Oil and Gas

Don’t panic. Big oil stocks are in a sweet spot, says top-ranked analyst

Terreson: We remain overweight S&P integrated oils
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Terreson: We remain overweight S&P integrated oils

Crude prices are shedding the gains they've made in recent weeks, but top-ranked analyst Doug Terreson said Monday it's not time to abandon the big oil trade.

U.S. crude fell to a two-month low Monday on signs that supply is bubbling up once again just as the market was beginning to look balanced and even moderately undersupplied.

But Terreson, who is highly ranked by Institutional Investor, and his firm Evercore are still positive on integrated oil stocks like Chevron, Exxon Mobil and Royal Dutch Shell, which have run up significantly this year. Royal Dutch Shell is up more than 37 percent in 2016, Exxon Mobil has risen nearly 21 percent and Chevron has climbed 17 percent.

Royal Dutch Shell products in Torzhok, Russia.
Andrey Rudakov | Bloomberg | Getty Images

Several factors behind the positive performance remain in place, Terreson said.

Integrated oil companies — which drill and refine crude and sell fuel — have reduced operating capital costs to lower the break-even expense of producing a barrel of oil, he said. And while crude prices may be plateauing at present, the trend has been positive in recent months, he said.

Some commodity watchers see another temporary leg lower for oil in the coming months as the market works through an excess of fuel inventories.

Investors should also consider that big oil stocks are trading near 25-year lows on key valuation measures and have dividend yields near 5 percent, according to Terreson. Those dividends appear to be safe,

"We think we're in the sweet spot of the investment cycle in energy for these reasons and we plan to maintain our positive view for at least a few more quarters," Terreson told CNBC's "Fast Money: Halftime Report."

To be sure, analysts have raised concerns over the the waning benefit of downstream refining operations. Refining operations buoyed integrated energy firms as upstream production revenue has fallen, but refining margins have begun to normalize this year.

Buy big cap oil?
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Buy big cap oil?

For analyst Stewart Glickman of S&P Global Market Intelligence, Exxon is a buy — but he thinks Chevron is a hold.

For one, Exxon is much better at generating free cash flow, he told CNBC's "Power Lunch" Tuesday.

Plus, Chevron has "an awful lot of balls in the air" including trying to significantly expand its production, protect its high dividend and streamline its operations.

"From a risk standpoint, I think Exxon is a safer bet," he said "With what we're seeing with the global economy, I would rather play defense than offense."

— CNBC's Michelle Fox contributed to this report.