Investors who did not own stocks in the energy sector in January are probably regretting it now in a big way. The strength was so profound that the energy sector outperformed the broader S&P 500 by 24.2% in January. That is the widest performance gap between the two going all the way back to the late 1980s. The question is where we stand now and, most importantly, whether it is too late to buy energy stocks after the massive outperformance.
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According to a new report from the energy team at Goldman Sachs, the answer, as far as they are concerned, is likely no. Even with OPEC announcing this week a 400,000 barrel per day increase in production, the analysts feel that continued strong demand, combined with other mitigating factors, will push oil higher. The report noted this:

Brent oil prices have rallied past $90 per barrel, with steep inventory draws over the last three months in the face of prior consensus expectations for builds. Demand in particular has remained strong, with an only modest hit from Omicron (-0.5 mb/d) but a sizable boost from gas-to-oil switching (from at least 0.5 up to 1 mb/d). This has left the market with critically low inventory levels across a range of petroleum products and regions, with physical market pricing at the strongest since the early 2000s.

We screened the Goldman Sachs energy research universe looking for companies that are rated Buy and pay solid and big dependable dividends. We found five top ideas that still make sense for growth and income investors. It is important to remember that no single analyst report should be used as a sole basis for any buying or selling decisions.

BP

This is one of the premier European integrated oil giants, and Goldman Sachs has it on the firm’s Conviction List of top stock picks. BP PLC (NYSE: BP) engages in the energy business worldwide. It produces and trades in natural gas; offers biofuels; operates onshore and offshore wind power and solar power generating facilities; and provides de-carbonization solutions and services, such as hydrogen and carbon capture, usage and storage.

The company is also involved in the convenience and mobility business, which manages the sale of fuels to wholesale and retail customers, convenience products, aviation fuels, and Castrol lubricants. It is involved in refining, supply and trading of oil products, as well as operation of electric vehicle charging facilities. In addition, it produces and refines oil and gas, and it invests in upstream, downstream and alternative energy companies, as well as in advanced mobility, bio and low carbon products, carbon management, digital transformation and power and storage areas.

Shareholders receive a 3.96% yield. The Goldman Sachs price target for the domestic shares is $50, which is well above the $34.17 consensus target. The final BP stock trade Wednesday was reported at $31.96 a share.

This is the largest publicly traded energy partnership and a leading North American provider of midstream energy services to producers and consumers. Enterprise Products Partners L.P. (NYSE: EPD) services include gathering, processing, transportation and storage of natural gas, natural gas liquid (NGL) fractionation, import and export terminaling, and offshore production platform services.
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One reason many analysts may have a liking for the stock might be its distribution coverage ratio. This ratio is well above 1 times, making it relatively less risky among the master limited partnerships.

Enterprise Products Partners stock investors receive a 7.77% distribution. Goldman Sachs has a price target of $31, while the consensus target is $28.59. Shares closed at $23.94 on Tuesday.

Exxon Mobil

Shares of this mega-cap energy leader backed up nicely as oil sold off in November, and they still offer investors an excellent entry point. Exxon Mobil Corp. (NYSE: XOM) is the world’s largest international integrated oil and gas company. It explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa and elsewhere.

Exxon also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas and petroleum products.

The supermajor posted massive numbers this week, and the analysts noted this:

We emerge from ExxonMobil’s fourth quarter 2021 results with our constructive view on the stock intact. We expect the company to be a key beneficiary in this higher oil price environment, and we remain positive around the company’s sharp positive inflection in capital allocation strategy, Upstream portfolio, and leverage to a further demand recovery, with ExxonMobil offering greater Downstream/Chemicals exposure relative to peers.

The 4.37% dividend will continue to be defended. The $84 Goldman Sachs price target was raised to $88. The consensus target on Exxon Mobil stock is $75.46, and the closing share price on Wednesday was $80.62.

This is the top holding for the Alerian MLP energy exchange-traded fund. MPLX L.P. (NYSE: MPLX) is primarily engaged in crude oil and refined products transportation and terminaling in the U.S. Midwest and Gulf Coast regions, as well as natural gas gathering and processing in the northeast from its prior acquisition of MarkWest Energy in 2015. MPLX was formed by independent U.S. refiner Marathon Petroleum.
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The company’s assets include a network of crude oil and refined product pipelines; an inland marine business; light-product terminals; storage caverns; refinery tanks, docks, loading racks and associated piping; and crude and light-product marine terminals. It also owns crude oil and natural gas gathering systems and pipelines, as well as natural gas and NGL processing and fractionation facilities in key U.S. supply basins.

Investors receive an 8.34% distribution. Goldman Sachs has set a $37 price target on MPLX stock. The $35 consensus target is closer to Wednesday’s closing price of $33.80 a share.

Phillips 66

This extremely diversified energy company has a long and successful operating history and is another Goldman Sachs Conviction List member. Phillips 66 (NYSE: PSX) operates through four segments: Midstream, Chemicals, Refining, and Marketing and Specialties. The company holds many of these assets within its master limited partnership, Phillips 66 Partners.

The company benefits from the tax-advantaged structure while still operating a more diversified operating business that also contains many assets that are not ideal master limited partnership assets, such as its fast-growing chemical manufacturing business and its super-profitable refined products marketing business.

After it posted stellar results for the quarter, the analysts had this to say:

Phillips 66 remains our top idea within our Refining coverage, where we continue to see headroom for incremental capital returns this year, are constructive on a positive rate of change at Refining in 2022, and continue to see attractive non-refining value in Midstream, Marketing, and Chemicals.

Investors receive a 4.20% dividend. The Goldman Sachs price target is $95. The consensus target is $95.57, and Phillips 66 stock closed at $87.70 on Thursday.

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These are two leading mega-cap integrated energy companies (one based here and one in Europe), two of the best performing energy master limited partnerships and the top Goldman Sachs refining idea. All five pay big and dependable dividends or distributions, and they look ready to continue to ride the increase in oil pricing this year, and perhaps beyond. Investors should remember that MLP distributions may contain return of principal.

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