Goldman Names the Big Oil Stocks It Says Have a 20% Upside

Brendan McDermid | Reuters

Goldman Sachs has picked its top Big Oil stocks in Europe for 2021, after they tumbled during the coronavirus pandemic last year.

Analysts from the bank said in a note published Monday that optimism around vaccines and a macro economic recovery was behind energy stocks' improved performance. Their prices have risen by more than 35% since their low in April, the analysts, led by Michele Della Vigna, highlighted.

Looking ahead, they said they see a "further 20% upside" for their stock picks, in addition to a potential 30% bounce in prices they identified in a November note.

Goldman's top oil and gas picks are:

  • BP, which it said is set to deliver a strong pipeline of new projects, as well as a focus on cost efficiency and a zero-carbon strategy. Goldman estimated a free cash flow (FCF) yield of 16% for the British company — a higher FCF yield is attractive to investors because it means a business has cash for dividends and to pay off debt.
  • Spain's Repsol, which the bank praised for having "one of the most resilient downstream businesses in Europe." It estimated a dividend yield — how much a company pays out relative to its share price — of 7.3% in 2021.
  • Total, which Goldman projected will offer a dividend yield of 7.7% this year, and described as "one of the sector-leading cash returns to shareholders" with one of the strongest balance sheets for European Big Oil companies. It forecasts a FCF yield of around 10% for the French company in 2021.
  • Italy's ENI, whose exploration and pipeline of new projects is helping drive up returns.
  • Shell, which the bank estimates has a FCF yield of 13%, favorable when compared to the rest of the group. Goldman also praised the British-Dutch multinational's "credible decarbonization strategy."

Goldman said there were five elements behind its choices, including a macro recovery in Big Oil stocks and a reversal of negative earnings revisions for the sector. It also noted restructuring and cost-cutting in the industry, above-average shareholder returns and an effort by the companies to reduce carbon emissions.

"Energy has been, along with financials, one of the best performing sectors since the rotation in cyclical/value began, which supports the high sensitivity of the sector to vaccine optimism and a macro economic recovery which our economists anticipate in 2021," the analysts stated.

Cyclical stocks like energy usually do better when the economy improves. Value stocks, which are considered underpriced relative to their fundamentals such as earnings, have also been popular with investors.

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