Goldman Sachs Makes 2 Big Changes on Its Oil Bets

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Each morning’s top analyst upgrades and downgrades come from dozens of various analyst reports. If there is one firm that can garner a serious look based on analysts changing opinions up or down, it would probably be Goldman Sachs. After all, the firm effectively only caters to institutional investors and the wealthiest individuals.

Goldman Sachs has made a key rotation in its oil and gas sector coverage. The firm downgraded ConcoPhillips (NYSE: COP) to Neutral from Buy now that its shares had risen more than 40% so far in 2018 alone. That blows away the performance of most energy index leaders, and this downgrade is based on the good news now being reflected in the shares. Goldman Sachs analyst Neil Mehta has an $81 price target on ConocoPhillips, which compares with the prior closing price of $79.89 and its 52-week high of $80.24.

While Conoco’s plans are said be well above that of Chevron Corp. (NYSE: CVX) and Exxon Mobil Corp. (NYSE: XOM), ConocoPhillips is still thought of as having a positive strategy and an even better execution of that strategy. The call even talks about solid cash flow generation and underappreciated assets. All that said, there appears to be better relative upside elsewhere in the energy sector. For a reference, Chevron was last seen down less than 1% so far in 2018, if the dividend is included, and Exxon shares have been up just about 2.5% so far in 2018, again if you include dividends.

Goldman Sachs has a Buy rating and $142 price target on Chevron, but the firm now has added Chevron to the prized Conviction Buy list. That would indicate a total return as high as 20% if this call proves to be right.

Several things have been brought up in defense of Chevron. A slate of poor earnings execution, higher costs and contracts expiring generally are overstated and baked into the cake when it comes to Chevron’s share price.

As a reminder, most bulge bracket firms making major calls with Buy and Outperform ratings on Dow Jones industrials and the top S&P 500 stocks generally call for upside of 8% to 10% at this stage in the bull market. And we cannot forget that the bull market is now nine and a half years old, nor that the major media and financial media keeps everyone on edge by reminding the community that the next correction could be imminent.

Also cited for the upgrade in Chevron are solid production growth through 2020 and better results from its downstream operations. Also worth noting was Chevron’s 8% free cash flow yield in the coming year, with an actual dividend yield of about 3.6%.

It is important to understand when calls like this are made that they are also keeping a directionally positive call for energy in general. Otherwise, Goldman Sachs would not have made an addition to the Conviction Buy list. Relative valuation calls can also be tricky for investors, because it is no secret that investors have been and are likely to be willing in many instances to pay up for performance and solid execution over value.

Shares of Chevron were last seen up just two cents at $124.41 after about an hour of trading on Tuesday, but shares of ConocoPhillips were down $1.58 at $78.31. Meanwhile, the S&P 500 was down four points at 2,920, and the Dow was up 24 points at 26,675.