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While some feel the recent rally in oil is about to run out of steam, there are solid reasons for investors to stay or get involved. The continued unrest in Venezuela could pressure supply, and the U.S. government is considering sanctions against the country for a recent special election vote that increased the power of President Nicolas Maduro and granted his government the ability to rewrite the constitution. While the government claimed 8 million citizens participated and voted in their victory, third-parties estimated that fewer than 4 million Venezuelans actually participated.
With the potential for Venezuelan sanctions, and Middle East nations vowing to continue to cut their production, it may be a solid time to put some capital toward the energy sector. As we have noted previously, energy was the only negative S&P 500 sector in the first half of 2017, and it is probably offering the best value in a rich market.
We screened the Merrill Lynch energy research universe for large cap companies rated Buy that also pay good dividends. We found four top companies that fit the bill perfectly.
This integrated giant is a safe way for investors looking to stay or get long the energy sector, and it has big Permian Basin exposure. Chevron Corp. (NYSE: CVX) is a U.S.-based integrated oil and gas company with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals.
The company sports a sizable dividend and has a solid place in the sector when it comes to natural gas and liquefied natural gas (LNG). Some on Wall Street estimate the company will have a compound annual growth rate of over 5% for the next five years.
The company reported solid earnings for the second quarter, and analysts have noted that the Permian Basin remains a key source of capital flexibility, and it is a key issue behind their relative preference for Chevron versus some of the other majors. Merrill Lynch analysts noted this in their report:
Permian production is running ahead of guidance with implications on reducing sustaining capital for the broader portfolio. Major project starts, led by Gorgon continue to drive an inflection in free-cash-flow with the cash break-even trending below $50 by 2018.
Chevron shareholders receive a 3.9% dividend. The Merrill Lynch price target for the stock is $120 a share, and the Wall Street consensus price objective is $116.24. Shares closed trading on Tuesday at $110.78.
The world’s largest international integrated oil and gas company remains a top Wall Street energy pick. Exxon Mobil Corp. (NYSE: XOM) explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa, Asia, Australia and Oceania. It 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.
The company posted some messy second-quarter results, and Merrill Lynch feels the stock is still an outstanding place for investors to put money now. The team also cites the ability of the company to maintain and cover the cash dividend at lower oil prices as a key positive, and a recent report said this:
Management could do a better job of highlighting unusual items; on review the second quarter met consensus in contrast with a perceived miss. Analysis of operating cash flow suggests Exxon had a second quarter cash break-even of $35 although capex is running 33% below guidance. With $2 billion of free cash in the second quarter before working capital, the company remains a low risk strategic route to reweighting energy portfolios.
Shareholders receive a 3.85% dividend. Merrill Lynch has a $90 price objective, while the consensus target is $83.03. The stock closed Tuesday at $80.17.
This top company has one of the highest yielding domestic stocks in the energy sector. 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. The chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.
With a rock-solid balance sheet and a commitment to dividend coverage, investors look safe for now. Occidental has paid quarterly cash dividends continuously since 1975, and it has increased its dividend each year since 2002. The company reported solid earnings and recently raised the dividend. The analysts said this in a recent report:
Occidentals recent dividend increase is a small but significant signal of management’s commitment to its dividend growth strategy. The dividend is covered by cash flow bricks. Permian growth currently funded by asset sales, looks self-funding by end 2018. At $50 oil, the company grows at 5% and fully covers a current 5% yield – the highest of the US oils, with room for growth post 2018.
Shareholders receive a 5.0% dividend. The $70 Merrill Lynch price target compares with a consensus target of $65.47. The stock closed trading Tuesday at $61.53.24/7 Wall St.
RBC Oilfield Services Stocks to Buy With Up to 100% and More Upside Potential
Royal Dutch Shell
This company has survived the plunge in oil pricing as good as or better than any other major integrated stock. 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 NGLs.
Royal Dutch 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.
The company generated 3.83 billion cubic feet per day of natural gas in the second quarter of this year from its integrated gas operations and another 6.40 billion cubic feet per day from its upstream operations. The company posted solid results and the analysts noted this:
Shell has organically covered the total cost of its dividend at $50 barrel over the last month – underlying Free-cash-flow accretion from the BG Group plc takeover last year. With gearing down from 29% to 25% in the first half of 2017 already, the company remains on track to see gearing drop below 20% next year.
Investors receive a 5.63% dividend. The Merrill Lynch price objective is $62. The consensus target is $62.09, and the stock closed Tuesday at $56.80.
AUGUST NEWSLETTER 2
CATERPILLAR STOCK UP
Shares of Caterpillar Inc. shot up to the highest level in over five years, as the farming and mining equipment maker’s results confirmed what investors seemed to already know, that business had bottomed a while ago.The company CAT, -0.13% reported early Tuesday earnings and revenue that beat expectations and raised its outlook. But more important, revenue increased from the year ago period for the second straight quarter to officially mark the beginning of a new sales expansion, as well as the end of a nine-quarter sales recession.The rule of thumb is the economy enters an official recession after gross domestic product declines for two consecutive quarters, while an expansion returns after two straight quarters of growth. Caterpillar’s earnings-per-share recession had officially ended last quarter.
With the company raising the midpoint of its 2017 revenue guidance by $3.5 billion to $43 billion, and its adjusted EPS outlook increased to $5.00 from $3.75, it seems management is also starting to believe the bottom has been seen.Given our performance in the first half of the year and current quotation and ordering activity, we are confident in raising our full-year 2017 outlook,” said Chief Executive Jim Umpleby.
This was a “marked improvement” in terms of tone and results from the end of last year, “as the normalization cycle in [the] heavy machinery space continues to roll,” wrote analyst Maxim Sytchev at National Bank of Canada in a note to clients.The stock jumped $6.36, or 5.9%, to close at the highest level since Feb. 28, 2012. The price rally added about 44 points to the Dow Jones Industrial AverageDJIA, +0.28% which climbed 100 points. See Market Snapshot.Analyst Jim Corridore at CFRA, which acquired S&P Global’s equity and fund-research business last year, upgraded Caterpillar to buy from hold, and boosted his stock price target to $132 from $112. “With fundamentals improving across many of CAT’s business units and geographies, we have become more positive on the shares,” Corridore said.
Kudos to BMO Capital analyst Joel Tiss, who turned bullish on the stock on Monday, a day before results were released.NBC’s Sytchev pointed out an “interesting chart” from Caterpillar’s second-quarter slideshow that he believes the company released for the first time to show that “large mining truck average service hours per month have moved materially above the five-year average”:“With the sale of large mining gear 75% below the prior peak, we still have a lot of room to run,” Sytchev wrote.Caterpillar Chief Financial Officer Bradley Halverson said on the post-earnings call with analysts that the company had a “great” first half of the year, with sales rising in all three primary product segments, led by the construction business. But it could still get a lot better, especially if President Donald Trump follows through with his promises to give a big boost to infrastructure spending.“The United States is in need of infrastructure investment,” Halverson said, according to a transcript provided by FactSet. “Passage of a federal infrastructure bill would be positive for our country and our business.”Investors seemed to believe that Caterpillar’s business had already bottomed, as the stock had rocketed 16.6% year to date through Monday, while the SPDR Industrial Select Sector exchange-traded fund XLI, -0.13% had climbed 10.3% and the Dow had rallied 8.9%. With the latest results, now they can prove it.
According to a report from the Federal Reserve Bank of New York, business activity grew only modestly in the state of New York in July. Companies responding to the July 2017 Empire State Manufacturing Survey delivered a 10 point drop in the growth rate, with the general business conditions index falling to 9.8 in July from 19.8 in June. The number is not only below the Bloomberg consensus of 15.0, but it is lower than the range of 10.0 to 18.3 from all the economists polled by Econoday.
There are some larger national issues that may explain this drop in growth, but the weakness was also felt in many of the individual areas. Thirty percent of the respondents reported that conditions had improved over the month, and twenty percent of respondents reported that conditions had worsened in July. Indexes assessing the six-month outlook (see below) suggested that firms remained positive about future conditions, albeit with a less optimistic tone than in June.The new orders index fell by 5 points to 13.3 and the shipments index fell by 12 points to 10.5, which suggests that orders and shipments continued to grow but at a slower pace than in June. Also, according to the New York Fed, delivery times (at 4.7) continued to lengthen at the same time that inventory levels were fairly steady, falling to 2.4 in July.
On a national level there are continuing reports of a tightening labor market, but the New York State region’s labor market indicators pointed to a small increase in employment, while there was no change in hours worked. The Fed report said:The index for number of employees fell for a third consecutive month, though it remained positive at 3.9—a sign that employment was growing, but not as rapidly as in earlier months.Input prices and selling prices were up by roughly the same amount as in June. The Fed report said:The prices paid index was little changed at 21.3, as was the prices received index at 11.0, suggesting that the pace of price increases held steady.Perhaps the most important issue to consider now is the economic outlook. This is generally a six-month outlook and is in theory what business executives are basing their business decisions around. On this front, the New York Fed’s outlook component of the report continued to show some weakness. It said:The index for future business conditions fell seven points to 34.9, and the index for future new orders fell nine points to 33.4. Employment was expected to increase modestly, though the average workweek was expected to decline slightly. The capital expenditures index slipped to 15.0, and the technology spending index was 11.8.
All in all, this is an economic report that should be viewed as showing growth that is much more modest than robust. It also just one regional report, rather than a live national economic snapshot.As a reminder of how this survey is conducted, it is sent out by the New York Federal Reserve Bank on the first day of each month to the same pool of roughly 200 CEOs or presidents of manufacturing companies in New York State. The survey’s numbers are generally based on about 100 responses that are received.