Oil has rallied big off the levels of the spring debacle when the forward futures actually traded negative and panicked traders were forced to sell at a loss as those holding contracts on expiration have to take physical delivery, and with no storage space available, had to take a loss. Trading right around the $40 level now, the analysts at Goldman Sachs think there are numerous upcoming catalysts that can support increasingly higher benchmark prices.
The energy analysts already have raised the firm’s long-term oil price forecasts for 2021, as fundamentals for next year appear skewed to a faster pace than they originally had in their base case for energy pricing. They also have cited the rising likelihood of a COVID-19 vaccine, which would greatly help the travel industry, among others.
A new report from oilfield services analyst Angie Sedita makes the case that some of the top companies the firm follows could exceed third-quarter expectations. The large drop in stock prices since the summer also is a huge bonus for investors looking to add energy-related names. The report said this about near-term possibilities:
Sector still down 35%-40% from June 2020 highs. We believe the pull-back offers investors an attractive entry opportunity. Quality companies with appealing 12-month catalysts have sold off by 20%-50%. In our view, the long-term positive macro thesis for an oil price recovery in the second half of 2021 (and 2022) remains intact and the sector offers an opportunity for substantial upside into 2021. Additionally, the often seen seasonal trade of the sector rallying into the end of the year (post-election), and early in the year lies ahead.
Six top stocks were considered worth buying now, and all make sense for growth stock investors who feel that adding energy-related shares now is a good long-term bet. While Goldman Sachs rates all six at Buy, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.
This somewhat contrarian play makes sense for investors looking for quality energy exposure. Baker Hughes Co. (NYSE: BKR) is an international industrial service company and one of the world’s largest oil field services companies. It provides the oil and gas industry with products and services for oil drilling, formation evaluation, completion, production and reservoir consulting.
The analysts are bullish on the company’s prospects and wide business silos, noting this in the report:
Energy hybrid (40% of revenues from industrial like businesses) revenues 80% international, LNG exposure with significant competitive moat, focused on energy transition technologies (hydrogen, carbon capture), has the least exposure to energy cyclicality, strong balance sheet (Net debt/EBITDA of 1.3x for 2020), plus a dividend yield of ~5%.
The dividend yield is 5.60%. Goldman Sachs has a $24 price target on the shares, while the Wall Street consensus target is $20.31. Baker Hughes stock closed most recently at $13.15, so hitting the Goldman Sachs target would be almost a 100% gain.
Shares of this industry leader are down almost 75% over the past two years and were recently added to the Goldman Sachs Conviction list. Halliburton Co. (NYSE: HAL) is one of the world’s largest providers of products and services to the energy industry. The company serves the upstream oil and gas industry throughout the life cycle of the reservoir, from locating hydrocarbons and managing geological data to drilling and formation evaluation, well construction and completion, and optimizing production through the life of the field.
Halliburton is the second-largest provider of oil services and the number one player in pressure pumping services worldwide. The company’s business always has been dependent on commodity prices. While the benchmark price of oil has recovered nicely from the lows back in the spring, contrarians that see a path to higher oil prices could make some huge money here. The analysts said this:
Quality beta play on oil price recovery, revenues 60% international, significant structural cost-cutting should lead to greater pricing power in a recovery, investment grade, and the company generating free-cash-flow of $1 billion in 2020 and 2021 (~8.6% FCF yield).
Shareholders receive a 1.44% dividend. Goldman Sachs price target is $22.50, well above the $15.50 consensus target. Halliburton stock closed Wednesday at $12.72.
National Oilwell Varco
This is another top company in the industry and its share price offers an incredible entry point. National Oilwell Varco Inc. (NYSE: NOV) designs, constructs, manufactures and sells systems, components and products for oil and gas drilling and production worldwide.
The company offers various equipment and technologies used to perform drilling operations. It also provides solids control and waste management equipment and services; drilling fluids; portable power generation products; drill and wired pipes; drilling optimization and automation services; tubular inspection, repair and coating services; instrumentation and measuring and monitoring services; downhole and fishing tools; steerable technologies; and drill bits.
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