Some of the most well-known oil stocks have further room to run amid elevated oil and gas prices, says strategists at Goldman Sachs.
And they point to several fundamental factors for their ongoing bullishness.
“We continue to believe upstream energy companies are favorably set-up in the current commodity upcycle (1) to generate double-digit free cash flow, which should allow for attractive capital returns and/or balance sheet improvement and thus allow for shares to outperform; (2) to undergo favorable consensus revisions in 2022 (we see 42% upside to consensus operating cash flows and 57% upside to EPS); and (3) given attractive valuation at our long-term Brent oil price of $90/bbl (vs. $80/bbl prior) despite our expectations for higher incremental inflation. Given the highly volatile commodity price environment, we continue to recommend a beta barbell strategy and prefer companies where we see dislocations on valuation relative to asset quality and where higher free cash flow from the current upcycle can drive greater capital returns relative to consensus expectations,” explains Goldman Sachs’ Neil Mehta.
Goldman lists 12 oil stocks it’s particularly locked in on: Hess (HES), Ovintiv (OVV), Diamondback Energy (FANG), Pioneer Natural Resources (PXD), ConocoPhillips (COP), Magnolia Oil & Gas (MGY), PDC Energy (PDCE), Antero Resources (AR), Kosmos Energy (KOS), Occidental Petroleum (OXY), Coterra Energy (CTRA), and EQT Corp. (EQT).
MIAMI, FL – MAY 22: A Hess gas station is seen on May 22, 2014 in Miami, Florida. The Hess Corporation announced that it would sell its retail arm to Marathon Petroleum for $2.6 billion. (Photo by Joe Raedle/Getty Images)
The investment bank notes these 12 stocks have average upside potential of 32% and a forward dividend yield of 4%.
Traders may not be too shocked to see Goldman’s calls here.
Oil prices are off their highs of nearly $139 a barrel on optimism U.S. oil majors such as Exxon and Chevron will produce more to make up for any lost Russian output amidst its war on Ukraine. Even still, oil prices remain above $100 a barrel reflecting the geopolitical risk.
Some on the Street have warned recently that oil prices could still surge to $200 a barrel.
Berkshire Hathaway billionaire Warren Buffett has been scooping up shares of Occidental Petroleum this month as oil prices have soared.
Says Mehta on the move in Occidental, “At our bullish commodity prices in 2022 estimate, we expect the company to generate ~$20 billion in free cash flow (37% of market cap before including the dilution impact from the warrants), which should allow for $3 billion in share repurchase + fixed dividend (~6% capital returns yield) and potential for further debt reduction. We continue to see potential for greater investor credit towards the company’s Upstream, Chemical and Low Carbon assets as Occidental continues to delever.”