Goldman Sachs says buy oil-stock pullbacks, highlighting a Club name to purchase
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Goldman Sachs said in a research note Thursday the recent energy sector pullback should be viewed as a reason to buy since that strategy has worked well since late 2020. Thinking along those lines, we did add to one of our three oil exploration and production (E & P) stocks twice this month. However, we’re currently debating whether we need that much exposure to an industry so tied to the economy. West Texas Intermediate crude and energy stocks have been under intense pressure in recent weeks on the back of heightened recession fears. While debated for months, worries about the economy and how it might impact oil demand have increased following fallout from the banking crisis and concern about the Federal Reserve hiking interest rates too much. @CL.1 YTD mountain West Texas Intermediate crude YTD performance At a high level, Goldman concedes that recession risks are “more elevated than in the past.” How could they not be following the second and third largest bank blowups in U.S. history and the ripple effect across the financial industry. However, Goldman only puts 35% odds on a recession, leading analysts to reason that an economic hard landing won’t likely break oil’s buy-the-dip streak. The Goldman note pointed out that six major energy pullbacks — three in 2021 and three in 2022 — each translated into “a meaningful buying opportunity.” But, given the elevated uncertainty, the analysts are focused on what they view as quality producers with attractive valuations, meaning those with “strong balance sheets, deeper inventories and lower cost assets.” Based on that criteria, Goldman has Pioneer Natural Resources (PXD) on its “Americas Conviction List” with a buy rating. Similar to Goldman, the analysts at Citi also like Pioneer, saying it’s in a position to realize increased well productivity starting in the second half of 2023 and see increased capital efficiency into 2023. In research note Thursday, Citi upgraded PXD to a buy rating and boosted its price target to $210 per share from $193. The stock closed Thursday just above $189 per share. The Club likes and owns Pioneer, too. It’s the E & P we’ve been buying lately — adding 25 shares on March 13 and 25 more shares Monday . Both were small buys in down markets, bringing our total ownership position to 175 shares for an overall portfolio weighting of 1.3% as of Thursday’s close. The Goldman and Citi updates are certainly welcome as they clearly support our view that Pioneer’s low crude break-even levels and strong cash flow profile are supportive of continued shareholder returns, especially should energy demand rebound from current levels. As for our two other E & P stocks, we’re leaning toward booting Devon Energy (DVN) and keeping Coterra Energy (CTRA), which we bought more of in early February on a collapse in natural gas prices. Both of them carry less than a 1% weighting in our portfolio. Coterra, unlike the others, is about 50/50 oil and nat gas. Influencing our inclination to hold on to Coterra is management’s recent guidance to prioritize buybacks over the company’s base dividend and variable dividend in their mission to return at least 50% of free cash flow to shareholders. The team believes Coterra shares are among the most attractive opportunities in the market. That’s what makes a good buyback. A large variable dividend is nice, but it’s a onetime payout based on recent free cash flow generation with no guarantee that the size will remain the same to the next payout. By repurchasing shares, management is increasing the ownership stake for existing shareholders forever, barring any future equity sales, which we see no need for. If you own more of the company then the next time WTI prices increase, you stand to make much more money should management determine that a larger variable payout is warranted because you have a greater right to the free cash flow than you would have if fewer shares were repurchased. Recognizing the ups-and-downs of owning energy stocks, we still believe they should be part of any diversified portfolio. When we first moved into the energy sector in late 2021, we viewed the holdings as a hedge. The thinking: Should energy prices continue to climb, we would make money while our other holdings — those that have energy as an input cost — took a hit as the higher prices would pressure margins. Recently, we’re starting to see the opposite dynamic. However, the E & Ps we own do throw off lots of cash to shareholders, basically paying us to be patient as we figure things out. (Jim Cramer’s Charitable Trust is long PXD, DVN, CTRA. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
A work-over rig performs maintenance on an oil well in the Permian Basin oil production area near Wink, Texas August 22, 2018.
Nick Oxford | Reuters
Goldman Sachs said in a research note Thursday the recent energy sector pullback should be viewed as a reason to buy since that strategy has worked well since late 2020. Thinking along those lines, we did add to one of our three oil exploration and production (E&P) stocks twice this month. However, we’re currently debating whether we need that much exposure to an industry so tied to the economy.
