. ConocoPhillips (COP) explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids worldwide. Its 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 Conoco can accelerate growth from a reloaded portfolio depth in the Bakken and Eagle Ford, with visibility on future growth from a sizable position in the Permian.
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The company reported much improved third-quarter 2017 earnings of $0.4 billion, or $0.34 per share, compared with a third-quarter 2016 loss of $1.0 billion, or $0.84 per share. Excluding special items, third-quarter 2017 adjusted earnings were $0.2 billion, or $0.16 per share, compared with a third-quarter 2016 adjusted loss of $0.8 billion, or $0.66 per share.
Conoco Investors are paid a 2.1% dividend. The Merrill Lynch price target on the company is $63. The Wall Street consensus price target for the stock is posted lower at $56.52. Conoco closed Friday at $50.13.
This company has a very large exposure to crude oil. Continental Resources, Inc. (CLR) is primarily a producer of onshore US oil. Continental has positioned itself in two growing hydrocarbon discoveries in the US: 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.
Continental Resources posted solid third quarter results and the analysts said this when the company reported:
Adjusted earnings per share of $0.09 beat consensus and Merrill Lynch estimates of $0.05 on higher oil realizations fueled by improved Bakken differentials. Strong fourth quarter guidance versus consensus leaves strong operational momentum headed into 2018 and implies 33% exit rate growth versus the fourth quarter of 2016.
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The Merrill Lynch price target was recently raised to $53 from $46, and that compares with the Wall Street consensus target of $49.36. The shares closed Friday at $45.92.
Pioneer Natural Resources
This is a stock many Wall Street analysts love for a pure crude oil play. Pioneer Natural Resources (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 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. With a stellar balance sheet Pioneer is poised to remain a top player in the Permian as it is expecting to deliver solid production growth in 2018 and beyond.
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Pioneer has continued to pursue a comprehensive Midland Basin infrastructure plan to accompany development including water, tank batteries/saltwater disposal (SWD), sand, and gas processing. These investments have helped lower the company's direct cash operating costs with ongoing efficiency gains offering further opportunities for compression.
Pioneer investors are paid a tiny 0.05% dividend. The Merrill Lynch price target is $200 and the consensus price figure is set at $187.78. Pioneer closed trading on Friday at $152.22.
Four top energy companies to own for 2018 that all have big upside potential to the Merrill Lynch price targets. All make good additions to portfolios that need to initiate or add energy exposure.