Oil prices roared back into a bull market last quarter, despite dips in recent sessions, and yet oil company equities have lagged those gains, opening up a performance gap that Goldman Sachs believes could make shares the smart play on long-term oil prices of $50 to $55 a barrel.
"The headwinds for the equities have now largely played out: energy has been the worst performing sector in MSCI World, with relative performance of energy equities in the US & Europe lagging their normal relationship with the oil price," analysts including Peter Hackworth wrote in a note published Monday.
Brent Crude oil futures for December delivery have gained 13% in three months, despite dipping in recent trading sessions including Monday, when they were down 0.63% to $56.43. U.S benchmark West Texas Intermediate futures for Nov. are up 11% over the same period, though they also traded down on Monday at $51.42, off 0.48% on their Friday price.
Those gains are more than double the gains of some of Goldman Sachs' top oil sector picks, including Total SA (TOT) , which is up 5.23% over the past three-months, EOG Resources Inc. (EOG) , up 6.9% and RSP Permian Inc. (RSPP) , up 7.2%.
Other Goldman tips have more closely matched oil price rises. Royal Dutch Shell Plc (RDS.B) , has gained 10.7% over the past three months, while Chevron Corp., (CVX) , is up 12.6%. Yet structural improvements mean that their free cash flow position has significantly improved. Likely enabling European producers to abandon dilutive scrip dividends and return to cash, while capital expenditure cuts could also provide a boost, with Goldman tipping Capex budgets to undershoot guidance in 2018 by 10% to 20%.
"Big Oils' competitive positioning has structurally improved, owing to better access to low-cost barrels, simpler developments and more favorable tax terms," wrote Goldman's analysts. "The European majors now have better FCF coverage at $52/bl than they had at >$100/bl, which. Risk-reward is therefore skewed to the upside in our view, with strong 3Q results, capex cuts and scrip removal the main catalysts."
Goldman's top pick in the U.S. is RSP Permiam, which it has handed a 12-month price target of $44, a 27% premium to its Friday closing price of $34.59. EOG Resources and Diamond Back Energy Inc. (FANG) are both tipped to rise 14% over the coming year, while Chevron has been handed a more modest 12-month target of $123, 4% above its Friday closing of $117.5.
"We...prefer shale-scale winners with good track records of execution: EOG continues to stand out among the large caps, with FANG and RSPP preferred from our mid-cap coverage," noted Goldman. Those stocks potential is underpinned by a new spirit of fiscal discipline, that could translate into a shareholder-friendly focus on return on capital, according to the bank.
In Europe, Goldman's No.1 pick is Total. The French oil major has a 12-month price target of €56 ($65.77), suggesting a 22% upside to its current price of €45.55. Shell's target price of 2,286 pence ($30.44) for its more commonly traded B-shares equates to an upside of 13%.