GOLDMAN SACHS: 10 oil stocks investors should buy now, and one to avoid

  • On Monday, Exxon was removed from the Dow Jones Industrial Average, leaving Chevron as the sole energy company in the index. 
  • Exxon's ousting was due, in part, to the oil giant's poor performance relative to Chevron, analysts at Goldman Sachs said in a note last week. 
  • In a report published Monday, Goldman analysts offered up 10 alternative oil stocks that they say offer investors more value, from Chevron to ConocoPhillips. 
  • For more stories like this, sign up here for our weekly energy newsletter, Power Line.

In another sign of the shifting energy industry, Exxon was removed from the Dow Jones Industrial Average on Monday, leaving Chevron as the sole oil company in the index. 

Behind the ousting was years of poor performance relative to Chevron, Goldman Sachs analysts said in a note last week. The bank has long been bearish on the Texas-based oil giant, citing low cash flow and weak margins in its downstream business.

Exxon was removed from the Dow along with Pfizer and Raytheon, and the companies were replaced by Salesforce, Honeywell, and Amgen. 

On Monday, the bank reiterated its negative view of Exxon. Goldman analysts said that while they no longer see as much downside risk for owning Exxon in absolute terms — partly because they believe oil is set to soar in 2021 — there are other oil companies that offer "a more differentiated value proposition." 

Here are 10 companies the analysts say offer investors more value, across each segment of the industry. 

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A ConocoPhillips facility in AlaskaConocoPhillips

The bank's top upstream picks 

In the upstream segment, which includes oil exploration and production firms, the analysts favor Hess, Pioneer Natural Resources, Canadian Natural, and ConocoPhillips

Their view on Hess relies on the company's growth potential in Guyana, where Exxon (XOM) also has a presence. 

"While we recognize Exxon is the operator and has executed well in finding/developing resources in the region, we believe investors can get greater leverage to Guyana as a percentage of the enterprise value through Hess, without the declines in the base assets that XOM is likely to experience," they wrote in Monday's note.

The bank favors ConocoPhillips because its stock price is set to follow the recovery in oil prices, they said. Meanwhile, Canadian Natural and Pioneer Natural Resources both have strong free cash flow, among other benefits, they said. 

A Chevron oil drilling site near Midland, TexasReuters

Goldman favors Chevron over Exxon

Among the global oil majors, which operate in all segments of the industry, Goldman Sachs prefers Chevron, BP, and French multinational Total

Chevron (CVX) has outperformed Exxon, the analysts said, and they "expect this alpha to continue over the next year," citing a handful of metrics including cash flow. 

"We believe the relative strength of CVX's balance sheet is its key differentiating value proposition versus XOM for US investors that often have to decide between the two stocks," they wrote. 

The bank also favors BP, largely due to its pivot towards lower-carbon energy sources such as renewables and biofuel.

Read more: BP just shared a huge strategy update after posting a $17 billion loss. See the 6 key slides that map out the oil giant's future.

Marathon Petroleum

Fuel demand is set to recover, benefiting refiners

In the segment of the industry focused on turning crude oil and gas into fuels and chemicals, the bank's top picks are Phillips 66, Marathon Petroleum, and the Indian conglomerate Reliance Industries.

After plummeting in the wake of the coronavirus pandemic, which collapsed demand for fuel, refining margins are on track to recover, the analysts said. And investors can reap some of the benefits by buying Phillips 66, a big refiner that offers high returns, they added. 

Meanwhile, Marathon Petroleum's proposed sale of its gas station chain, Speedway, makes it "uniquely positioned to return capital," should the deal go through, the bank said. 

Finally, the analysts favor Reliance Industries, now the largest global energy company in the world aside from Saudi Aramco, Saudia Arabia's state oil company.

"In the core oil to chemicals business segment, its refining utilization should outpace Exxon," the analysts said of Reliance.

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