Energy
Goldman Sachs Has Its Top Oil Stocks to Buy Ahead of a Second-Half Recovery
Published:
Last Updated:
The biggest story during the collapse on Wall Street earlier this year was of course the COVID-19 pandemic. This brought on an instant recession with lightning speed. The battle over oil dominance that erupted between Russia and Saudi Arabia over oil production helped to slash further benchmark pricing for West Texas Intermediate and Brent crude by more than 70% at one point this past week.
The energy sector had another ugly turn recently when the front-month oil futures contract for May, which expired in mid-April, actually traded negative, as traders were forced to sell at a loss because those holding contracts on expiration have to take physical delivery. With no storage space available, that brought a torrent of selling with no bids. In this doom and gloom environment, who wants to buy oil stocks now?
The analysts at Goldman Sachs have raised their hands. In a recent report, these analysts noted that the unprecedented drop in demand is giving investors a chance to buy energy stocks at very cheap levels. The team has a list of 24 oil stocks it feels will benefit the most from a recovery. Goldman Sachs even sees oil demand ramping back up by the end of June, and it also sees low prices forcing more domestic production shut-ins.
The analysts listed five specific reasons in the research report why investors should be looking at the wounded energy sector now.
- Oil prices are at/below cash costs.
- Shut-in announcements are becoming material.
- Demand appears to be at a trough.
- Valuation is near 25-year lows on enterprise value/gross cash invested.
- The Energy Select Sector SPDR Fund (NYSEARCA: XLE) ETF had risen handily, despite bad micro/macro news in recent weeks.
We screened the 24 stocks the analysts are recommending for a recovery rebound and picked five that are Buy rated and also have retained their dividends. This is an important metric, as Royal Dutch Shell PLC (NYSE: RDS-A) slashed its dividend for the first time since World War II this week.
Energy stocks have been battered and bruised for longer than most memories can easily recall. Despite the “ESG” theme dominating before the bull market ended, and even with many investors simply refusing to invest in oil companies supposedly at any price, it is almost impossible to fathom that April’s great stock market gains had energy stocks leading the way with the greatest gains. Even after such huge gains, oil and gas stocks may have a place as value stocks beyond acting as value traps.
Chevron
This integrated leader is a safer way for investors looking to be positioned in the energy sector. Chevron Corp. (NYSE: CVX) is a U.S.-based integrated oil and gas company, with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals. The company sports a sizable dividend and has a solid place in the sector when it comes to natural gas and LNG.
Chevron, which is among the companies with the largest corporate debt, recently became the latest major oil company to slash spending after halting its $5 billion-a-year share buyback and halving spending in the Permian Basin, which means a large decrease in projected output from America’s biggest shale region.
The California-based oil giant has said that it would lower projected 2020 capital spending by 20%, or $4 billion. The Permian will account for the largest single element of that reduction, translating into 125,000 fewer barrels of oil equivalent per day than previously forecast, a quantity equal to about 2.5% of the basin’s total current production.
Shareholders receive a hefty 5.45% dividend, which the analysts feel comfortable will remain at current levels. The Goldman Sachs price target is posted at $89. It compares to a Wall Street consensus target of $90.62. The last Chevron trade on Friday was reported at $89.44, down almost 3% on the day.
ConocoPhillips
This stock may offer solid upside potential, and the company recently gave investors a massive dividend increase. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas and natural gas liquids worldwide.
Conoco’s portfolio includes resource-rich North American tight oil and oil sands assets; lower-risk legacy assets in North America, Europe, Asia and Australia; various international developments; and an inventory of conventional and unconventional exploration prospects.
24/7 Wall St.Conoco posted solid earnings per share for the first quarter that beat consensus estimates. Many analysts see the delta on lagged realizations, lower operating expenses and taxes as solid positives. Shut-in plans are increased for May and expanded to June as a response to the oil price collapse.
Investors receive a 3.98% dividend. The Goldman Sachs price target is $38. The posted consensus price target is $46.83, and ConocoPhillips stock last closed at $39.14.
EOG Resources
This leading energy company is also a top pick across Wall Street. EOG Resources Inc. (NYSE: EOG) is one of the largest independent exploration and production companies operating in the United States, Canada, Trinidad, the United Kingdom and China.
Despite some rough going over the past month, in February the company did post adjusted fourth-quarter earnings that beat consensus expectations on better realizations, lower operating expenses and depreciation, depletion and amortization. The company had $440 million of free cash flow generated after dividends.
Shareholders receive a 3.14% dividend. The price target at Goldman Sachs is $58, while the consensus price target is $59.68. EOG Resources stock closed on Friday at $44.57.
Marathon Petroleum
This solid way to play the energy sector remains the top pick at Jefferies. Marathon Petroleum Corp. (NYSE: MPC) is one of the largest independent petroleum refining and marketing companies in the United States. It operates approximately 2,750 retail sites under the Marathon and Speedway brands. In addition, it operates a logistics network of pipelines, barges, trucks and terminals that store and transport crude and products.
Despite a plan to spin-off Speedway, the company announced in late February it would invest $550 million in the chain. The investment will focus primarily on converting convenience stores the company added to its portfolio through several acquisitions over the past two years — notably, its strategic combination with San Antonio-based Andeavor in the fall of 2018 — to Speedway’s branding and systems.
The company bought rival Andeavor for $23.3 billion in the biggest-ever deal for an oil refiner, creating the largest independent fuel maker in the United States. It was one of the biggest mergers in 2018. Following the deal, Marathon became the largest operator of refining capacity in the United States, and management believes the company can achieve the $1 billion in synergies that it suggests.
Shareholders receive a robust 7.02% dividend, but this one does have the potential to be trimmed. The $31 Goldman Sachs price target is lower than the $46.14 consensus figure. Marathon Petroleum stock closed Friday at $29.24.
24/7 Wall St.Pioneer Natural Resources
Many Wall Street analysts love this stock for a pure crude oil play. Pioneer Natural Resources Co. (NYSE: PXD) operates a modern fleet of more than 24 top performing drilling rigs throughout onshore oil and gas producing regions of the United States and Colombia. Pioneer production services are supported by 100 well-servicing rigs, more than 100 cased-hole, open-hole and offshore wireline units, and a range of advanced coiled tubing units.
Pioneer is a huge player in the Permian Basin and in the Eagle Ford in Texas, and the company owns more than 20,000 locations in the world’s second-largest oil reservoir in the Midland Basin. The company recently updated 2020 and 2021 hedging, adding $1.2 billion to cash flow estimates over next two years. It also added a new $900 million credit facility, which enhances liquidity. In addition, the Gulf coast marketing makes Pioneer less exposed to widening Midland differentials.
Investors receive a 2.45% dividend. The Goldman Sachs price target is $105. The consensus figure is $107.06, and Pioneer Natural Resources stock closed on Friday at $82.92.
We stayed with exploration and production companies and a refiner, and avoided oil field services due to the continued potential for domestic production shut-ins, and OPEC cuts overseas. The energy sector will remain volatile, but scale buying shares now and being patient could bring some very solid gains for investors over the rest of 2020. With the country opening back up, and the busy summer driving and vacation season all but upon us, demand looks to move substantially higher.
Is Your Money Earning the Best Possible Rate? (Sponsor)
Let’s face it: If your money is just sitting in a checking account, you’re losing value every single day. With most checking accounts offering little to no interest, the cash you worked so hard to save is gradually being eroded by inflation.
However, by moving that money into a high-yield savings account, you can put your cash to work, growing steadily with little to no effort on your part. In just a few clicks, you can set up a high-yield savings account and start earning interest immediately.
There are plenty of reputable banks and online platforms that offer competitive rates, and many of them come with zero fees and no minimum balance requirements. Click here to see if you’re earning the best possible rate on your money!
Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.
Latest from 24/7
