Energy

Goldman Sachs Makes a Surprising Energy Addition to Its Conviction List

Lee Jackson

Published: August 14, 2020 7:22 am

With 2020 rolling right along and the third quarter already half over, many investors are resetting for what could be a very volatile rest of the year. The ongoing trade issues and political conflicts with China, geopolitical instability in the Middle East and social unrest here at home could continue to stir the pot. Toss in an election in less than 90 days, and an overbought market, and there could be some tough sledding ahead. While the rally off the March lows has been positive, it makes sense for investors to find the best possible stock ideas from the top analysts and firms.

One of Wall Street’s most respected lists of stocks to buy is the Goldman Sachs Conviction List. The list includes the firm’s top picks for high net worth and institutional accounts spread across 10 sectors. We constantly monitor the list for changes. This week, the analysts made a huge energy oilfield services addition to the list, Halliburton Co. (NYSE: HAL), while also removing another energy services company, Baker Hughes Inc. (NYSE: BKR), which remains Buy rated.

We also screened the list for other top energy picks and found four additional stocks to buy that look like good ideas for investors looking to add some energy exposure. While all five are outstanding energy ideas for more contrarian investors, it’s important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Halliburton

This stock is down almost 75% over the past two years and is the newest member of the Goldman Sachs Conviction List. Halliburton is one of the world’s largest providers of products and services to the energy industry.

The company serves the upstream oil and gas industry throughout the lifecycle of the reservoir – from locating hydrocarbons and managing geological data, to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.

Halliburton is the second-largest provider of oil services and the number one player in pressure pumping services worldwide. The company’s business always has been dependent on commodity prices. While the benchmark price of oil has recovered nicely from the lows back in the spring, contrarians that see a path to higher oil prices could make some huge money here.

The analysts noted this:

We are adding Halliburton to the Conviction List given: 1) our view of greater earnings upside versus peer group in an oil price recovery, 2) significant structural cost-cutting in 2020 ($1 billion), which will create even greater operating leverage and thus earnings power out of the downturn, 3) strong international exposure (60% of revenues in 2021), which will drive long-term growth, and 4) robust free-cash-flow of $1 billion in both 2020 estimated and 2021 estimated (free-cash-flow yield of 8%).

Shareholders receive a 1.08% dividend. Goldman Sachs has a $20 price target on the shares, while the Wall Street consensus target is just $15.38 Halliburton stock closed Thursday’s trading at $16.65 a share.

ConocoPhillips

Shares of this large-cap company may offer solid upside potential for investors that are more conservative. 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.

Many Wall Street analysts feel Conoco can accelerate growth from a reloaded portfolio depth in the Bakken and Eagle Ford, with visibility on future growth from a sizable position in the Permian.

Investors receive a very reliable 4.13% dividend. The Goldman Sachs price target is $51, and the posted consensus target price is $50.85. Conoco stock was last seen trading at $40.63 per share.

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This leading energy company is another top energy 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.

The company posted an earnings miss last week on fixed price oil contracts that did not fully participate in the rebound in oil prices at the end of the quarter. Forecast earnings estimates for the year ending December 31, 2020, recently have been increased. The current consensus is for $0.58 per share, up from the previous consensus of $0.52 per share, and is derived from 30 publicly distributed estimates.

Holders of EOG Resources stock receive a 3.16% dividend. The $70 price target at Goldman Sachs is higher than the $64.53 consensus target. Shares closed at $47.14 on Thursday.

Marathon Petroleum

This is another solid way for more conservative accounts to play the energy sector. Marathon Petroleum Corp. (NYSE: MPC) is one of the largest independent petroleum refining and marketing companies in the United States.

Until just recently, the company operated 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.

Earlier in August, the company announced it would sell Speedway to 7-11 in an all-cash deal valued at $21 billion, or $16.5 billion after-tax. The sale transforms the company’s balance sheet and creates options to revisit the corporate structure of MPLX. Many across Wall Street feel that with Speedway removed, the dislocation in refining value becomes even more transparent as the company trades much cheaper than its industry peers do.

The dividend yield is a robust 6.23%. Goldman Sachs has set its price target at $44. The consensus target is higher at $48.71, but Marathon Petroleum stock closed at $37.26 a share.

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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. With updated 2020 and 2021 hedging adding $1.2 billion to cash flow estimates over next two years, a new $900 million credit facility further enhances liquidity. In addition, the Gulf coast marketing makes Pioneer less exposed to widening Midland differentials.

Pioneer Natural Resources stock investors are paid a 1.99% dividend. The Goldman Sachs price target is $127. The consensus price figure is $122.16, and the most recent close was at $109.94 per share.

While oil has had a sparkling run off the lows back in the spring, West Texas Intermediate is just barely over the $40 level, and any sustained reopening of the economy and a return to any sense of normality easily could spike the price as much as 50% or more.