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J.P. Morgan Sees Solid Earnings from Big Integrated Oil Stocks

Lee Jackson

The big North American integrated oil and major oil-producing stocks will begin to release their quarterly results on October 24. The research team at J.P. Morgan Chase & Co. (JPM) are forecasting an 8% increase in earnings for the integrated oils and major producers, relative to results posted in the second quarter of 2013, and a 9% increase relative to year-ago levels. They also believe that investor sentiment heading into the earnings season remains fairly positive, given 1) strong crude oil prices, 2) excitement around major restructurings and ongoing asset divestiture programs, and 3) some optimism about the long-term value of Canadian oil production as transportation solutions in the region unfold.

While West Texas Intermediate crude has remained solidly over $100 a barrel for some time, some firms on Wall Street believe the price of oil can fall as low as $90 by the end of the year. We wrote about that possibility recently, when we highlighted stocks that could benefit if oil sold off. Even with that possibility, J.P. Morgan oil analysts remain very positive on the sector. Here are the stocks they are focusing on to buy before earnings start later this week.

ConocoPhillips (COP) is a top name to buy and a great total return play for investors. ConocoPhillips has substantial acreage in the booming Permian Basin in West Texas. Investors are paid a solid 3.8% dividend. The J.P. Morgan price target for the stock is posted at $69 and may be poised to be raised. The Thomson/First Call estimate is at $70, and Conoco closed Friday at $73.43.

Hess Corp. (HES) has raised Wall Street expectations and confidence as a strong risk-reward play, led by a step up in activity in Bakken Shale and potential to buy back 20% to 30% of shares, a move that could have a huge price impact. Investors are paid a 1.2% dividend. The J.P. Morgan price target for the stock is $86, and the consensus target is at $87. Hess closed Friday at $84.06.

Marathon Oil Corp. (MRO) is an independent oil and gas producer providing liquids-driven growth with additional natural gas activities. Marathon has proven reserves of around 2 billion barrels of oil equivalent (BOE), with a potential reserve replacement above 100% (potential resources 2.8 billion BOE). In addition, production growth in the lower 48 onshore United States has increased 150% over the past two years with impressive quarterly growth rates. Investors receive a 2% dividend. The J.P. Morgan price objective for the stock is $35, while the consensus is much higher at $42. Marathon closed Friday at $35.28.

Occidental Petroleum Corp. (OXY) is expected to announce more on its spin-off of Occidental/California at the Merrill Lynch energy conference in November, which we will be covering. There could be substantial cash returned to investors from the company via the spin-off and other transactions. Investors are paid a solid 2.7% dividend. The J.P. Morgan price target for the stock is $104. The consensus target is set at $107, and Occidental close on Friday at $98.29.

Suncor Energy Inc. (SU) is a top Canadian oil producer and a major player in the vast oil sands in Canada. Suncor Energy has 23.5 billion BOE in contingent resources and 6.9 billion BOE of proved plus probable reserves. At the 2012 production rate of 549,100 BOE per day, these reserves are enough to last for more than 34 years, which is more than some of the oil majors. Suncor is also one of the few Canadian oil companies that sells the majority of its oil at the higher Brent prices. Investors are paid a 2.1% dividend. The J.P. Morgan price target for the stock is set at $41, while the consensus is at $43.27. Suncor closed Friday at $36.65.

Cenovus Energy Inc. (CVE) is another top oil producer and oil sands player based in Canada. The company engages in the development, production and marketing of bitumen, crude oil, natural gas and natural gas liquids (NGLs) in Canada with refining operations in the United States. Investors are paid a solid 3.1% dividend. J.P. Morgan has a $42 price target for the stock, and the consensus stands at $40. Cenovus closed Friday at $30.15.

The analysts at J.P. Morgan are not as enthusiastic about the prospects for some of the other high-profile integrated stocks. Both Chevron Corp. (CVX) and Exxon Mobil Corp. (XOM) are Neutral-rated. While shares of Chevron appear fully valued, Exxon has guided down the amount for share buybacks substantially. Buybacks have contributed to share stability over the years, and the concern is a lower figure may hurt share pricing going forward with no major catalysts expected.

Even with increased domestic production, and the possibility that at some point the United States will be exporting oil, emerging market consumption remains the wild card. If world growth reignites past current levels, oil demand could stay strong for many years to come.