Goldman Sachs says that $35 a barrel for West Texas Intermediate crude oil is an "idealistic Goldilocks scenario," one where the price is "not too high and not too low but just right -- above cash costs but keeping a too-early shale restart at bay," according to an April 6 research note to clients.
A $35/bbl price is also one which makes several oil and gas exploration and production stocks attractive, Goldman Sachs analysts wrote in the joint note.
"While we view recent supply data from both the U.S. and OPEC as somewhere between in line and modestly bearish for prices, modestly bearish near term is not enough to change our attractive coverage view for E&P equities," the note said. "We would use volatility to add to positions of shale productivity winners and the next rung down."
Despite near-term volatility, oil prices between $30 and $35 should keep the "behavior" of U.S. oil producers unchanged and accommodate a $55-$60 per barrel price range for 2017 -- providing opportunity for equity buying, Goldman says. Even if oil prices rally to $45-$50 a barrel, which would reduce the 2017 upside for prices, it is still favorable for equities.
Goldman does not expect producers to change their capital expenditure budgets unless oil prices rise above $50 a barrel, while inventory falls. (The analysts acknowledge that some Permian basin exploration and production companies could begin add activity if oil rises above $45 a barrel.)
Crude oil was racing toward $40 a barrel on Friday as commodity traders pinned hopes on next week's meeting among Organization of Petroleum Exporting Countries members which will hopefully result in a production freeze. As well, the number of active oil rigs in the U.S. fell by 8 to 354, according to Baker Hughes data. West Texas Intermediate was up 5.6% to $39.35 a barrel, at a recent check.
The analysts wrote in the April 6 note that they are "less willing to believe in a sustained OPEC production freeze or cut, so we do not regard the data as a departure from our outlook at present."
Here are the nine stocks Goldman is recommending. We've paired the list with commentary from Jim Cramer if the stock is owned by his Action Alerts PLUS Charitable Trust Portfolio.
EOG Resources (EOG - Get Report) , headquartered in Houston, explores for, develops, produces, and markets crude oil and natural gas. The company's principal producing areas are located in New Mexico, North Dakota, Texas, Utah, and Wyoming in the United States. It also has production sites in Canada, the Republic of Trinidad and Tobago, the U.K. and China.
EOG Resources is among Goldman's "Conviction Buy" list of stocks. Analyst Brian Singer has a 12-month price target of $96 on the stock.
"EOG trades at 14.1x/7.4x 2016E/17E EV/EBITDA (8.5x/5.5x for peers)," Singer wrote in a Feb. 26 note to clients following company quarterly earnings results. "We see 40% upside to our 12-month DCF/M&A-based target price of $96. EOG is CL-Buy on strong long-term growth/returns/FCF/technical leadership."
Diamondback Energy (FANG - Get Report) is a Midland, Texas-based independent oil and natural gas company that focuses on the acquisition, development, exploration, and exploitation of onshore oil and natural gas reserves in the Permian Basin in West Texas. Its activities are primarily focused on the Clearfork, Spraberry, Wolfcamp, Cline, Strawn, and Atoka formations.
Diamondback Energy is among Goldman's "Conviction Buy" list of stocks. Analyst John Nelson has a 12-month price target of $84 on the stock.
"Alongside 4Q15 results FANG reduced the low-end of annual capital spending and production guidance," Nelson wrote in a Feb. 19 note to clients. "We continue to believe FANG's strong balance sheet, low-cost asset base and potential to execute opportunistic acquisitions should support outperformance. We reiterate our Buy rating (on CL), seeing 19% upside to our 12-month ... target price of $84 ($86 previously)."
PDC Energy (PDCE - Get Report) is a Denver-based independent exploration and production company, acquires, explores for, develops, and produces crude oil, natural gas, and natural gas liquids in the United States.
PDC Energy is also among Goldman's "Conviction Buy" list of stocks. Analyst Pavan Hoskote has a 12-month price target of $72 on the stock.
"We rate the stock Buy (on the Conviction List) due to its best-in-class 2016 production growth (38%) and strong balance sheet (1.2x 2016E net debt/EBITDA)," Hoskote wrote in a Feb. 23 note to clients.
Hess (HES - Get Report) is a New York-based exploration and production company, that develops, produces, purchases, transports, and sells crude oil, natural gas liquids, and natural gas. The company operates primarily in the U.S., Denmark, Equatorial Guinea, the Joint Development Area of Malaysia/Thailand, Malaysia, and Norway.
Hess is also among Goldman's "Conviction Buy" list of stocks. Analyst Brian Singer has a 12-month price target of $59 on the stock.
"We continue to see HES in the 'hopes and dreams' opportunity in 2016 due to exploration upside largely from Guyana but also the Gulf of Mexico," Singer wrote in a Feb. 26 note. "We believe Guyana is a multi-billion BOE opportunity for HES, with risked upside scenario of $11/shr (we assume $5 in our $59 12-month, DCF-based target price)."
Cenovus Energy (CVE - Get Report) is a Calgary-based develops, produces, and markets crude oil, natural gas liquids (NGLs), and natural gas, mainly in Canada, but the company owns a 50% interest in two refineries in the U.S.
Cenovus Energy is also among Goldman's "Conviction Buy" list of stocks. Analyst Neil Mehta has a 12-month price target of $16 on the stock.
"In recent investor conversations, one of the key debates around Cenovus has been the risk the company will issue equity. While CVE issued common stock on 2/17/15 (at levels 41% higher than the current stock price), we see a low probability CVE will tap the equity markets in 2016 given: (1) C$4 bn in cash on the balance sheet, (2) reduced capex, (3)an undervalued share price on a normalized EV/DACF and FCF yield basis, (4) dividend reductions, and (5) limited liquidity needs," Mehta wrote in a March 28 note.
Anadarko Petroleum (APC) engages in the exploration, development, production, and marketing of oil and gas properties. Anadarko Petroleum is based in The Woodlands, Texas. The company's asset portfolio includes U.S. onshore resource plays in the Rocky Mountains area, the southern U.S., the Appalachian basin, and Alaska; the deepwater Gulf of Mexico; and in Algeria, Ghana, Mozambique, Colombia, Côte d'Ivoire, New Zealand, Kenya, and other countries.
Goldman Sachs analyst Brian Singer upgraded Anadarko Petroleum to buy from neutral on March 11. He has a 12-month price target of $58 on the stock.
"We upgrade APC to Buy as we see potential for leverage improvement in 2017 via: (1) higher commodity prices in 2017 (benefits all E&Ps); (2) oil production growth year-over-year (APC is among a select group of E&Ps that we expect will be able to grow oil production yoy in 2017); and (3) potential asset sales (we do not assume additional asset sales in 2016 in our base case, but see potential for positive surprises)," Singer wrote.
Encana (ECA - Get Report) is a Canadian-based company that engages in the development, exploration, production, and marketing of natural gas, oil, and natural gas liquids in Canada and the United States.
Goldman Sachs analyst Brian Singer rates Encana a buy with a 12-month price target of $9 on the stock.
"We are Buy-rated given ECA's positive core four operations and potential for cost execution to serve as a key catalyst for the stock, while attractive 2016 hedges help protect the balance sheet during low oil prices," Singer wrote in a Feb. 24 note, following the company's quarterly earnings results.
Continental Resources (CLR - Get Report) , based in Oklahoma City, Okla., explores for, develops, and produces crude oil and natural gas properties in the north, south, and east regions of the United States.
Goldman Sachs analyst Brian Singer rates Continental Resources a buy with a 12-month price target of $42 on the stock.
"Investors are concerned on balance sheet deterioration in a $35-$40/bbl oil environment (we estimate net debt/EBITDA would rise to 6x at $35/bbl WTI). While we see risk to investor sentiment and stock performance if oil price sentiment deteriorates further, we see risk-reward to the upside from higher oil prices and productivity improvement from 'shale scale' position in the Bakken and SCOOP/STACK plays," he wrote in a Feb. 25 note.
Whiting Petroleum (WLL - Get Report) , based in Denver, is an independent oil and gas company, engages in the acquisition, exploration, development, and production of crude oil, natural gas liquids, and natural gas in the Rocky Mountains and Permian Basin regions of the United States.
Goldman Sachs analyst John Nelson rates Whiting Petroleum a buy with a 12-month price target of $13.75 on the stock.