There's value within the energy sector.
Slowing global economic growth and demand concerns have WTI crude oil prices down more than 20% from a year ago. Oil investors were hoping for much higher prices in 2019 than the mid $50s per barrel, and the energy sector has once again lagged the market significantly this year. Bank of America analyst Doug Leggate recently lowered his oil price forecast for the second half of 2019 from $68 per barrel to $63, but Leggate says there are still plenty of value opportunities among oil stocks today. Here are nine oil stocks Leggate recommends.
Exxon Mobil Corp. (ticker: XOM)
Leggate says Exxon has the strongest project pipeline of any oil major, including developments in Guyana and the U.S. Permian Basin. Exxon management has a five-year plan in place to double free cash flow by 2025. Leggate says investors can enjoy the stock's 4.5% dividend while they wait for that cash flow to come rolling in. Exxon is his top stock pick among oil majors, and he expects Permian production to reach 1 million barrels of oil equivalent per day by 2024. Bank of America has a "buy" rating and $100 price target for XOM stock.
Noble Energy (NBL)
While many oil investors await better market conditions and/or a positive shift in investor sentiment, Noble has a major company-specific catalyst coming at the end of 2019. The company's Leviathan project is expected to be up and running full throttle in 2020. Leggate says Noble's Israel property differentiates the stock from its peer group and will create a more than $1 billion inflection in free cash flow by the end of the year. Noble recently raised its dividend by 9% as well. Bank of America has a "buy" rating and $41 price target for NBL stock.
Occidental Petroleum (OXY)
Leggate says the acquisition of Anadarko Petroleum Corp. (APC) will be transformational for Occidental. In addition, he says the company's 6.5% dividend is one of the most attractive yields in the energy sector. Leggate is optimistic after speaking with Occidental management that the company will be able to realize cost synergies more quickly than the market anticipates. Occidental took on a potentially concerning amount of leverage with the buyout, but Leggate says management has already begun asset sales to repair its balance sheet. Bank of America has a "buy" rating and $78 price target for OXY stock.
Hess Corp. (HES)
For investors looking for a differentiated investment story within the oil group, Leggate says Hess is the best play thanks to its joint development of Guyana's Stabroek block. Up to this point, 13 of 15 exploration wells within the block have yielded positive results, and Leggate says there is a multi-billion barrel upside to Hess' current estimated resource base in the region. He says Hess is positioned to grow cash flow in coming years even in the event of stress-case level oil prices. Bank of America has a "buy" rating and $75 price target for HES stock.
Continental Resources (CLR)
Leggate says Continental Resources is unique among its peer group due to the magnitude of its future free cash flow. On June 3, the company announced its first quarterly dividend to go along with its $1 billion stock buyback program. The buyback program is relatively aggressive for a company with a market cap below $15 billion and is expected to be completed by the end of the year. By that time, Leggate says Continental will likely also have reduced net debt to $5 billion as well. Bank of America has a "buy" rating and $60 price target for CLR stock.
Concho Resources (CXO)
Leggate is a big fan of Concho's "Shale 2.0" plan, which involves spending discipline, moderate growth, a conservative oil price outlook and more capital returns to investors. Bank of America is projecting production growth to drop from 25.7% in 2019 to 10% in 2020. However, Leggate says from 2020 through 2023, Concho should generate a total of $5.8 billion in free cash flow, roughly equivalent to 30% of its current market cap. Bank of America has a "buy" rating and $145 price target for CXO stock.
Leggate says Cimarex may be positioned for a steep ramp in production in the second half of 2019 that could put the company at the high end of its full-year oil production guidance. He says Cimarex has high-quality acreage and made the right strategic call by shifting its focus to the Permian Basin. Bank of America is calling for 21% production growth this year and another 5% growth in 2020. Leggate says Cimarex makes it an extremely attractive potential buyout target as well. Bank of America has a "buy" rating and $87 price target for XEC stock.
Devon Energy Corp. (DVN)
Leggate says the sum-of-the-parts valuation of the Devon portfolio following the announced $2.8 billion sale of its Candian oil sands property suggests the stock is trading at one of the steepest discounts in the energy sector. Even in a weak oil price environment, Leggate says Devon's restructuring program could serve as a catalyst for relative outperformance in coming quarters. Devon also plans to cut costs by $780 million, a move that Leggate says should create about $5 per share in value for investors. Bank of America has a "buy" rating and $40 price target for DVN stock.
Pioneer Natural Resources Co. (PXD)
Pioneer has taken several steps to improve its long-term investment outlook, according to Leggate. First, Pioneer has simplified its investment strategy, including a planned exit from Eagle Ford and the potential sale of non-core Permian assets. In addition, Pioneer has begun to prioritize free cash flow over production growth. Leggate estimates Pioneer will generate $5.5 billion in free cash flow from 2020 to 2023. Finally, Pioneer plans to more than double its current 0.4% dividend yield. Bank of America has a "buy" rating and $190 price target for PXD stock.
Oil stocks to buy in a down energy market.
-- Exxon Mobil Corp. (XOM)
-- Noble Energy (NBL)
-- Occidental Petroleum (OXY)
-- Hess Corp. (HES)
-- Continental Resources (CLR)
-- Concho Resources (CXO)
-- Cimarex (XEC)
-- Devon Energy Corp. (DVN)
-- Pioneer Natural Resources Co. (PXD)