BOSTON (TheStreet) -- There's no stopping the energy sector's juggernaut over the past year, and Goldman Sachs' (GS) analysts say it's not too late to jump on the bandwagon.
A few of the investment bank's list of top buys have potential gains of as high as 42 % in the next six months. The rapid rise in oil prices have contributed to the outperformance. Oil is selling for about $112 a barrel, up from about $75 in late August due to rising demand in the U.S. in China and global events, such as uprisings in the Middle East and North Africa, that have trimmed production there.
As a result, energy stocks, which include oil, coal, gas and alternative energy, have returned 14% this year and 27% over the past 12 months through April 26, as tracked by Morningstar. The S&P 500 Index is up 7.7% and 13%, respectively. Goldman Sachs is particularly bullish on the oil industry, which includes everything from exploration and oil-field services to the largest, vertically integrated companies such as ExxonMobil ( XOM - Get Report). "Barring an unexpected hit to the world economy such as the housing/financial crisis of 2008-2009, we think oil markets will remain strong at least through 2012," said the Goldman oil-industry report of April 17. The firm has a "conviction list" of its highest-rated stocks, all of which are rated "buy." It relies on asset-value and cash-flow valuations to set its price targets. Five of Goldman Sachs' conviction-list "buys" for the energy industry follow (note that their price targets are for six months):
Occidental Petroleum ( OXY - Get Report), an international, integrated oil-industry giant, gets high marks from Goldman Sachs analysts, given its aggressive expansion plans in North America. The company participated in a series of transactions in December 2010 that bolstered its U.S. presence, the most significant of which were the purchase of undeveloped oil shale acreage in North Dakota and additional ownership interests in production processing facilities in California, said the Goldman analysts. The share price volatility around the company's earnings releases represents only temporary problems raised at that time, they said. "In contrast to its historical trading history, Occidental shares have more recently been experiencing significant volatility around earnings releases as investors have focused on developments pertaining to (the company's) California gas operations rather than its favorable long-term production growth and returns outlook," said the April 17 research report. The company is scheduled to release first-quarter earnings today. Goldman has a $125 six-month price target on Occidental's share, which represents a potential 23% premium to its current price. The company has an $82 billion market value. Occidental's shares are up 5.4% this year and 19.4% over the past 12 months.
Hornbeck Offshore Services ( HOS - Get Report) is an owner-operator of offshore supply vessels to the oil-drilling industry. The company, which does most of its business in the Gulf of Mexico, is starting to see an upturn in demand for its services after a slowdown due to the restrictions on oil production in the Gulf after the BP ( BP) oil-rig explosion and subsequent leak of 2010 virtually shut down exploration. "While we did not expect to see any strength until deepwater drilling returned, vessel utilization rates have taken a step up in March and day (lease) rates appear to have troughed due to increased shallow water activity and non-drilling-related work," said the Goldman report. "We continue to expect new deepwater drilling to start as early as April and to drive the next leg of (offshore vessel) demand, but faster-than-expected improvement represents an upside risk to our already well-above consensus estimates," said the Goldman analysts' report. "Hornbeck Offshore is the only stock in our oil service/driller coverage to trade at a discount to book value," it notes. The company is scheduled to release first-quarter earnings May 5. Its shares were trading at about $29 recently, and Goldman put a six-month price target of $36 on it as of April 26, or a potential premium of 25%. The company's shares are up 37% this year, giving the company a market value of $821 million.
Plains Exploration & Production ( PXP) is a small-cap oil-and-gas company that Goldman Sachs likes because of both its ownership of oil properties and production capabilities. The company owns oil- and gas-producing on-shore properties from California to the Gulf Coast. Goldman reiterated its conviction-list "buy" rating on the firm in a Feb. 25 analysts report noting that a strong fourth quarter of 2010 and early production results in the company's fully-owned (oil shale) Eagle Ford Shale project helped build confidence. Asset sales have also helped buttress the balance sheet. Its first-quarter earnings are due May 5. Plains trades at 5.4 times Goldman's 2011 estimated earnings of $2.07 per share (which includes several adjustments), versus the average of 7.3 times earnings for its peers. Given Goldman's $48 six-month price target, and its current price of about $35.50, it has a potential premium of around 35%. Plains Exploration's shares are up 9.7% this year, giving it a market value of $5 billion.
Goldman Sachs' only conviction-list non-oil industry pick in the energy sector is the solar-energy industry's largest player, First Solar ( FSLR - Get Report), which manufactures thin-film solar modules and constructs solar systems. The Tempe, Ariz.-based maker of solar panels and turnkey solar systems has aggressively used acquisitions to bolster its project capabilities and demand pipeline. "We highlight (First Solar) as our top pick for one of our key themes for 2011: 'Buy low-cost, well-funded producers with visible capacity growth and credible demand visibility,' " said the Goldman research note of Feb. 25. Its strong fourth quarter, which showed improved sales, is driving higher earnings estimates for the rest of the year from the financial firm and "fortifies our view that First Solar will continue to stay a step ahead of the pack," said Goldman. Goldman analysts also like that First Solar's cost advantage in an industry that is driven by cost, is improving. It also has a solid balance sheet. First Solar's earnings are due May 3. The investment firm's price target is $190, which gives a potential premium to its current price of about $137 of 38%. Its shares are up 3.5% this year, giving it a market value of $13 billion.
Cenovus Energy ( CVE - Get Report) is a Canadian oil company that operates conventional and oil sands and gas production projects in Alberta and Saskatchewan, and participates in a partnership joint venture with industry giant Conoco Philips ( COP). Goldman Sachs analysts say they "remain bullish on Canadian oil sands equities, which we believe will remain in a 'sweet spot' of rising crude oil prices and relatively muted cost inflation over the course of 2011." Goldman said "strategic refining exposure aside, our bullish view on Cenovus is centered around our very favorable view of the company's best-in-class asset base, which we believe can generate economic returns" even if long-term crude-oil prices are below $65 a barrel. "This is in contrast to the view we believe many investors hold that oil sands projects in general are at the higher end of global marginal supply cost curve," it said. Longer term, the company has aggressive oil sands expansion plans, which remain on track, and it has some of the best assets in the oil sands industry, Goldman said. It is also seeking joint ventures that will help it expedite current and future projects "with at least one deal targeted for 2011." The company reported first-quarter earnings of 6 cents per share Wednesday, down from 70 cents a year earlier. Goldman has a $54, six-month price target on the stock, based on asset value- and cash-flow estimates. That represents a potential 42% premium to its current price of $38. Cenovus shares are up 19% over the past three months, and the company has a $29 billion market value. >>To see these stocks in action, visit the 5 Energy Stocks Loved by Goldman Sachs portfolio on Stockpickr.