An oil pump jack
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Oil prices have continued to rise even after hitting two-year highs last week, and analysts are increasingly optimistic that prices will stay strong through the summer. West Texas Intermediate and Brent crude futures were trading roughly flat at $72.12 and $74.19 a barrel, respectively, on Thursday after surging earlier in the week.
But it’s not enough to place a bet on the overall oil and gas sector and walk away.
“This summer could once again mark inflection points in multiple energy markets, similar to summers in recent years, instead of a ‘summer lull’ that lures market participants into a false sense of complacency,” Citigroup analysts warned in a note this week.
The “surprises” in store for this summer are at least as likely to push oil prices higher. Forecasts of a nasty hurricane season mean that oil and gas production and refining could be slowed, causing prices to rise more, for instance. Citi thinks oil prices could rise above $80 this summer.
Other analysts are also bullish. Goldman Sachs likewise expects strong prices to last, and advises investors to get more picky about the stocks they bet on. It ranks Canadian oil producers as the most attractive at current levels, because they are poised to produce more free cash flow. The Canadian companies have lagged behind their U.S. brethren, and thus have more potential upside, writes analyst Umang Choudhary.
Goldman recommends investors buy Suncor Energy (ticker: SU), Cenovus Energy (CVE), and Canadian Natural Resources (CNQ), with Suncor as their highest-conviction bet. Choudhary expects investors to give the companies more credit as the vaccine rollout leads to higher demand, and the companies reinforce their commitment to restrained spending on new projects.
Goldman also likes some U.S. producers that can similarly benefit from high prices and spending discipline. Their favorite pick is Devon Energy (DVN) because it has a strong position in the Permian Basin, the most productive area in the U.S., and has committed to return more cash to shareholders. Other top picks include Diamondback Energy (FANG) and Hess (HES).
Larger oil companies can rise too, Goldman argues, because they benefit from some of the same forces that help the smaller more-focused producers. Goldman’s favorite is ConocoPhillips (COP), and Occidental Petroleum (OXY) is also attractive, the analysts say.
But oil service companies and refiners are somewhat less attractive. “As upstream producers remain focused on capital discipline, we see less room for U.S. land activity to return to 2018 levels,” Choudhary writes. Schlumberger (SLB) is relatively more attractive because of its focus on international clients, after selling a majority stake in its U.S. shale business last year.
Refiners are not the best way to play the oil and gas price boom, however, Goldman asserts. One problem for them is that the cost of adhering to renewable fuel standards is rising and is cutting into margins. The Biden administration is reportedly considering whether to adjust some of the standards to help refiners, though that could hurt efforts to slow climate change. For those who want to play refiners, Goldman suggests buying Marathon Petroleum (MPC).
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