Investing

5 Energy Stocks Goldman Sachs Expects to Deliver More Than Dividends

Paul Ausick

Published: May 26, 2022 1:16 pm

Extracting oil and natural gas from the earth is expensive. With crude oil and gas prices at current levels, it is reasonable to ask why energy companies are not spending more of their newfound wealth on pumping more of the stuff.

The answer is partly that they have been burned before, borrowing heavily in the middle part of the past decade to take advantage of high prices only to see the high prices fall after they made those investments. Another part of the answer is that investors demanded a bigger payout and the companies had to respond by raising buybacks and dividends and by cutting costs, especially the high costs of expanding. A third part could have been the threat of alternative fuels, primarily electricity, destroying the market for transportation fuels over a relatively short time frame, compared to the long time frames common in the energy business.

Goldman Sachs on Thursday issued a report on several Buy-rated energy stocks the analysts continue to be bullish on, even though energy sector stocks have outperformed the S&P 500 by about 70% so far in 2022. Here is a look at five stocks in which Goldman Sachs sees continued high total returns to shareholders even though (in most cases) dividends are relatively modest.

ConocoPhillips

ConocoPhillips (NYSE: COP) gets the nod in the supermajor category. Goldman Sachs has a $130 price target, which was about 14% higher than the trading price just before noon on Thursday. The analysts note that Conoco raised its capital spending budget by $1 billion recently and its capital returns outlook by $2 billion. Goldman Sachs expects Conoco to generate a return on capital employed (ROCE) of around 30% on average in the years between 2022 and 2026.

The analysts also expect higher capital returns to offset any cost pressures in the coming years. At current share price levels, Conoco’s total return is estimated to be around 22%, compared to the sector average of 14%. The company pays an annual dividend of $1.98, for a yield of 3.03%. Risks include commodity prices, capex, operating costs, Conoco’s ability to execute, and mergers and acquisitions activity.

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Antero Resources

Antero Resources Corp. (NYSE: AR) is primarily a producer of natural gas and natural gas liquids (NGLs). Goldman Sachs expects the company to generate $3.5 billion of free cash flow in 2022 and 2023, about 28% of total cash flow, compared with a peer average of 16% to 17% over the same two-year period. Among the natural gas producers the firm covers, 2023 estimates are pricing natural gas at $3.40 per million BTUs rising to $4.50 in 2024. The analysts note that this “highlights the potential for further upside to gas prices with confidence in improving secular demand outlook through LNG exports.”

Antero has said it expects to use its free cash flow to repay debt and repurchase stock. Executives expect to use about 50% of free cash flow for the stock buybacks in the second half of this year. Goldman Sachs estimates Antero’s total return potential at 20%. Antero does not pay a dividend. Risks include costs, well results, commodity price volatility and government pronouncements.

Phillips 66 (NYSE: PSX) has lagged the refining and marketing industry over the past year. The stock price is up just 16%, compared to a gain of 52% among similar stocks in Goldman Sach’s coverage. The analysts expect Phillips 66 to bring back investors through a combination of improved earnings and operational execution. The company should be able to buy back $1.5 billion annually in stock for the next several years and meet management’s target of reducing costs by $700 million.

Goldman Sachs expects Phillips 66 to provide investors with above-average capital returns of about 7% in 2023, compared to a peer average of around 4.5%. The analysts see a total return of 20% based on their $112 price target for Phillips 66 stock. The company pays an annual dividend of $3.64 for a yield of 3.69%. Risks to that outlook include refining margins, operational execution, chemicals margins and capital spending levels.

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Halliburton

Halliburton Co. (NYSE: HAL) may have to be patient in order to see improvement in pricing for its pressure pumping business. The central question for the company is how much pricing power it has. The Goldman Sachs analysts are taking a wait-and-see approach to that question. While they expect pricing to improve this year, they do not expect a step-change until exploration and production companies set their 2023 budgets later this year.

Based on a free cash flow yield of 6% and an enterprise value to EBITDA target of nine times, Goldman sees a total return of 21% from Halliburton. The company pays an annual dividend of $0.26, for a yield of 1.19%. Risks to that outlook include weak commodity prices that lead to reduced activity, slowing international growth and a slower pace of the return of Halliburton’s pricing power.

Hess

Hess Corp. (NYSE: HES) has been focused on developing its offshore Guyana resource, and that attention has kept investors somewhat at bay due to the lack of capital returns. Company management is fighting back and has said it plans to return 75% of free cash flow annually to shareholders by raising dividends and through share buybacks. As production from Guyana ramps up, Goldman Sachs expects Hess’s free cash flow yield to rise to 14% in 2026, compared to a large-cap producer average of 11%.

The$148 Goldman Sachs price target is about 22% higher than Thursday’s trading price, and the analysts expect a total return of 26%. Hess pays an annual dividend of $1.13, for a yield of 1.24%. Risks to that outlook include costs, well results, commodity price volatility and government pronouncements.