With reports surfacing Wednesday that the price of U.S. oil is on the rise, I've begun to look for energy players that are poised to capitalize on the price increase. With the Dow Jones Industrial average and the S&P soaring to record highs, we're approaching the point where it's time to protect some gains.
And with word that Federal regulators are exploring whether to lift a longstanding ban on crude oil exports, energy companies, particularly those that pay a strong yield, should become extremely attractive.
Exxon Mobil (NYSE:XOM) - Rated Buy with a $115 price target
The first name that comes to mind is Exxon Mobil. This should not have come as a surprise. Exxon, which pays a strong yield at 2.70%, is the world's largest oil company by market cap. The stock closed Wednesday at $102.29, down 0.07%. But the shares are up 2.5% year-to-date.
Being one of the largest companies in the business of gas, refining, and chemicals, Exxon Mobil doesn't always get the credit it deserves. Not only has this international crude oil and natural gas company been consistently profitable, but Exxon has a strong track record for returning value to shareholders. Despite this strong reputation, investors still appear unsure of what to make of the company's earnings prospects, given how challenging production growth has been in North America.
Management answered these fears with a strong first-quarter report. The company reported first-quarter revenue of $106.8 billion and net income of $9.1 billion, or $2.10 per share. The company beat estimates of $1.88 per share.
Unlike previous quarters, management didn't have to put up a struggle to turn oil into cash. During the quarter, the company produced an average of 4.1 million barrels of oil equivalent per day. Leading the charge was Exxon's upstream business, which delivered earnings of $7.8 billion. This result was boosted by $746 million due to higher natural gas prices.
To that end, investors have to trust that management will figure out ways to capitalize on Wednesday's report of higher U.S. oil prices. With the stock hovering around $102, I'm going to raise my price target by $5, and project fair value to reach $115 on the basis of the company's quicker pace of recovery, and positive effects of regulatory decisions.
Chevron (NYSE:CVX) - Rated Buy with a $135 price target
As with Exxon, Chevron has had its own challenges with production growth. Since Chevron shares reached a high of $126.43 last September, the shares have fallen more than 6%. The stock closed Wednesday at $126.42, up 0.45%, but the shares are up less than 1% year-to-date. And this makes it an excellent opportunity to buy.
Chevron, which is the world's second-largest oil company, has had a tough time convincing the Street that it had not forgotten how to find oil. Management has done a decent job of growing where it can. And with Chevron's rich pipeline of growth projects, which - I believe - should maintain long-term higher production levels, investors looking for a solid play in energy should consider Chevron following this recent dip.
First-quarter results weren't breathtaking. But there were no surprises, either. The company reported first-quarter revenue of $53.27 billion, which fell 6.3% year-over-year. Analysts were looking for revenue of $57 billion. But last month, Chevron management had warned that production would drop year-over-year due to severe weather, which caused significant downtime in (among other areas) the U.S., Canada and Kazakhstan.
But here's the thing; despite the revenue miss, Chevron reported earnings of $4.51 billion, or $2.36 a share. And even with the lower volumes, Chevron's management highlighted a number of major initiatives scheduled to come online during the next few years. These include the liquefied natural gas [LNG] project in Angola, the deepwater project in Nigeria, the Caesar/Tonga project in the deepwater Gulf of Mexico, and the Chirag development in the Caspian Sea.
From my vantage point, this makes Chevron's outlook even more promising than Exxon's. Investors have to believe in management's ability to use capital wisely. These projects are not cheap. But with the company having boosted its dividend by 7% to $1.07 per share, Chevron is not lacking in confidence to return value to shareholders, which makes it one of the best no-brainers on the market.
BP plc (NYSE:BP) - Rated Buy with a $60 price target
With BP stock trading at around $50, which is $10 lower than analysts' highest target of $60, BP presents a strong buying opportunity for current shareholders to add to existing positions, or for those on the sidelines looking for exposure in energy. The stock is up 6% year-to-date.
Over the past couple of years, not only has the company done a remarkable job recovering from the 2010 Gulf of Mexico rig explosion, during that span, management has figured out ways to raise the company's profits and reward shareholders with strong dividends.
Chief Executive Bob Dudley has never lost focus on the company's operations. We've talked about the production struggles from Exxon and Chevron. But it seems BP has been shielded with relatively better operations. And the company's first-quarter earnings results suggested that more gains and outperformance should be expected.
First-quarter revenue arrived at $92.98 billion. The company's underlying replacement, which is an oil industry measure for earnings, came in at $3.2 billion, which was a 14% jump sequentially. This resulted in earnings of $1.05 per share. While this figure is not as strong when compared to last year, the figure was also adversely impacted by higher non-cash costs and divestitures.
Still, the company generated roughly $9 billion in net cash from operations, a remarkable jump of 104% year-over-year. Management also showed the confidence to announce an 8.3% increase in its dividend to 9.75 cents per share, which will be payable in June. This means that BP will approach the end of its current $8 billion buyback program. That the company also plans to divest $10 billion by the end of 2015 means that shareholders will continue to see cash benefits.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: The article has been written by Wall Street Playbook's energy sector analyst. Wall Street Playbook is not receiving compensation for it (other than from Seeking Alpha). Wall Street Playbook has no business relationship with any company whose stock is mentioned in this article.