Goldman Sachs Has Its Top Oil Stocks to Buy Ahead of a Second-Half Recovery

Energy

Published: May 2, 2020 6:46 am

Last Updated: May 2, 2020 8:31 am

The biggest story during the collapse on Wall Street earlier this year was of course the COVID-19 pandemic. This brought on an instant recession with lightning speed. The battle over oil dominance that erupted between Russia and Saudi Arabia over oil production helped to slash further benchmark pricing for West Texas Intermediate and Brent crude by more than 70% at one point this past week.

The energy sector had another ugly turn recently when the front-month oil futures contract for May, which expired in mid-April, actually traded negative, as traders were forced to sell at a loss because those holding contracts on expiration have to take physical delivery. With no storage space available, that brought a torrent of selling with no bids. In this doom and gloom environment, who wants to buy oil stocks now?

The analysts at Goldman Sachs have raised their hands. In a recent report, these analysts noted that the unprecedented drop in demand is giving investors a chance to buy energy stocks at very cheap levels. The team has a list of 24 oil stocks it feels will benefit the most from a recovery. Goldman Sachs even sees oil demand ramping back up by the end of June, and it also sees low prices forcing more domestic production shut-ins.

The analysts listed five specific reasons in the research report why investors should be looking at the wounded energy sector now.

Oil prices are at/below cash costs.
Shut-in announcements are becoming material.
Demand appears to be at a trough.
Valuation is near 25-year lows on enterprise value/gross cash invested.
The Energy Select Sector SPDR Fund (NYSEARCA: XLE) ETF had risen handily, despite bad micro/macro news in recent weeks.

We screened the 24 stocks the analysts are recommending for a recovery rebound and picked five that are Buy rated and also have retained their dividends. This is an important metric, as Royal Dutch Shell PLC (NYSE: RDS-A) slashed its dividend for the first time since World War II this week.

Energy stocks have been battered and bruised for longer than most memories can easily recall. Despite the “ESG” theme dominating before the bull market ended, and even with many investors simply refusing to invest in oil companies supposedly at any price, it is almost impossible to fathom that April’s great stock market gains had energy stocks leading the way with the greatest gains. Even after such huge gains, oil and gas stocks may have a place as value stocks beyond acting as value traps.

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 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.

Shareholders receive a hefty 5.45% dividend, which the analysts feel comfortable will remain at current levels. The Goldman Sachs price target is posted at $89. It compares to a Wall Street consensus target of $90.62. The last Chevron trade on Friday was reported at $89.44, down almost 3% on the day.

ConocoPhillips

This stock may offer solid upside potential, and the company recently gave investors a massive dividend increase. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, liquefied natural gas and natural gas liquids 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.