Goldman Sachs on Monday picked five top energy stocks of ahead of their quarterly earnings, saying it keeps a “constructive” view on the sector thanks to cash flows and valuations, among other highlights.
Investor sentiment has turned “more negative” on the E&P sector, due to concerns about a looming global recession, the analysts at Goldman Sachs said. The SPDR Energy Select Sector exchange-traded fund XLE,
has tumbled about 20% since closing at an eight-year high on June 8 through afternoon trading on Friday, while the S&P 500 index SPX,
has lost 3.6% over the same time.
The analysts, however, “maintain a long-term constructive/bullish posture given strong cash flow, discounted valuation, the growing strategic value of US gas/oil, and improving returns on and of capital,” they said.
A “key focus” for the quarter will be on production execution, the ability to manage costs amid higher inflation, capital returns outlook, and managing commodity risks through hedging, the analysts said.
Here are the five top picks for the Goldman Sachs analysts:
Diamondback Energy Inc.’s FANG,
recent shift to higher free cash flow allocations toward capital returns “should help differentiate the company relative to peers,” the analysts said.
Highlights for Chesapeake Energy Corp. CHK,
are its natural-gas assets, which underpin “attractive (free cash flow) generation supported by a strong balance sheet,” the analysts said.
“We believe (Chesapeake Energy) is on track to provide strong capital returns to shareholders and close the value gap etc. its peers,” including a 16% dividend yield over the next four quarters.
Unlike Diamondback Energy and Chesapeake Energy, Pioneer Natural Resources Co. PXD,
has outperformed “peers since the recent correction, which we believe is in part due to its strong balance sheet and attractive dividend,” the Goldman analysts said.
Goldman expects Pioneer to declare an $8.24 a share dividend, which would be an about 15% annualized divided yield, “which we believe can be further enhanced longer-term through modest production growth and opportunistic share repurchases.”
EQT Corp. EQT,
is well positioned to benefit from a favorable long-term natural gas outlook, and enjoys upside from better capital
efficiency from its new-well design plus exposure to improved pricing.
“We see potential for EQT shares to re-rate with further balance sheet improvement and more allocation of FCF toward capital
returns,” the Goldman Sachs analysts said.
Natural gas producer Ovintiv Inc. OVV,
formerly known as Encana, is on Goldman’s radar as its free cash flow allocation toward share buybacks “can allow the shares to close the relative gap etc. peers,” the analysts said.