Banc of America analyst Daniel Barcelo figures big oil companies ought to enjoy another good year in 2006, and he says shares of ExxonMobil (XOM) should be standout performers. He upgraded the stock on Wednesday to "buy" and lists it as one of his top picks for the coming year. (Amerada Hess is Barcelo's other favorite oil stock.)
Barcelo says oil prices should remain strong in 2006, although he doesn't think they'll soar to new highs as they did last year. Rather, he estimates prices will average around $55 a barrel. Crude traded at $63 a barrel on Wednesday.
But Barcelo points out that production growth among integrated oil companies should be "significantly stronger than what we have seen over the past five years." That should help keep up the sector's earnings momentum, he says, even without a big surge in oil prices.
He looks for Exxon, which has been seeking new production areas, to increase production 5% this year, one of the strongest growth rates in the sector. Plus, with its diversified business, Exxon is less leveraged to the price of oil than some of its peers are, which Barcelo says should benefit its shares should oil prices remain flat.
Exxon is widely admired for its financial strength and operational efficiency. Barcelo notes that the company leads the pack in returns on capital employed (ROCE) -- a key measurement for integrated oil and gas companies. Exxon rewards investors through its large share repurchase program and has raised its dividend more than 20 years in a row. The stock yields 2.0%.
Shares have fallen 11% from their 52-week high of $66, reached in September. At $59, they trade at 11 times the consensus 2006 earnings estimate of $5.47 per share, according to Thomson First Call.