Goldman says this is how to play energy after a 40% gain this year
Major averages are a long way from their highs, but energy remains a bright spot in the market. Goldman Sachs has identified several Buy-rated names that it sees as the greatest opportunities for investors. While the S&P 500 is down nearly 19% for the year, the energy sector has performed well in comparison, posting a gain of around 40% in 2022. As people return to office life, business trips and travel planning during the summer and holidays, demand for oil has rebounded this year. Also, Russia’s war against Ukraine this year has disrupted oil supplies, causing fuel prices to spike. “We recognize that the current near-term macro environment is challenging given growing demand concerns in China, Europe and the US. We also recognize that the Fed’s presentation is difficult for riskier ideas such as cyclicals,” Goldman’s Neil Mehta said in a report on Wednesday. “However, we step back and believe amidst the volatility there will continue to be attractive relative and absolute opportunities for investors to complement with pullbacks.” Here are five small- and mid-cap stocks in oil and gas where Goldman Sachs thinks the upside outweighs the risks: Chesapeake Energy is one of the company’s favorites for the exploration and production subsector. Analysts at Goldman highlighted the company’s “underestimated” inventory depth. The company expects Chesapeake to generate a 15% free cash flow yield in 2023 and 10% the following year. Shares are up 60% this year. Among its refinery picks is Delek, which is up almost 80% in 2022. Goldman noted that the company has positive momentum in terms of returns on capital to shareholders, citing a return on capital of around 6% for 2023 and room for upside. Weatherford International is Goldman’s Services sub-sector stock pick. The note said it has discovery value, adding that companies exposed to international oilfield activity will see a greater rate of change. Additionally, Weatherford has launched initiatives to close its margin gap with peers and improve its free cash flow conversion, Goldman says. Shares are up 14% this year. For oil and global exploration and production, Goldman looked at stocks that trade at a discount to their net asset value. That includes Magnolia Oil & Gas, which the company says is well positioned to deliver a double-digit free cash flow yield and dividend growth. Its shares are up 16% in 2022. PDC Energy was highlighted in the same sub-sector. Goldman said its buy rating is driven by the company’s ability to acquire drilling permits in Colorado, de-risk its holdings and ramp up production over the next year. PDC shares are up about 29% in 2022. – CNBC’s Michael Bloom contributed to this report.