Oil majors and refineries are entering a key juncture with first-quarter earnings coming out over the next few days after stocks have already outperformed over the last month - the sector has risen 1,600 basis points vs. the S&P 500.
In spite of this, Goldman Sachs is bullish on the sector because the majors and refineries are expected to generate more free cash flow than at any time in recent history.
Goldman's thesis rests on four pillars.
First, the firm expects global oil demand to grow 1.8 million barrels per day vs. the 10-year average of 1.3 million bpd. Second, the firm sees crude differentials with the potential to widen out from spot levels due to rising production levels. Third, the sector is expected to see regulatory tailwinds in the coming years. Finally, Goldman sees refiners as industry-leaders in dividend growth and share repurchases.
Added to the fact that Goldman believes Brent crude oil will trade between $70 and $80 per barrel, the firm is bullish on the entire sector.
Here are some oil and refinery stocks Goldman Sachs has a buy rating on and what the firm says about them.
Suncor Energy Inc. (SU) - "We expect modestly below-consensus results driven by
downtime and the ramp costs at Fort Hills. We still see a robust second-half 2018 and 2019 free cash flow story and would recommend investors look through any near-term
Canadian Natural Resources Ltd. (CNQ) - "We expect modestly below-consensus results
driven by wider WCS and AECO spreads, which weighed on realizations. That said,
the stock trades at a 2018-2019 average FCF yield of 12%, so any pressure around
the quarter creates an even more attractive entry point to accumulate shares."
Chevron Corp. (CVX) - "We expect cash flow per share of $3.52 vs consensus of $3.57
on the quarter. We recognize that after disappointing third quarter and fourth quarter results vs. consensus, it is important for the company to execute near consensus in the
Andeavor (ANDV) - "We see the most upside to ANDV among refiners in terms
of upside to target given WTI-Midland spreads, strong California refining margins
and upside from midstream/marketing. We are below consensus on the quarter, but
would remain buyers of any weakness around the print given a strong setup for,
second-quarter to fourth quarter 2018."
Marathon Petroleum Corp. (MPC) - "MPC offers attractive exposure to MPLX upside (Buy
rated, covered by Jerren Holder), IMO 2020 regulations, widening WCS and WTI
crude differentials and peer-leading dividend growth. Given weather impacts,
especially to Speedway, we are below consensus for MPC for first-quarter 2018, as well, but
expect investors to look through this given a strong second quarter and 2018-2020 outlook."
Delek US Holdings Inc. (DK) - "We raise our 2019-2020 EPS estimates to reflect higher capture rates at the refining segment and see a path to $50 for the stock. We expect WTI-Midland spreads will widen out from $3/bbl currently to $4-$5/bbl by year-end as the marginal
barrel to clear the Permian will turn to trucking given pipeline constraints. We
continue to believe that DK is an M&A candidate as well, with a 15% probability of
M&A built into our valuation."