While 2013 was a solid year for the energy sector, it could not keep pace with the overall blistering rise in the S&P. The energy team at Credit Suisse is positive on the year ahead, but they see some clear changes in the overall picture. The biggest one will be the overall volume of oil available. They are think that investing in energy may be volatile in 2014, but they see the top stocks in the sector going higher from current levels.
The Credit Suisse analysts have focused in on four important themes that may affect the energy sector in 2014. Their top stocks to buy reflect a close eye on these themes and the changing landscape in the world.
- In 2014, oil markets may need to adjust to the wildcard of rising volumes out of Libya, Iran and Iraq. Any improvement in Middle East relations could up the ante in terms of supply.
- The U.S. service market is oversupplied at the low end, though high-tech providers can generate good terms. The top players should be able to remain on top.
- The majors are still one year away from a demonstrable payoff from their $250 billion investment programs.
- Big winners from 2013 are fully valued and investors may need to shift to other energy names. The analysts specifically mention the master limited partnerships and the refining stocks.
Here are the top energy stocks to buy from Credit Suisse for 2014.
Chevron Corp. (CVX) is the only major domestic integrated on the Credit Suisse list. The company has benefited greatly in 2013 from record oil and natural gas production in the United States. The company may be looking to expand domestic production by acquiring one of the top exploration and production stocks. Investors are paid a solid 3.4% dividend. The Credit Suisse price target is $140. The Thomson/First Call estimate is $135. Chevron closed Thursday at $123.22.
Phillips 66 (PSX) is a refiner that the Credit Suisse team is still very positive on. The Department of Defense declared this week that it granted a $292 million contract to Phillips 66 for aviation turbine fuel or jet fuel. Under this contract, Phillips 66 is to deliver jet fuel for 14 months, until April 30, 2015. According to the Pentagon, Phillips 66 knocked down 25 other firms for this job. Shareholders are paid a 2.2% dividend. The Credit Suisse price target for the stock is $80, and the consensus is at $79.50. Phillips 66 closed Thursday at $72.92.
Tesoro Corp. (TSO) is the only other refining name to make the list. The company operates in two segments, Refining and Retail. The Refining segment refines crude oil and other feed stocks into transportation fuels, such as gasoline, gasoline blend stocks, jet fuel and diesel fuel, as well as other products, including heavy fuel oils, liquefied petroleum gas, petroleum coke and asphalt. The Retail segment sells gasoline, diesel fuel and convenience store items through company-operated retail stations and third-party branded dealers and distributors in the western United States. It operated approximately 2,200 retail stations, including approximately 595 company-operated stations under the Tesoro, Shell, ARCO and USA Gasoline brands. Investors receive a 1.8% dividend. Credit Suisse has a $74 target, and the consensus is posted lower at $66. Tesoro closed Thursday at $56.39.
Exploration and production names are in the subsector that has the heaviest weighting on the Credit Suisse top Picks for 2014. We sorted this list for the stocks with the largest upside potential to their price target. Plus, all three have been considered takeover candidates at one point or another in 2013.
PDC Energy Inc. (PDCE) caught an upgrade to Buy at Stifel recently and is a top name at Credit Suisse. Looking forward to 2014, there will be a lot more activity in the southern Utica shale, with both PDC Energy and Antero Resources leading the way. If results revert back to the mean, PDC could see shares recover rather quickly from their recent sell-off. PDC has also been a rumored takeover candidate. Credit Suisse has an $83 price target, and the consensus is much lower at $72. PDC closed Thursday at $52.05. A move to the target would be a 58% gain for shareholders.
Diamondback Energy Inc. (FANG) is a top Permian basin name to buy at Credit Suisse for 2014. Diamondback has about 85% of its reserves in liquids, with 65% oil and 20% natural gas liquids. This has caused the average well to produce between 80% and 90% liquids, which results in high margins. This is another top name that could be a potential takeover candidate, given its high-quality assets in West Texas. The Credit Suisse price target is $69, while the consensus figure stands at $65. Diamondback closed Thursday at $49.80. A trade to the target represents almost a 45% move.
EOG Resources Inc. (EOG) was named a takeover candidate and called the best oil stock in America last week by none other than CNBC's Jim Cramer. EOG Resources is fueling record oil and natural gas production that is revolutionizing the U.S. energy position. Its role in the three biggest tight oil plays makes it a huge player in the exploration and production field. EOG Resources would be a huge acquisition for even the biggest of big oil companies. That said, there is a lot to like about EOG, as it is the top producer in the Eagle Ford Shale, and it has solid positions in both the Bakken and Permian Basin. Investors are paid a tiny 0.5% dividend. The Credit Suisse price target for the stock is posted at $210, and the consensus figure is $195. EOG closed Thursday at $165.33.
Halliburton Co. (HAL) is the only domestic oil field services company to make the Credit Suisse list for 2014. The company is making a strong comeback in the North American drilling market, from where it derives more than half of its revenue. It has launched a number of programs to enhance the well drilling process for oil field operators. Its competitive cost structure keeps it in the game for almost any project. Investors are paid a 1.2% dividend. Credit Suisse has a $70 price target on the stock, and the consensus number is at $63. Halliburton closed Thursday at $49.42.
Rowan Companies PLC (RDC) is the only offshore driller to make the Credit Suisse list. Rowan spent the past two years clawing back the destructive effects of the Great Recession and the Macondo disaster, first by shifting mix away from the ravaged Gulf of Mexico and then by growing into the popular Southeast Asia market. Now, with new drillships in place, it should roughly double its EBITDA in two years. Credit Suisse has a $45 price objective for the stock. The consensus is at $42. Rowan closed Thursday at $32.94.
With the threat of more supply hanging over the market, Wall Street firms have narrowed their list of stocks to those that can truly have top upside gains in 2014. The one wild card for 2014 is domestic and international economic growth. Should growth exceed current expectations, energy demand will increase as well. That could prove to be a huge positive for investors.