Goldman Sachs Sees 4 Exploration & Production Winners for $35 Oil Long Term

Now that West Texas Intermediate Crude (WTI) oil has dipped under $30.00 per barrel, investors and industry watchers are even more concerned about the oil and gas stocks in the energy patch than ever. It is becoming almost assured that there will be far more corporate failures, more dividend cuts, more credit rating cuts and more debt defaults.

Goldman Sachs might not have been the first and certainly was not the only of the brokerage firms to sound a warning bell about $30 or $20 oil, but Goldman Sachs remains among the largest of them all, and they cater solely to institutions and to the wealthy individual investors. So, what does one make of the firm naming 4 exploration and production companies that do best in an extreme stress test?

That stress test is one where the price of oil remains around $35.00 for the next three years. Again, this will cause even more failures and implosions, so it is important to find which companies can survive and thrive in that climate.

Using the criteria of debt/liquidity, an ability to actually increase production in such a low price climate, and the potential to excel if oil manages to recover and go back towards $60 per barrel. Over 30 exploration and production companies were screened and only four seemed to make a passing grade.

Hess Corp. (NYSE: HES) was the top play noted and it has the largest market of these four stocks at $12 billion, with Goldman Sachs raising its rating to the prized Conviction Buy list. Hess was selected for its new projects, its flexibility in shale, having ample liquidity and an ability to find additional resources. Goldman Sachs also believes that most of Hess’ negative news from the company itself (capex and generating capital) being now behind the company. The firm’s $59.00 price target would imply more than 50% upside if the firm is not too aggressive here. Hess was last seen up 1.2% at $39.15, with a $55.26 consensus analyst price target and with a 52-week range of $32.41 to $79.00.
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Devon Energy Corp. (NYSE: DVN) was another would-be survivor with a market cap of about $8.6 billion. Interestingly enough, Devon recently hired Jefferies to sell non-core assets and to lower its debt levels. Devon shares were last seen down 4.3% at $21.68, versus a consensus analyst target of $42.18 and a 52-week range of $19.69 to $70.48.

Marathon Oil Corp. (NYSE: MRO) was deemed another $35 oil winner. It does deserve merit to point out that this was last seen down only 0.2%, but at a share price of $7.28. Marathon has a $4.9 billion market cap, a consensus analyst price target of $15.21 and has a 52-week range of $7.01 to $31.53.

RSP Permian Inc. (NYSE: RSPP), which is the smallest of the 4 companies at a $2 billion market cap, was the fourth winner for $35 oil 3-years out. Be advised that RSP Permian is still two weeks away from announcing its formal earnings report. Its shares were last seen up 0.5% at $19.81, versus a consensus analyst price target of $29.66 and versus a 52-week range of $16.74 to $31.15.

Investors should understand that a report of this sort, even with the “Conviction Buy” note, is far from a screaming buy at the bottom signal. This is a climate where investors better just assume that the bad news and how the market will react to such news just hasn’t been seen yet. A classic V-Bottom is something that very few analysts, investors and energy industry participants are expecting as of now.

Crude was last seen trading under $28.00 on Wednesday. If that price keeps drifting lower, analysts making more long-term buy calls are going to have to convince wary energy investors that lower and lower stock prices are just a better buying opportunity.