Goldman Says Now Is The Time For Energy Stocks

By Aaron Levitt | June 04, 2012 AAA

With a variety of global economic data beginning to show some weakness and signal trouble ahead, investors have once again begun to shun risk assets. Everything, from stocks to commodities, has sold off heavily over the last few weeks as this new reality has taken hold. Broad global market measures like the iShares MSCI ACWI Index (Nasdaq:ACWI) have seen huge asset outflows and now sit closer to their 52-week lows rather than their highs. However, venerable investment bank Goldman Sachs sees opportunities on the horizon and recently reiterated its "buy" rating on one key group of natural resources producers. For investors, the energy sector is cheap, but not too cheap, and offers a great value.

Beaten Down Too Far
In a research note to clients this past week, analysts at Goldman recently re-upped their bullish stance on the energy sector, saying that equities in the industry have dropped "too far" over the last few months. Global growth concerns, coupled with dwindling potential shocks to supply have pushed the price of crude oil downwards to sit in the mid-$80 a barrel range. This has caused energy-related equities to fall down hard, reaching valuations that now reflect around an $85 per barrel long-term price.

According to Goldman, this $85 per barrel valuation doesn't reflect the real long-term picture in the oil market. Continued rising demand across various emerging markets in Asia with help keep global supplies tight and result in overall higher prices. At the same, pending Chinese stimulus measures as well as growing sector-wide M&A will cause outperformance. Finally, recognition of improving resource reserves will drive equity multiples across the sector. The bank forecasts that the market is underestimating many energy firms' natural gas liquids (NGL) growth and that upward revisions to resource life will drive higher energy stock prices. Right now, E&P firms are trading for multiples only slightly higher than they did when massive shale plays like the Eagle Ford and Marcellus first came online in 2010. Goldman also believes that natural gas prices are in the middle of bottoming-out and will rise in 2013.

Goldman estimates that energy investors could see potential upside of 38% in oil stocks from current levels and those investors should feel "greater comfort in owning higher beta energy stocks."

SEE: 4 Benefits of Rising Oil Prices

Buying Some Energy Bargains
Given the long-term outlook for rising energy demand, investors may want to follow Goldman's advice and take a bet on the sector. Much of investment banks recent research note focused on exploration and production firms. To that end, the SPDR S&P Oil & Gas E&P ETF (ARCA:XOP) could make a great broad play. The fund tracks 75 different energy producers including small fries like Cabot Oil & Gas (NYSE:CBT) and giants like Exxon (NYSE:XOM). Additionally, the fund includes a 14.29% weighting to refinery firms and charges a cheap 0.35% in expenses. Likewise, the Vanguard Energy ETF (ARCA:VDE) can be used as broad energy play.

Goldman also highlighted the opportunity in several independent oil and gas producers including EOG Resources (NYSE:EOG). EOG has seen tremendous liquids growth stemming from its holdings in the Permian, Bakken and Eagle Ford shales. Devon Energy (NYSE:DVN), another independent oil and gas producer, continues to focus on oil and NGL rich assets and recently announced it will increase 2013 oil production by 20%. Both get top nods from the investment bank, along with Gulf of Mexico driller Noble (NYSE:NBL).

Finally, also hitting bargain status are the various oil service firms. Tapping unconventional and deepwater reserves takes big technological expertise and expense. As these assets become the norm, it will benefit firms like Baker Hughes (NYSE:BHI) and Halliburton (NYSE:HAL).

SEE: Meet OPEC, Manager of Oil Wealth

The Bottom Line
With the market's steep sell-off over the last few weeks, a variety of bargains are emerging. According to investment bank Goldman Sachs, the biggest is in the energy sector. As long-term fundamentals overshadow current valuations, investors should pounce on the sector. The previous picks, along with Forest Oil (NYSE:FST), make ideal selections to play Goldman's forecast.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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