Marathon Petroleum refinery.
Courtesy of Marathon Petroleum
Investing in almost any oil and gas stock has been extremely profitable this year. The SPDR S&P OIl & Gas Exploration & Production ETF (XOP) is up 66% and the VanEck Vectors Oil Refiners ETF (CRAK) is up 24%.
But the next leg of outperformance may not be as smooth.
Goldman Sachs analyst Neil Mehta thinks stocks with specific characteristics are likely to outperform. Goldman has been particularly bullish on oil prices—and still is. Brent crude, the international benchmark, is trading around $70 a barrel today, and Goldman thinks it can climb above $75. Yet, the rise from $70 to $75 probably won’t give stocks the same across-the-board boost like the one when the price went from $50 to $70 so it’s more important to be choosy.
To play the sector now, Mehta suggests following three themes.
The first is to look for “idiosyncratic” ideas, including stocks with low-cost drilling potential like Exxon Mobil (XOM) and Hess (HES), which both have substantial opportunities off the shore of Guyana. Other names include Devon Energy (DVN) and Pioneer Natural Resources (PXD); they have variable dividend policies that should result in higher payouts over the next year. Mehta also thinks it’s worth considering Marathon Petroleum (MPC), Magnolia Oil & Gas (MGY) Cenovus (CVE), and Schlumberger (SLB).
Investors can also profit from oil and gas stocks that are a relative value, Mehta argues. That includes Canadian Natural Resources (CNQ), which he upgraded to Buy because it has trailed peers and he thinks it may be able to boost its dividend. The stock already yields 4.2%, better than peers, he notes. Other “value” names include ConocoPhillips (COP), Ovintiv (OVV), Diamondback Energy (FANG), PDC Energy (PDCE), Par Pacific Holdings (PARR), Parkland (PKI.TO), and Liberty Oilfield Services (LBRT).
And Mehta also likes stocks that have trailed their own historical performance: Kosmos Energy (KOS), Suncor (SU), Occidental Petroleum (OXY), Phillips 66 (PSX), and Baker Hughes (BKR). For Occidental, Mehta expects balance sheet improvements, better results in its chemicals division, and low-carbon businesses to help the stock rise.
Write to Avi Salzman at [email protected]
