Goldman Sachs Has 5 Top Oil Picks for Gains Into 2021

Energy

Published: September 1, 2020 7:40 am

Oil has rallied big off the spring debacle in which forward futures actually traded negative. Panicked traders were forced to sell at a loss as those holding contracts on expiration have to take physical delivery, and with no storage space available, they had to take a loss. With oil trading right around the $40 a barrel now, the analysts at Goldman Sachs think numerous catalysts are in the queue for next year that can support increasingly higher benchmark prices.

In a new report, the analysts raised the long-term oil price forecasts for 2021, noting that fundamentals for next year appear skewed to a faster pace than they originally had in their base case for energy pricing. They cite the rising likelihood of a vaccine for the COVID-19, which would greatly help the travel industry, among others.

Goldman Sachs also points to discipline by both the OPEC countries and the shale producers in the United States. In addition, the majors’ upstream capital spending is still low and shifting toward renewable energy. They set a West Texas Intermediate crude target of $51.38 a barrel and a Brent crude target of $55.63 for next year. Each is over 20% higher than current levels.

The analysts have 10 top picks for 2021, and here we focused on five that look like the most conservative ideas, three of which are on the firm’s U.S. Conviction list. The analysts feel all the picks are better ideas for investors than Exxon Mobil Corp. (NYSE: XOM), despite the low stock price and big dividend. While Goldman Sachs rates the following five as Buys, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

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 liquefied natural gas (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.

The analysts are positive and noted this:

We believe the relative strength of Chevron’s balance sheet is its key differentiating value proposition versus Exxon-Mobil for US investors that often have to decide between the two stocks (almost 50% of the S&P Energy benchmark. Key risks relate to Tengiz project execution, Gorgon operations, oil prices and West Coast/Asia refining margins.

Shareholders receive a 6.15% dividend, which the analysts feel comfortable will remain at current levels. The Goldman Sachs price target for the shares is $100, while the Wall Street consensus target is $99.87. The last Chevron stock trade on Monday was reported at $83.93 a share.

ConocoPhillips

This large-cap company resides on the Goldman Sachs U.S. 1 list of top stocks. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, LNG and natural gas liquids (NGLs) 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.

Many Wall Street analysts feel that 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. Goldman Sachs said this:

While sentiment on the company has soured given (a) Alaska/federal lands exposure, (b) Mergers and Acquisitions uncertainty and (c) poor second quarter earnings execution, ultimately we expect the stock price to reflect a recovery in 2021/2022 crude oil prices.

Investors receive a 4.43% dividend. Goldman Sachs has a $51 price target, and the consensus target is $51.42. ConocoPhillips stock closed at $37.89 on Monday.