Exxon Mobil’s cost cuts and higher oil price may allow it to cover its dividend from cash flow this year.
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Analysts are growing more convinced that the oil rally is here to stay—with a few exceptions—and they’re upgrading some stocks that could still have room to run.
On Thursday, Morgan Stanley upgraded APA (ticker: APA), the parent of Apache, which drills in the U.S. and overseas. The bank’s analysts see potential in other areas—from big names like Exxon Mobil (XOM) to refiners like Valero Energy (VLO). Supportive policies from OPEC and the success of Covid-19 vaccines mean “the stars have aligned for the oil market to tighten even faster than expected,” wrote analyst Devin McDermott.
Morgan Stanley oil strategist Martjin Rats sees West Texas Intermediate oil averaging $57 per barrel in 2021-22, 18% above his prior expectations. Brent crude, meanwhile, is off to its best start to a year since it began trading in 1988. On Thursday, Brent futures were up 2.1% to $69.31 per barrel, and West Texas Intermediate futures were up 2% to $65.74.
McDermott argues that investors should be buying a list of “quality stocks on sale” that include ConocoPhillips (COP), Devon Energy (DVN), and Hess (HES), along with more “beta” names that could show volatility. That would include producers like Diamondback Energy (FANG), Cimarex Energy (XEC), and APA. McDermott just upgraded APA to Buy. He likes it in part because it has substantial overseas holdings, including off the coast of Suriname in South America. That should insulate the company from regulatory changes under the Biden administration that could be restrictive on oil and gas producers.
McDermott’s favorite big oil company is Exxon, which has been getting more praise from analysts lately as the company’s cost cuts and higher oil price may allow it to cover its dividend from cash flow this year.
Refiners sometimes struggle when oil prices rise, because crude is an input cost for them. But McDermott sees gains ahead from some of the big U.S. names. The Texas deep freeze a few weeks ago caused several refineries to shut down temporarily and meant that the market for refined products tightened up more quickly than expected. And pent-up demand may mean that Americans take off on road trips this summer, meaning gasoline will be selling fast.
His favorite names include Valero, Marathon Petroleum (MPC), and Phillips 66 (PSX), which “offer large cap exposure to the refining recovery as well as idiosyncratic elements” like Marathon’s ownership stake in a network of gas stations that it has agreed to sell to 7-Eleven.
Write to Avi Salzman at [email protected]
