Investing in just about any oil and gas stock has paid off over the past year, as commodity prices have soared and even companies with debt problems have climbed their way out of a hole. The next stage of energy investing might be trickier, however.
A Goldman Sachs team led by analyst Neil Mehta thinks that investors should focus on six themes to find the next big winners among large-cap energy stocks.
Goldman has been among the most bullish banks when it comes to oil, and it sees prices staying high for several years. Other banks have come around to Goldman’s position, though the International Energy Agency expects prices to weaken in the next few months.
One major theme the analysts think that investors ought to watch is how oil-and-gas companies are reacting to the energy transition. A few oil, gas, and power stocks have been able to shift their businesses to start making money off new energy themes. One of those is oil services company Baker Hughes (ticker: BKR), which has begun offering more services for hydrogen and liquefied natural gas. Quanta Services (PWR), which provides services for power and pipeline companies, is similarly poised to benefit from clean-energy funding.
Another group to consider is companies that can benefit from a surge in demand next year. That would help refiners in particular, because they are particularly demand-dependent. Among the companies that can benefit are Phillips 66 (PSX), Marathon Petroleum (MPC) and Exxon Mobil (XOM), which has a large refining business.
Canadian companies with strong free cash flow are also poised to rise, Mehta asserts. The bank’s top picks include Cenovus Energy (CVE), Canadian Natural Resources (CNQ) and Suncor Energy (SU).
Goldman also projects that producers will start spending more on services to help them pump more oil. The beneficiaries of that decision include Schlumberger (SLB), and Halliburton (HAL).
In addition, companies that have vast inventories of oil available to them could succeed. That includes Hess (HES), which is teaming up with Exxon on a major multiyear project off the coast of Guyana. Pioneer Natural Resources (PXD) and Occidental Petroleum (OXY) also have extensive holdings in various basins.
And lastly, Goldman likes stocks that can return significant cash to shareholders. Most oil-and-gas companies have been raising their dividends, or announcing new policies to pay out a variable dividend based on cash flow. One of the pioneers of that strategy was Devon Energy (DVN), which made it onto Goldman’s list. Diamondback Energy (FANG) has also been paying out more to shareholders. And Goldman likes Coterra Energy (CTRA), a company formed from the merger of Cimarex and Cabot Oil & Gas.
Write to Avi Salzman at [email protected]
