- While a coronavirus-fueled demand crunch has caused the price of oil to collapse, Goldman Sachs says now may be a good time to buy energy stocks.
- “We believe investors should add exposure to energy stocks,” the bank said in a note Monday.
- Analysts see oil demand ramping back up before the end of June and low prices forcing more production shut-ins.
- In the note, Goldman Sachs revealed 24 stocks that it thinks will benefit most from a recovery — and a handful to avoid.
- Visit Business Insider’s homepage for more stories.
The worst may be yet to come for oil markets, with some analysts projecting another bout of negative numbers.
But Goldman Sachs analysts say now is the time to buy energy stocks.
They offered up a handful of reasons that support their view that the sector downturn is near its bottom with only up to go.
But with today’s oil prices below the cash cost of production (about $20 to $25 per barrel), the analysts said companies would be forced to shut in wells. They projected the number of rigs would fall by two-thirds, relative to early March, which would relieve some pressure on demand.
Meanwhile, the bank expects global oil consumption to start ramping back up before the end of June and “gradually recover over the next two years.”
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“When combined with shut-ins, our commodities research team sees shift from building inventories to drawing inventories by June,” the analysts wrote in the note.
That should push the price back up.
Fast forward to the second half of 2021, and you could see prices stabilizing at about $60 a barrel for Brent, they said — similar to where they were at the start of this year.
Plus, announcements of dividend cuts, spending reductions, shut-ins, and lower front-month oil prices “no longer appear to be negatively impacting stocks.”
Taken altogether, that makes the bank “positive on energy stocks.” Here’s how it’s thinking about where to place its bets.
In the note, Goldman highlights three stocks that are “quality of sale” — meaning, they’re trading below what the bank sees as their worth.
Those are the exploration and production companies EOG Resources (EOG) and Pioneer Natural Resources (PXD), as well as the oil field service company Baker Hughes (BKR).
Goldman also lists its “next rung down” picks: Suncor Energy (SU), WPX Energy (WPX), Plains All American Pipeline (PAA), Halliburton (HAL), and Marathon Petroleum (MPC).
“We see 41% average total return for these companies,” the bank wrote, adding that they have strong balance sheets and cost structures.
But the bank said those second-rung picks could be at risk if oil prices are slower to recover than it expects.
Exploration and production: ‘Increasingly attractive’
The bank expects the price of US crude, which is at about $12.40 a barrel, to recover to about $55 a barrel by the second half of next year. That will lead to “strong equity performance” among exploration and production firms as they “begin to flatten and grow production again,” the analysts wrote.
They said they believed exploration and production stocks were “increasingly attractive for a cyclical rally in oil prices.”
In addition to Pioneer Natural Resources and EOG Resources, the bank gave Concho Resources (CXO), Parsley Energy (PE), and Diamondback Energy (FANG) as buy ratings.
On a rung down are Hess (HES), Noble Energy (NBL), Murphy Oil (MUR), and WPX Energy.
And what about stocks to avoid?
Chesapeake Energy (CHK), California Resources (CRC), Laredo Petroleum (LPI), Southwestern Energy (SWN), and Continental Resources (CLR) all have sell ratings because of things like weak balance sheets or expected declines in their production, the bank said.
In a typical oil-price downturn, integrated oil companies — which both produce oil and refine it into products like gasoline — are more protected. If drilling oil is no longer profitable, their downstream business units keep them afloat.
This time is different. Demand for refined oil has all but evaporated because of stay-at-home orders designed to slow the spread of the novel coronavirus. As a result, Goldman said the next couple of months would prove tough for integrated oil companies.
The analysts said that as demand bounces back, they expect integrated companies in the US to “participate in the recovery on both the upstream and the downstream segments.”
The bank prefers Chevron (CVX) over Exxon Mobil (XOM) because of a “relatively stronger balance sheet position and lower Brent price required to cover the dividend — a core priority for both companies which have recently slashed 2020 spend levels to better protect their payout.”
Refiners will ride the demand recovery
Companies that refine crude oil into fuels and other petrochemicals “remain under pressure” because of weak demand, the bank said. After all, demand for gasoline — the most refined fuel — is down about 30% this month globally, according to the research firm Rystad Energy.
But as countries start to relax lockdowns, demand for gasoline will be quick to return, putting refiners into a strong position “to participate in the economic recovery,” the analysts said.
As for stocks — the bank’s preferences are Par Pacific Holdings (PARR), Phillips 66 (PSX), and Valero Energy (VLO), in addition to Marathon Petroleum.
Oil field service companies — which, among other activities, operate equipment in an oil field — are often hit first by a downturn, as exploration and production grind to a halt.
Goldman said these companies in North America were “right-sizing” for the downturn by cutting costs, which could give way to “a far healthier North American” market starting in the second half of next year and into 2022, relative to last year.
The bank is focusing on companies that offer international or offshore exposure and some basics — competitive technologies, plus strong balance sheets and cash flows.
In addition to Baker Hughes, Schlumberger (SLB) fits the bill, the bank said, and so does National-Oilwell Varco (NOV), to a lesser extent.
“All three companies generate a higher portion of revenues from the international/offshore markets than U.S. land,” the analysts wrote.
But the bank said Halliburton — one of its “next-rung-down” picks — offered the highest free-cash-flow yield in a recovery.
Clean-energy stocks have fallen sharply, but their ‘long-term fundamentals remain relatively solid’
At the beginning of the year, solar stocks appeared to buck the downward trend shaping the rest of the energy industry, Business Insider previously reported.
While many of them have since fallen in step with the rest of the industry, Goldman said it believed the “long-term fundamentals remain relatively solid.”
“We see secular growth opportunities across the space reaching more attractive valuation levels than we have seen in some while,” the analysts wrote.
They added that while they see some near-term risk, they “believe the combination of increasing solar cost competitiveness and continued headroom for more adoption” could buoy longer-term growth.
The bank said Enphase Energy (ENPH), Sunrun (RUN), and Vivint Solar (VSLR) were strong picks among the residential sector.
“Elsewhere in our coverage, we see utility-scale solar likely to be more resilient through the recession,” they wrote.
The analysts highlighted First Solar (FSLR) “as being better-positioned than most stocks in our coverage to weather the current environment given volume visibility and the industry’s leading balance sheet strength.”