Goldman Sachs shares 24 energy stocks set to grow when oil recovers - Business Insider

While a coronavirus-fueled demand crunch has caused the price of oil to collapse, Goldman Sachs says now may be a good time to buy energy stocks. “We believe investors should add exposure to energy stocks,” the bank said in a note Monday.Analysts see oil demand ramping back up before the end of June and low prices forcing more production shut-ins.In the note, Goldman Sachs revealed 24 stocks that will benefit most from a recovery — and a handful to avoid. Visit Business Insider's homepage for more stories.

The worst may be yet to come for oil markets, with some analysts projecting another bout of negative numbers. But Goldman Sachs analysts said now is the time to buy energy stocks. They offered up a handful of reasons that support their view that the sector downturn is near its bottom with only up to go. The oil price collapse — which has sent the international benchmark, Brent crude, to 20-year lows — was ultimately an issue of oversupply that even a historic OPEC deal couldn't reverse.

But with today's oil prices below the cash cost of production (about $20 to $25 per barrel), the analysts say companies will be forced to shut-in wells. The number of rigs will fall by two thirds, they project, relative to early March, relieving some pressure on demand. Meanwhile, the bank expects global oil consumption to start ramping back up before the end of June and “gradually recover over the next two years.”Click here to subscribe to Power Line, Business Insider's weekly clean-energy newsletter.“When combined with shut-ins, our commodities research team sees [a] shift from building inventories to drawing inventories by June,” the analysts wrote in the note.

That should push the price back up.Fast forward to the second half of 2021, and you could see prices stabilizing at about $60 a barrel for Brent, they said — similar to where they were at the start of this year. Plus, announcements of dividend cuts, spending reductions, shut-ins and lower front-month oil prices “no longer appear to be negatively impacting stocks.”Read more: Layoffs, dividend cuts, and budget reductions: We're tracking how 18 oil giants from Equinor to Exxon are responding to the historic oil price meltdown

Taken altogether, that makes the bank “positive on energy stocks.” Here's how it's thinking about where to place its bets. Stocks 'on sale' In the note, Goldman highlights three stocks that are “quality of sale” — meaning, they're trading below what the bank sees as their worth.Those are the exploration and production companies EOG Resources (EOG) and Pioneer Natural Resources (PXD), as well as the oilfield service company Baker Hughes (BKR). Goldman also lists its “next rung down” picks: Suncor Energy (SU), WPX Energy (WPX), Plains All American Pipeline (PAA), Halliburton (HAL), and Marathon Petroleum (MPC).

“We see 41% average total return for these companies,” the bank wrote, mentioning that they have strong balance sheets and cost structures.But the bank cautions that those second-rung picks could be at risk if oil prices are slower to recover than it expects.

Goldman Sachs gives the exploration and production company Continental Resources a sell rating.

Wikimedia Commons

Exploration and production: 'Increasingly attractive'The bank expects the price of US crude, currently at about $12.40 a barrel, to recover to about $55 a barrel by the second half of next year. That will lead to “strong equity performance” among exploration and production firms, as they “begin to flatten and grow production again,” the analysts wrote. “We believe [exploration and production] stocks are increasingly attractive for a cyclical rally in oil prices,” they said.

In addition to Pioneer Natural Resources and EOG Resources, the bank rates Concho Resources (CXO), Parsley Energy (PE), and Diamondback Energy (FANG) as buy. On a rung down are Hess (HES), Noble Energy (NBL), and Murphy Oil (MUR), in addition to the previously mentioned WPX Energy. And what about stocks to avoid？ Chesapeake Energy (CHK), California Resources (CRC), Laredo Petroleum (LPI), Southwestern Energy (SWN), and Continental Resources (CLR) all have sell ratings due to things like weak balance sheets or expected declines in their production, the bank says.

A tough time for integrated oil companiesIn a typical oil-price downturn, integrated oil companies — which both produce oil and refine it into products like gasoline — are more protected. If drilling oil is no longer profitable, their downstream business units keep them afloat. This time is different. Demand for refined oil has all but evaporated, due to stay-at-home orders designed to slow the spread of the novel coronavirus. As a result, Goldman says the next couple of months will prove tough for integrated oil companies. “That said, as demand returns, we do expect the US [integrated companies] to participate in the recovery on both the upstream and the downstream segments,” the analysts wrote. The bank prefers Chevron (CVX) over ExxonMobil (XOM), citing a “relatively stronger balance sheet position and lower Brent price required to cover the dividend — a core priority for both companies which have recently slashed 2020 spend levels to better protect their payout.”

Refiners will ride the demand recoveryCompanies that refine crude oil into fuels and other petrochemicals “remain under pressure” due to week demand, the bank said. After all, demand for gasoline — the most refined fuel — is down about 30% this month, globally, according to the research firm Rystad Energy. But as countries start to relax lockdowns, demand for gasoline will be quick to return, putting refiners into a strong position “to participate in the economic recovery,” the analysts said. As for stocks — the bank's preferences are Par Pacific Holdings (PARR), Phillips 66 (PSX), and Valero Energy (VLO), in addition to previously mentioned Marathon Petroleum.

Workers adjust the valves of oil pipes at West Qurna oilfield in Iraq's southern province of Basra

Reuters/Atef Hassan

Oil service companies could be much 'healthier' next yearOilfield service companies — which, among other activities, operate equipment in an oilfield — are often hit first by a downturn, as exploration and production grind to a halt.

Goldman says these companies in North America are now “right-sizing” for the downturn by cutting costs, which could give way to “a far healthier North American” market starting in the second half of next year and into 2022, relative to last year.The bank is focusing on companies that offer international or offshore exposure and some basics — competitive technologies, plus strong balance sheets and cash flows. In addition to Baker Hughes, Schlumberger (SLB) fits the bill, the bank says, and to a lesser extent so does National-Oilwell Varco (NOV). “All three companies generate a higher portion of revenues from the international/offshore markets than U.S. land,” the analysts wrote.

But the bank says the company Halliburton — one of its “next-rung-down” picks — offers the highest free-cash-flow yield in a recovery.

Vivint Solar technicians install solar panels on the roof of a house in Mission Viejo, California

Thomson Reuters

Clean-energy stocks have fallen sharply, but their 'long-term fundamentals remain relatively solid'At the beginning of the year, solar stocks appeared to buck the downward trend shaping the rest of the energy industry, as Business Insider previously reported. While many of them have since fallen in step with the rest of the industry, Goldman says it believes the “long-term fundamentals remain relatively solid.” “We see secular growth opportunities across the space reaching more attractive valuation levels than we have seen in some while,” the analysts wrote.

They add that while they see some near-term risk, they “believe the combination of increasing solar cost competitiveness and continued headroom for more adoption” could buoy longer-term growth. The bank says Enphase Energy (ENPH), Sunrun (RUN), and Vivint Solar (VSLR) are strong picks among the residential sector. “Elsewhere in our coverage, we see utility-scale solar likely to be more resilient through the recession,” they wrote. The analysts highlighted First Solar (FSLR) “as being better-positioned than most stocks in our coverage to weather the current environment given volume visibility and the industry's leading balance sheet strength.”