Goldman lists 5 reasons why traders should load up on energy stocks following oil's historic plunge
- In a note published Monday night, analysts at Goldman Sachs listed five reasons investors should add exposure to energy stocks following oil's historic plunge into negative territory.
- Goldman said it thinks energy fundamentals have bottomed and there is potential for a lasting recovery depending on the pace of the demand rebound.
- The risk behind the call, the analysts note, is a much longer than expected pace in oil demand recovery, which would likely be due to the coronavirus lingering for longer than expected.
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Goldman Sachs thinks now is the time for investors to add exposure to energy stocks following oil's historic plunge into negative territory last week.
The investment bank gave five reasons why in a note published Monday night.
Goldman thinks energy fundamentals have bottomed and sees potential for a lasting recovery in energy stocks depending on the pace of the rebound in demand for oil.
The main risk related to the call, according to the analysts, is a much longer-than-expected oil demand recovery, which could be exacerbated if the coronavirus pandemic lingers around longer than investors expect.
Here are the five reasons Goldman Sachs is bullish on energy stocks.
1. "Oil prices are at/below cash costs."
WTI oil prices are below the $20 to $25 per barrel price that is often seen as "typical cash cost floors." Goldman thinks current low prices and even the negative oil prices seen last week are warranted due to the level of oversupply in oil markets. At the same time, these ultra-low prices should force a reduction in production, thus reducing supply and helping put a floor in oil prices.
2. "Shut-in announcements are becoming material."
"The combination of OPEC+ supply cut and US/Canada shut-ins should reduce the need for prolonged low shale activity needed to rebalance oil prices."
3. "Demand appears to be at a trough."
Goldman expects global demand in oil to improve off trough levels before the end of the quarter, and "will gradually recover over the next two years." Goldman's Commodities Research team sees a transition from building oil inventories to drawing on oil inventories by June.
4. "Valuation near 25-year lows on EV/gross cash invested basis."
"E&P stocks are trading near $0.50 cents on the dollar per dollar invested adjusted for longer-term degradation in corporate returns -- this is slightly above troughs seen since 1995."
5. "Stocks on average have stopped falling on recent bad micro news."
Between dividend cuts, production shut-ins, and lower front-month oil prices, oil stocks no longer appear to be negatively impacted by the poor headlines coming out of the oil industry. Goldman said, "as producer announcements shift from capex/dividend cuts to shut-ins, we expect equity response to inflect more positively."
WTI oil prices are trading down more than 3% in Tuesday morning trading to $12.34 per barrel. Energy stocks, as measured by the XLE ETF, are down 40% year-to-date. Below is a timeline for oil's potential recovery path, accoring to the bank.
