While many on Wall Street are predicting a possible slide in West Texas Intermediate (WTI) pricing for next year, the energy team at Merrill Lynch is reasonably bullish. Some firms see a fall to as low as $70 a barrel. The Merrill Lynch median target for next year is a very solid $92.
In a new research report, the Merrill Lynch analysts fully acknowledge that there is a downside risk to their price. Their theme for 2014 is to focus on quality names with near-term catalysts, with a preference on individual drilling execution into first-quarter earnings, versus solely net asset value growth prospects.
Here are the top energy stocks to buy for 2014 according to Merrill Lynch.
Hess Corp. (HES) tops the list for exploration and production names. The company is the second largest producer in the Bakken region. However, unlike many other operators in the region, Hess's Bakken assets make up less than a quarter of the company's production and reserves. Investors are paid a 1.2% dividend. The Merrill Lynch price target for the stock is $115 and is the highest on Wall Street. The Thomson/First Call estimate is set at $90. Hess closed Thursday at $78.56.
Occidental Petroleum Corp. (OXY) is another top domestic exploration and production name on the Merrill Lynch list for 2014. The company may be looking to sell a stake in its Middle East and North Africa operations. With an estimated value of $22 billion, the assets are located in the United Arab Emirates, Qatar, Oman, Bahrain, Yemen, Libya and Iraq. Some analysts believe that selling an $8 billion to $10 billion stake would raise needed cash for debt reduction and share repurchases. Shareholders are paid a 2.6% dividend. The Merrill Lynch price target for the stock is $130, and the consensus is at $109. Occidental closed Thursday at $91.24.
Pioneer Natural Resources Co. (PXD) is a huge player in the Permian basin in Texas, and it has been a huge winner for shareholders this year. Rumors have swirled the last half of this year that one of the big integrateds may target Pioneer as a takeover candidate. It would be a very expensive deal as the company's market cap is almost 25 billion. The Merrill Lynch price target for the stock is a gigantic $275. The consensus number is lower at $233.75. Pioneer closed Thursday at $179.08.
Whiting Petroleum Corp. (WLL) is another large player in the Bakken shale, and it is ranked as the third largest producer there. Over 2013, Whiting sold off significant amounts of its assets that are not in the Bakken, including its Postle Field enhanced oil recovery assets for $817 million and its acreage in the Delaware Basin for $150 million. The company in turn is using the cash from the sales and deploying more assets into the higher-return Bakken. The Merrill Lynch price target for the stock is $79, and the consensus figure is at $77.50. Whiting closed Thursday at $59.10.
Concho Resources Inc. (CXO) is another big player in the Permian Basin. The company recently announced an accelerated growth plan that will see it double total production by 2016. That works out to about a 25% annualized growth rate over the same three-year period. The Merrill Lynch price target for the stock is $129, the same as the consensus price objective. Concho closed Thursday at $99.78.
Cabot Oil & Gas Corp. (COG) rounds out the top exploration and production names for 2014 at Merrill Lynch. In addition to a very positive recent update from the Marcellus operations, the company also announced its fourth-quarter share repurchase activities. Cabot has repurchased around 4.8 million shares that will be financed by the Marmaton and West Texas asset sales announced earlier. The Merrill Lynch price target is set at $47. The consensus number is posted at $45. Cabot closed Thursday at $36.57.
Halliburton Co. (HAL) is a top oil field services name for 2014. The company is a top provider of products and services that are used in the energy industry for exploration, development and production of oil and natural gas. It serves major oil and natural gas companies throughout the world, operating in 80 countries. Investors are paid a 1.1% dividend. Merrill Lynch has a price target of $69, and the consensus is at $64.50. Halliburton closed Thursday at $49.59.
Schlumberger Ltd. (SLB) is another mega cap oil field services stock to buy for 2014. Strong offshore drilling activity combined with a seasonal rebound in Western Canadian activity has driven Schlumberger's recent growth. Going into 2014, Schlumberger sees five markets providing strong growth: Russia, Sub-Saharan Africa, the Middle East, China and Australia. Shareholders are paid a 1.4% dividend. The Merrill Lynch price target is $111. The consensus is slightly lower at $110. Schlumberger ended Thursday at $86.96.
Merrill Lynch is sticking with the strongest names for 2014, and it makes sense. Because there is so much speculation about the actual direction of crude pricing, going with the biggest and most liquid names is a solid portfolio strategy. While world supplies may continue to increase, especially in the United States, world demand should increase as well next year.