Oil has rallied big off the spring debacle in which forward futures actually traded negative. Panicked traders were forced to sell at a loss as those holding contracts on expiration have to take physical delivery, and with no storage space available, they had to take a loss. With oil trading right around the $40 a barrel now, the analysts at Goldman Sachs think numerous catalysts are in the queue for next year that can support increasingly higher benchmark prices.

In a new report, the analysts raised the long-term oil price forecasts for 2021, noting that fundamentals for next year appear skewed to a faster pace than they originally had in their base case for energy pricing. They cite the rising likelihood of a vaccine for the COVID-19, which would greatly help the travel industry, among others.

Goldman Sachs also points to discipline by both the OPEC countries and the shale producers in the United States. In addition, the majors’ upstream capital spending is still low and shifting toward renewable energy. They set a West Texas Intermediate crude target of $51.38 a barrel and a Brent crude target of $55.63 for next year. Each is over 20% higher than current levels.

The analysts have 10 top picks for 2021, and here we focused on five that look like the most conservative ideas, three of which are on the firm’s U.S. Conviction list. The analysts feel all the picks are better ideas for investors than Exxon Mobil Corp. (NYSE: XOM), despite the low stock price and big dividend. While Goldman Sachs rates the following five as Buys, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

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 liquefied natural gas (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.

The analysts are positive and noted this:

We believe the relative strength of Chevron’s balance sheet is its key differentiating value proposition versus Exxon-Mobil for US investors that often have to decide between the two stocks (almost 50% of the S&P Energy benchmark. Key risks relate to Tengiz project execution, Gorgon operations, oil prices and West Coast/Asia refining margins.

Shareholders receive a 6.15% dividend, which the analysts feel comfortable will remain at current levels. The Goldman Sachs price target for the shares is $100, while the Wall Street consensus target is $99.87. The last Chevron stock trade on Monday was reported at $83.93 a share.

ConocoPhillips

This large-cap company resides on the Goldman Sachs U.S. 1 list of top stocks. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, LNG and natural gas liquids (NGLs) 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 that 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. Goldman Sachs said this:

While sentiment on the company has soured given (a) Alaska/federal lands exposure, (b) Mergers and Acquisitions  uncertainty and (c) poor second quarter earnings execution, ultimately we expect the stock price to reflect a recovery in 2021/2022 crude oil prices.

Investors receive a 4.43% dividend. Goldman Sachs has a $51 price target, and the consensus target is $51.42. ConocoPhillips stock closed at $37.89 on Monday.

This top pick is still down a stunning 35% this year and actually could be a takeover target. Hess Corp. (NYSE: HES) is an exploration and production company that develops, produces, purchases, transports and sells crude oil, NGLs and natural gas. It primarily operates in the United States, Denmark, Equatorial Guinea, the Joint Development Area of Malaysia/Thailand, Malaysia and Norway.

Goldman Sachs feels this is one of the best energy plays globally:

At the core of Brian Singer’s positive view on Hess is the growth driven from Guyana. While we recognize Exxon is the operator and has executed well in finding/developing resources in the region, we believe investors can get greater leverage to Guyana as a percentage of the enterprise value through Hess, without the declines in the base assets that Exxon is likely to experience.

Shareholders receive a 2.17% dividend. The whopping $66 Goldman Sachs price target compares with the $57.91 consensus target. Hess stock closed Monday’s trading at $46.04.

Marathon Petroleum

This is a very solid way for more conservative accounts to play the energy sector, and it is another U.S. Conviction list stock. 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.

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 analysts said this about the Speedway sale:

The company has indicated that it will significantly strengthen its balance sheet with the cash and return excess capital to shareholders in the form of buybacks. While Exxon trades at a valuation premium to its sum-of-the-parts, we continue to highlight that Marathon Petroleum trades at a discount to its sum-of-the-parts valuation.

Holders of Marathon Petroleum stock receive a 6.54% dividend. Goldman Sachs has set a $44 price target. The consensus target is higher at $48.57, but shares closed most recently at $35.46.

Pioneer Natural Resources

Many Wall Street analysts love this stock for a pure crude oil play, and it is also a U.S. Conviction list member. 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.

The Goldman Sachs report noted this:

By owning Pioneer, investors have access to a Permian growth and corporate free-cash-flow story, but with better asset level and corporate level operating/financial metrics. While Exxon has a higher fixed dividend yield, we note Pioneer could have an improved dividend if the cycle improves given the introduction of its variable dividend framework.

Investors receive a 2.12% dividend. The Goldman Sachs price target is $127. The consensus target is $129.48. Pioneer Natural Resources stock closed Monday at $103.93.

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While oil has had a sparkling run off the lows back in the spring, West Texas Intermediate is just barely over the $40 a barrel level, and any sustained reopening of the economy and a return to normal could easily spike the price as much as 20% or more. These five stocks are solid ways for investors to play an upswing in oil and an improving 2021 economy.

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