Goldman says it’s time to be a stock picker with energy stocks. Here are the firm’s favorites
Goldman Sachs is pleased to report that Energy stocks have outperformed in this week, month, and year. However, it believes there are still opportunities for value, but investors must be careful. “We remain bullish the Energy and Oil & Gas equities complex despite YTD outperformance…That said, we see strong dispersion,” the firm said Thursday in a note to clients. Neil Mehta, an analyst, identified eight stocks that have above-average upside due to their differentiated assets and discounted valuations. Goldman prefers ConocoPhillips to Phillips 66 among super majors and Halliburton in oilfield service companies. Conoco stock shares reached a new record on Thursday. Goldman expects that the stock will climb another 17%, to $130. Investors should consider Conoco’s goal of returning 30% or more of its cash flows from operations to shareholders via buybacks, dividends, and other means. “We also note our confidence in COP’s through-the-cycle repurchasing strategy with the company having bought back stock during the pandemic when various US Major and E & P peers were more focused on balance sheet repair over the same time frame,” Mehta wrote. The refiner’s high oil prices have enabled Phillips 66 to hit its highest point in over two years. According to AAA, the national average price for gasoline was $4.60 per gallon. Refiners have been selling more of their fuel at higher prices as diesel and jet fuel prices rose. Phillips 66 shares are now up 37%, compared to the 56% growth in wider sector. Goldman pointed out that the underperformance could be attributed to many factors such as poor earnings execution and slow operations. Goldman said the company was now a top choice among refiners because of its attractive valuation. Mehta explained that “we see potential for strong earnings/cashflow inflation in 2Q, especially in the current refinery margin environment. Especially given the company’s distillate lever and we continue to find value in stable earnings streams from other non-refining business.” Goldman has the stock on conviction and its $112 target for the company is approximately 13% higher than where it traded on Thursday. Halliburton, an oilfield services company, hit a 52 week high in April but now trades about 5% lower. Uncertainty around the current price environment is partly responsible for the poor performance. Goldman explained that HAL shares can perform despite the fact that 2H22 looks more like an international story. “We believe 2H22 will be a global story due to US pressure pricing, continuing strength and continued strength of US prices pumping pricing, and the pullback. — CNBC’s Michael Bloom contributed reporting.