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- In a note released Monday evening, analysts at Goldman Sachs listed five reasons why investors should add exposure to energy stocks after the historic drop in oil into negative territory.
- Goldman said he believes energy fundamentals have bottomed out and there is potential for a sustainable recovery depending on the pace of the rebound in demand.
- The risk behind the call, analysts noted, is a much slower recovery in demand for oil, which would likely occur if the coronavirus pandemic persists longer than expected.
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Goldman Sachs believes that now is the time for investors to add exposure to energy stocks after the historic drop in oil into negative territory last week.
The investment bank gave five reasons in a note released Monday evening.
Goldman believes that the fundamentals of energy have bottomed out and sees the potential for a sustained recovery in energy stocks depending on the rate of rebound in oil demand.
The main risk associated with the call, analysts say, is a much slower recovery in demand for oil, which could be exacerbated if the coronavirus pandemic persists longer than investors expect.
Here are the five reasons why Goldman Sachs is optimistic about energy stocks.
1. “Oil prices are at / below cash costs. “
West Texas Intermediate oil is priced between $ 20 and $ 25 a barrel, often referred to as “typical cash cost floors”. Goldman believes that the current low prices and even the negative oil prices seen last week are warranted due to the level of oversupply in the oil markets. At the same time, these ultra-low prices are expected to lead to lower production, reducing supply and contributing to a floor in oil prices.
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2. “Closure announcements become physical. “
“The combination of OPEC + supply reductions and US / Canada closings should reduce the need for the prolonged weak shale activity necessary to rebalance oil prices,” said Goldman.
3. “Demand seems to be at a low point. “
Goldman expects global demand for oil to improve from lows before the end of the quarter and “will gradually recover over the next two years.” Goldman’s commodity research team plans to transition from building oil stocks to working oil stocks by June.
4. “Valuation near the lowest of 25 years on EV / gross cash invested basis. “
“E&P stocks are trading near $ 0.50 on the dollar invested adjusted for the longer term deterioration in corporate returns – which is slightly above the lows seen since 1995,” said Goldman.
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5. “On average, stocks have stopped falling due to recent bad news. “
Between dividend cuts, production shutdowns and falling oil prices in the first month, oil stocks no longer seem to be affected by bad titles from the oil industry. Goldman said that “as producer announcements move from investment cuts / dividends to closings, we expect the stock reaction to worsen more positively.”
WTI oil fell more than 3% Tuesday morning to $ 12.34 a barrel. Energy stocks, as measured by the XLE ETF, have fallen 40% since the start of the year.
Here is a potential timetable for oil recovery, according to the bank:
Goldman Sachs Research