The farther 2022 gets in the rearview mirror for most investors the better, as it was the worst year for stocks since the 2008 to 2009 period. Two sectors out of the 11 Global Industry Classification Standard (GICs) were positive. Energy blew away the competition, and utilities barely eked out a 1.6% gain for the year. The big question for investors is, after two stellar years, can energy lead the way again in 2023?
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The energy team at Goldman Sachs is optimistic again this year, especially after the backup in crude pricing since last summer. While the massive returns from the past two years are unlikely, the positive setup for 2023 is in place. The firm noted this in its report covering the sector:

While Energy outperformed the S&P by 78% in 2022, and we see a repeat of that magnitude as unlikely, we do believe the backdrop is still constructive and remain bullish on Energy equities. We see Brent in a multi-year $80-$100 per barrel range (above the forward curve), the equities “sweet spot” and see company-specific drivers around capital returns, project developments and execution to drive healthy upside/downside dispersion. Our bottom-up price targets imply 13% market cap weighted total return to Energy coverage, with 26% average total return to Buy-rated stocks.

Most investors would gladly take 26% total return. So we screened the Goldman Sachs Buy-rated energy stocks, looking for companies that pay big and dependable dividends and that have stocks with the highest total return potential. Total return is the increase in the price of a stock plus dividends paid in a given year. While all seven of the following stocks are rated Buy, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Canadian Natural Resources

This north-of-the-border energy giant offers a big dividend and growth potential. Canadian Natural Resources Ltd. (NYSE: CNQ) acquires, explores for, develops, produces, markets and sells crude oil, natural gas and natural gas liquids (NGLs). It operates primarily in western Canada, the United Kingdom portion of the North Sea and offshore Africa.

The company offers synthetic crude oil, light and medium crude oil, bitumen (thermal oil), primary heavy crude oil and Pelican Lake heavy crude oil. Its midstream and refining assets include two crude oil pipeline systems and a 50% working interest in an 84-megawatt cogeneration plant at Primrose.

As of December 31, 2020, the company had total proved crude oil, bitumen, and NGLs reserves were 10,528 million barrels (MMbbl); total proved plus probable crude oil, bitumen and NGLs reserves were 13,271 MMbbl; proved SCO reserves were 6,998 MMbbl; total proved plus probable SCO reserves were 7,535 MMbbl; proved natural gas reserves were 12,168 billion cubic feet (Bcf); and total proved plus probable natural gas reserves were 20,249 Bcf.

Canadian Natural Resources stock investors receive a 4.62% dividend. The Goldman Sachs price target is $64, while the consensus target is $67.13. The stock closed almost 5% higher on Friday at $54.53.

This large cap company offers strong value for investors. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas (LNG) and NGLs worldwide.
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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 Basin.

Shareholders receive a 2% dividend. The Goldman Sachs price target for ConocoPhillips stock is $133, but the consensus target is higher at $138.56. The share price ended Friday at $118.23.

EOG Resources

Analysts feel this leading energy company has strong total return potential. EOG Resources Inc. (NYSE: EOG) is one of the largest independent exploration and production companies operating in North America, the United Kingdom and China.

The company explores for, develops, produces and markets crude oil, natural gas and NGLs. Its principal producing areas are in New Mexico and Texas in the United States and in the Republic of Trinidad and Tobago. As of December 31, 2021, it had total estimated net proved reserves of 3,747 million barrels of oil equivalent, including 1,548 MMbbl of crude oil and condensate reserves, 829 MMbbl of natural gas liquid reserves and 8,222 billion cubic feet of natural gas reserves.

The company recently announced that it has joined the Oil and Gas Methane Partnership 2.0, UNEP’s flagship oil and gas reporting and mitigation program. OGMP 2.0 is the most comprehensive, measurement-based, reporting framework for the oil and gas industry designed to improve the accuracy and transparency of methane emissions reporting.

The dividend yield here is 2.6%. Goldman Sachs has set a $156 price target, and the consensus target for EOG Resources stock is $154.93. The last trade on Friday was reported at $127.47.

This top pick has rallied nicely off the 2021 lows 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. The company primarily operates in the United States, Denmark, Equatorial Guinea, the Joint Development Area of Malaysia/Thailand, Malaysia and Norway.
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Analysts across Wall Street are positive on the growth prospects for Hess driven from Guyana. While Exxon is the operator and has executed well in finding/developing resources in the region, most analysts 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.

Hess stock comes with a 1.04% dividend. The $158 Goldman Sachs target is well above the $149.55 consensus target and Friday’s closing print of $143.70.

Phillips 66

This extremely diversified energy company has a long and successful operating history, and it is a longtime 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 MLP, 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 MLP assets, such as its fast-growing chemical manufacturing business and its super-profitable refined products marketing business.

Phillips 66 is the top idea within refining coverage at Goldman Sachs, which continues to see headroom for incremental capital returns this year. The analysts are constructive on a positive rate of change at Refining in 2022. In addition, they continue to see attractive non-refining value in the other segments.

Investors receive a 3.77% dividend. The Goldman Sachs price target of $123 compares with the $121.14 consensus target. Phillips 66 stock closed on Friday at $105.70.

Pioneer Natural Resources

Many Wall Street analysts love this stock as a pure crude oil play, and the company also employs a variable dividend strategy. Pioneer Natural Resources Co. (NYSE: PXD) operates as an independent oil and gas exploration and production company in the United States.
The company explores for, develops and produces oil, NGLs and natural gas. It has operations in the Midland Basin in West Texas. As of December 31, 2021, the company had proved undeveloped reserves and proved developed non-producing reserves of 130 million barrels of oil, 92 million barrels of NGLs and 462 billion cubic feet of gas, and it owned interests in 11 gas processing plants.
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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 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 a stellar balance sheet, the company is poised to remain a top player in the Permian, as it expects to deliver solid production growth going forward.

The 11.2% dividend is stellar, but, again, it could be lower this year and may vary from quarter to quarter. Pioneer Natural Resources stock has a $264 target price at Goldman Sachs. The consensus target is $280.87, and Friday’s close was at $233.46.

Suncor Energy

This is another 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.

Suncor explores, acquires, develops, produces and markets crude oil and natural gas in Canada and internationally. It 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.

Shareholders receive a 4.86% dividend. The Goldman Sachs price objective is $38. The consensus target is $40.08 and Suncor Energy stock shares closed almost 4% higher on Friday at $31.37.

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These six top exploration and production leaders and a top refiner could deliver solid total returns this year as they are in a sector that can once again overachieve in 2023. While the massive gains of the past two years are unlikely, given the repricing of oil over the past six months, the potential for a demand pick-up, especially from China, could provide a robust tailwind for these top companies.

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