Are energy stocks back in play after MKM recommends Chevron?


MKM analysts began their coverage of Chevron’s stock with an optimistic stance.
One investment professional argued that a 3% investment in energy stocks was reasonable.
Another investment professional says that energy shares move in parallel and any high quality name can be bought.

The analyst of MKM Partners recommended clients to take advantage of a “cyclically opportunistic” stock and buy Chevron Corporation (NYSE: CVX). Does this mean a greater opportunity for other global energy companies?

The bullish details

MKM Partners’ analyst John Gerdes began his coverage of Chevron’s stock with a buy rating and believes the stock has upside potential up to $121 per share. The analyst justified his optimistic stance by stating that the company is expected to generate a free cash flow of $1.3 billion this year and almost tenfold that to $10.1 billion next year.

Meanwhile, Chevron’s acquisition of Noble Energy will provide the company with additional assets worldwide. The end result could be annual pre-tax acquisition synergies of approximately $300 million and additional value of $2.7 billion.

You do not have to buy today, but you should

Jim Lebenthal is a partner at Cerity and a regular “halftime report” for CNBC. As a Chevron shareholder, he said that today was not necessarily “the day” to buy energy shares. But investors would be well advised to do so at some point – albeit to some extent.

Energy stocks make up about 3% of the S&P 500 index, so it would be reasonable for individuals to invest 3% in energy stocks, he said. Chevron could be bought, he said, because it is a “high-quality name”, as it has the strongest balance sheet, which enables it to “pick up the pieces”.

The stock also offers investors a dividend yield of more than 7% at current levels.

“Maybe you want 4% [to be exposed to energy], maybe you want 2%,” he said. “Look – whatever your energy exposure is, it has to include chevron, is my opinion”.

You have the choice

Energy shares are traded in tandem, so it makes no difference whether investors stay with Chevron or with EOG Resources Inc (NYSE: EOG) or Schlumberger NV (NYSE: SLB), added Amy Raskin, CIO of Chevy Chase Trust, to the discussion.

Most energy stocks have all fallen about the same amount and it is hard to imagine that there is more room for further losses, she said. By comparison, the energy sector accounted for 16% of the S&P 500 index.

In the case of Chevron, the stock was hit hard amid the COVID 19 pandemic and poor earnings results.

“I don’t know when this will change, we have underweighted energy for years,” she said.

Nevertheless, the risk-return profile “makes sense here” at a time when capital is flowing out of the sector.


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