Energy might be the worst performing sector of 2019, but Goldman Sachs says the sector is headed for a rebound in 2020.
The energy sector has returned just 8% since the beginning of the year, significantly underperforming the S&P 500’s gain of nearly 28%.
This week, Goldman Sachs analyst Brian Singer increased his price target for crude to $63 for next year, and to $58.50 for West Texas Intermediate, up from $60 and $55.50, respectively.
Singer upped his price target “due to more favorable inventories resulting form a deeper than expected production cut by OPEC (we now expected OPEC supply of negative 0.6 million barrels per day year over year versus negative 0.1 million previously).”
The analyst identified several oil producers that he says can outperform in the current environment, favoring those companies with strong balance sheets, sustainable earnings, long-lasting inventories, and those companies that have demonstrated signs of attempting to lower their carbon emissions.
Goldman analyst Neil Mehta is also bullish on oil and gas stocks, and is especially focused on the major oil companies and refiners.
“Our stance continues to prefer companies that have superior free cash flow generation and returns profiles, which trade at discounted valuation multiples,” Mehta said of his picks.
As for refiners, Mehta likes Marathon Petroleum (NYSE: MPC), Phillips 66 (NYSE: PSX), and Valero Energy (NYSE: VLO), which he says stand to benefit from new rules out of the United Nations for shipping fuel standards. The new rules go into effect on January 1 and they should raise demand for cleaner—and thus higher margin—fuels.
Of these, Mehta’s favorite is Marathon Petroleum which he rates a Buy.
Mehta says Marathon’s recent spin-off of its Speedway gas station chain could be a potential catalyst for the stock. “While investors we spoke with viewed the news of Marathon’s decision to spin off the Speedway business positively, we would see the completion of the proposed spin as another potential positive catalyst given current premium multiple levels for other retail assets in the market,” Mehta wrote in a note from last month.