Here are Morgan Stanley’s top oil stock picks.
It has been a brutal year for oil stock investors, but things may be looking brighter as we head into 2021. Morgan Stanley recently upgraded its outlook for oil stocks and said a handful of top names are finally well-positioned to outperform following a decade of lagging the rest of the market. When global economies finally start to normalize in 2021, oil companies will be much leaner and more financially responsible than they have been in the past, and oil stocks could make for some of the best rebound investments. Here are seven oil stocks that Morgan Stanley recommends.
Chevron Corp. (ticker: CVX)
Analyst Devin McDermott says Chevron is his top pick among U.S. integrated oil stocks. In addition to Chevron’s low-risk investments, the company also generates more cash flow than its U.S. oil major peers. The company’s conservative business model and strong balance sheet allow it to play defense during market downturns. At the same time, they also give Chevron the financial flexibility to make opportunistic deals. Chevron has also raised its attractive 6% dividend in each of the past 33 years. Morgan Stanley has an “overweight” rating and $114 price target for CVX stock.
McDermott says there is a long list of things to like about ConocoPhillips, starting with the company’s excellent management team and disciplined approach to investing. He says ConocoPhillips has an attractive portfolio of low-cost properties that can generate both free cash flow and production growth even in less-than-ideal market conditions. ConocoPhillips announced an opportunistic $9.7 billion buyout of Concho Resources (CXO) in October, a deal that McDermott says will further strengthen the company’s asset portfolio. ConocoPhillips also pays a sizable 4.2% dividend. Morgan Stanley has an “overweight” rating and $58 price target for COP stock.
Devon Energy Corp. (DVN)
Devon shares are down about 40% in 2020, and McDermott says the market is not giving the company enough credit for its skillfully executed acquisition of WPX Energy (WPX), announced in September. McDermott says WPX will increase Devon’s impressive cash flow even further while also contributing scale advantages and diversification. Devon shares are trading at a roughly 20% discount to peer group enterprise multiples on a pro forma basis despite an impressive unlevered free cash flow-to-enterprise value yield of around 12%. Devon also has a 2.9% dividend yield. Morgan Stanley has an “overweight” rating and $20 price target for DVN stock.
Diamondback Energy (FANG)
McDermott says Diamondback is highly leveraged to a rebound in West Texas Intermediate crude oil prices. At WTI prices of $50 per barrel, Diamondback’s 14% free cash flow yield is highest among its peer group. WTI prices essentially dropped to zero dollars in April but have since rebounded close to $50. McDermott says Diamondback should significantly reduce its debt levels by the end of 2021, and the company’s pre-dividend breakeven WTI price of $26 is among the lowest of all the oil stocks Morgan Stanley covers. The firm has an “overweight” rating and $65 price target for FANG stock.
Hess Corp. (HES)
McDermott says Hess offers investors a unique combination of long-term growth in Guyana paired with near-term upside opportunities in the U.S. Bakken Shale. Thanks to its evolving portfolio, Hess’ breakeven oil price is on track to drop from more than $70 per barrel in 2019 to less than $40 by 2025. McDermott says this drop will significantly improve Hess’ ability to generate the cash flow needed to navigate future oil cycles. McDermott is also anticipating bullish headlines as the company continues to develop and explore its Guyana properties. Morgan Stanley has an “outperform” rating and $64 price target for HES stock.
Cimarex Energy Co. (XEC)
Oil production cuts and the opening of the Permian Highway pipeline should help support Texas Waha natural gas prices. McDermott says stronger gas prices will help Cimarex Energy more than its Permian competitors given its 40% gas exposure is roughly double its peer average of 20%. Cimarex is on track to generate $2.8 billion in free cash flow over the next five years, which will allow the company to fund its maintenance and pay its 2.3% dividend at crude oil prices as low as $28. Morgan Stanley has an “outperform” rating and $53 price target for XEC stock.
Valero Energy Corp. (VLO)
Valero Energy has the most upside of any of analyst Benny Wong’s oil refining stock picks. Wong says Valero is a pure-play refiner with a high-quality business focused on coastal, complex refining. He is bullish on the company’s coking and hydro-cracking capacity, which he says will serve the company well in an environment of lower crude oil prices. In addition, Valero’s renewable diesel business may be appealing to investors who are focused on environmental, social and corporate governance factors. Valero also pays an attractive 7.2% dividend. Morgan Stanley has an “overweight” rating and $74 price target for VLO stock.
Seven oil stocks that Morgan Stanley gushes over:
— Chevron Corp. (CVX)
— ConocoPhillips (COP)
— Devon Energy Corp. (DVN)
— Diamondback Energy (FANG)
— Hess Corp. (HES)
— Cimarex Energy Co. (XEC)
— Valero Energy Corp. (VLO)
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