Oil prices have dropped in the past month on fears of weaker global demand and strong supply, but Goldman Sachs analyst Brian Singer expects that the commodity will rebound.
“We reiterate our Attractive coverage view on E&P stocks following a sharp correction over the last two months. Weak oil prices and global growth concerns have superseded resource announcements, pushing down valuations to levels that now reflect around an $85/bbl long-term price. We believe the pullback in oil prices is overdone (our bullish WTI and Brent forecasts are unchanged) and that a combination of rising oil prices, recognition of improving resource bases, and M&A potential can drive outperformance.”
Investors should be more comfortable buying E&P stocks with more risk, or beta, the Goldman analysts argue.
“[W]e believe liquids growth guidance is conservative, and we see potential for upward revisions to resource life that drive multiple expansion despite the share price trading only modestly higher than it did in 2010 prior to the Eagle Ford Shale/Permian horizontal oil plays being unveiled.”
One of those stocks is EOG Resources (EOG), a beaten-down E&P stock that Goldman added to its Conviction List.
The Goldman analysts took Exxon Mobil (XOM), a lower-beta stock, off their conviction list.
Their other favorites include Pioneer Natural Resources (PXD), Noble Energy (NBL), and Devon Energy (DVN).
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