Despite an already massive run off the lows of last year, oil looks to be heading higher. While many on Wall Street have been positive on the commodity, one firm was among the first to hop on the bandwagon and has been on it since early last fall. With the reopening of the economy serving as a huge tailwind, the analysts at Goldman Sachs are forecasting the biggest jump in demand ever. They anticipate a 5.2 million barrel per day rise over the next six months. Toss in low interest rates and a weak dollar, and you have the perfect storm for a continued rise.
In a new and comprehensive report on commodities, Goldman Sachs notes that one of the interesting parts of the oil story is that the rising demand scenario was well flagged to the market, and the firm questions why this was not priced in earlier. It’s not like the reopening and dollar weakness tailwind comes as a big surprise to anybody who follows the oil markets.
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Goldman Sachs analysts said this when discussing rising demand:
The level of global oil demand has been flat – around 95 million barrels per day over the past six months. While this was initially a positive surprise through the large second wave of COVID infections this past winter, it has become a speed bump to the recovery in oil prices so far this spring as demand levels flattened in India, Latin America, and parts of Europe. Importantly, we expect a significant rebound in global oil demand in coming months, key to our forecast for higher oil prices by this summer. First, we see a weakening link between lockdowns and economic activity/mobility due to more targeted policies and the ongoing ramp-up in vaccinations (with warmer weather likely to help as well). Cases already appear to be inflecting in Brazil, Chile and Europe, and plateauing in the first hit Indian state of Maharashtra. We are in turn seeing clear evidence of higher mobility in countries of advanced vaccination (US, Israel, UK), with for example US gasoline demand near 2019 levels and domestic jet demand up 20% since March. As a result, we expect global oil demand to increase sharply by June, from 94.5 millions barrels per day currently to 99 million barrels per day in the third quarter of this year, as the pace of vaccination accelerates in Europe, finally unleashing pent-up travel demand.
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We screened the Goldman Sachs Americas Conviction List, which contains the firm’s top stock picks for clients, looking for energy companies and found four that look like very solid ideas now. While these picks are rated Buy at Goldman Sachs, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
Devon Energy
This stock may be offering one of the best value propositions among the Goldman Sachs ideas. Devon Energy Corp. (NYSE: DVN | DVN Price Prediction) is an independent energy company that primarily engages in the exploration, development and production of oil, natural gas and natural gas liquids (NGLs) in the United States and Canada. It operates approximately 19,000 wells.
The company also offers midstream energy services, including gathering, transmission, processing, fractionation and marketing to producers of natural gas, NGLs, crude oil and condensate through its natural gas pipelines, plants and treatment facilities.
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Devon Energy’s production is weighted toward crude oil while growth opportunities are liquids focused, anchored by the Delaware Basin, SCOOP/STACK, Eagle Ford Shale, Canadian Oil Sands, and the Barnett. Devon also owns equity in the publicly traded midstream master limited partnership EnLink.
Shareholders receive a 1.83% dividend. The Goldman Sachs price target on the shares is $29, while the Wall Street consensus target is $30.70 The last trade for Devon Energy stock on Thursday hit the tape at $24.07 a share.
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Marathon Petroleum
This is a solid way for investors who are more conservative 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, Marathon Petroleum 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.
Last year, 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 on 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 deal now is expected to close in this quarter.
Shareholders receive a robust 4.14% dividend. Goldman Sachs has a price target of $64, while the consensus target is $63.31. Marathon Petroleum closed trading at $56.04 a share on Thursday.
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Suncor Energy
This is a top Canadian energy play for investors to consider. Suncor Energy Inc. (NYSE: SU) operates as an integrated energy company and primarily focuses on developing petroleum resource basins in Canada’s Athabasca oil sands. It explores, acquires, develops, produces and markets crude oil and natural gas in Canada and internationally. Suncor also transports and refines crude oil, markets petroleum and petrochemical products primarily in Canada and markets third-party petroleum products.
With the North American majors pivoting more toward the Permian with potential free-cash-flow implications, the company does not expect its “industrial model” to change. The focus remains on reliable cash flow, steady capital allocation framework and top-tier cash returns. In addition, the company is trading at a discount to its historical multiple.
Investors in Suncor Energy stock receive 3.06% dividend. The $25 Goldman Sachs price objective compares with the much higher $42.83 consensus target price. The shares closed on Thursday at $21.76 per share.
Targa Resources
This top energy midstream company has had a string of positives lately. Targa Resources Corp (NYSE: TRGP) is a leading provider of midstream services and one of the largest independent midstream energy companies in North America. Targa owns, operates, acquires and develops a diversified portfolio of complementary midstream energy assets.
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The company is primarily engaged in the business of gathering, compressing, treating, processing and selling natural gas; storing, fractionating, treating, transporting and selling NGLs and related products, including services to liquefied petroleum gas exporters; gathering, storing and terminaling crude oil; storing, terminaling and selling refined petroleum products.
Targa Resources has one of the premier asset positions in the Permian basin. With solid management, a strong balance sheet and attractive exposure to some of the most attractive U.S. energy basins, it remains a top pick across Wall Street.
Investors receive a 1.15% dividend. Goldman Sachs has set its price objective at $49. The posted consensus target is just $39.75, and Targa Resources stock closed most recently at $34.80.
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These four top Goldman Sachs Conviction List energy picks are perhaps off the radar for some investors, but they offer outstanding growth potential and reasonable entry points, compared to some of the other stocks in the sector. It may make sense to buy partial positions now and see how earnings come in for the quarter, as all four will report in early May.
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