8 Oil Stocks Goldman Sachs Says to Buy in 2020
Some analysts see a rebound in 2020, for several reasons. The companies that produce oil and gas have begun to change their free-spending ways, emphasizing profitability over production growth. Energy stocks now have the highest average dividend yield in the S&P 500, at 3.8%.
Energy
needs a new narrative. Production growth has been the story of the recent past,
with oil-and-gas output rising steadily in the U.S., leading to an oil glut.
Several oil-and-gas producers have cut back on growth plans given concerns
about profitability. But next year, production growth is likely to be much
slower from the U.S. and other non-OPEC countries, and could go flat or decline
slightly the following year. That could remove the fear of oversupply, and
bring more stability to the market. Goldman Sachs anaIyst Brian Singer
increased his 2020 price target for Brent crude to $63 and $58.50 for West
Texas Intermediate, from $60 and $55.50, respectively, “due to more favorable
inventories resulting from a deeper than expected production cut by OPEC (we
now expect OPEC supply of negative 0.6 million barrels per day year over year
versus negative 0.1 million previously).” In 2021, low-cost producers could
start increasing drilling again, while maintaining capital discipline. That at
least is the bullish story.
Singer
picked several producers he thinks can outperform in this environment. He
favors companies with strong balance sheets, sustainable earnings, long-lasting
inventories and that have shown signs of attempting to decarbonize—adhering to
environmental, social and governance goals.
His
top picks along those lines include EOG (EOG), Pioneer Resources (PXD), and
Parsley Energy (PE). All are producers with substantial resources in the
Permian Basin.
Goldman
Sachs analyst Neil Mehta also released top 2020 picks in oil and gas, looking
in particular at major oil companies and refiners. Among the majors, he prefers
Chevron (CVX) and ConocoPhillips (COP) to Exxon Mobil (XOM). Exxon has been
spending more aggressively than its two competitors on increasing production.
“Our stance continues to prefer companies that have superior free cash flow
generation and returns profiles, which trade at discounted valuation
multiples,” Mehta wrote.
Among refiners, Mehta prefers Valero (VL)), Marathon Petroleum (MPC) and Phillips 66 (PSX), which should benefit from new United Nations standards for shipping fuel that should increase demand for higher-margin cleaner fuels. Those so-called IMO 2020 rules go into effect on Jan. 1. Among those stocks, Marathon is Mehta’s favorite.