An oil refinery.
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Oil companies are about to report their fourth-quarter earnings, and the results are likely to be downbeat—proof that 2020 was one of the worst years in history for the industry.
But the results also have the potential to lift the stocks, argues Goldman Sachs analyst Brian Singer. The big oil companies, including the European majors, Exxon Mobil (ticker: XOM), and Chevron (CVX) are set to report earnings over the next two weeks.
Investors will be focusing on their statements about free cash flow for the coming year more than their explanations of past results. And Singer thinks they’ll be happy with what they hear. Already, oil stocks have had a strong start to 2021 as fund managers start putting money back into the industry after staying away in 2020.
Goldman is particularly bullish on oil prices, and has been for a while. Its 2021 price target for West Texas Intermediate crude, the U.S. benchmark, is $58.50 per barrel, 23% higher than the average call among Wall Street analysts. WTI crude futures were up 0.8% to $53.38 on Wednesday.
Singer recommends that investors put money in the stocks of oil companies with low debt and the potential to pay growing dividends and possibly buy back stock.
“We continue to prefer stocks that can incrementally return capital in 2021,” he wrote.
His top pick for this trend is Devon Energy (DVN), an Oklahoma City oil producer that just closed a deal to buy fellow producer WPX Energy. Devon intends to follow a unique dividend policy, one that some analysts have said could be a blueprint for the industry. It plans to pay a fixed dividend worth about 10% of its operating cash flow, and then pay a variable dividend worth up to 50% of “excess” free cash flow based on the state of the market.
His other choices include Cimarex Energy (XEC), EOG Resources (EOG), Magnolia Oil & Gas (MGY), and PDC Energy (PDCE). Singer also likes Hess (HES), which has more international holdings, “for longer-term non-shale growth.”
Write to Avi Salzman at [email protected]
