Seven energy stocks in one specific sector, oil pipelines, are poised for a 'Goldilocks' rebound in 2019, according to Goldman Sachs and UBS. They have been pummeled by falling oil prices over the last year. But today, "We see this as somewhat of a Goldilocks environment where there is enough growth for above average earnings for the next several years,” says UBS analyst Shneur Gershuni, per Barron’s. Gershuni notes that while fundamentals have reached an inflection point, companies are also positioned to generate enough cash to accelerate distributions and buybacks.
Stocks that Goldman Sachs say may post average 33% returns over the next year include: Kinder Morgan (KMI), Cheniere Energy (LNG), Plains All American Pipeline LP (PAA), Energy Transfer LP (ET), and Targa Resources (TRGP). UBS also likes Williams Companies (WMB) and Western Gas Partners LP (WES).
What It Means For Investors
While energy stocks stocks underperformed the broader S&P 500 for yet another year in 2018, weighed down by headwinds including oversupply concerns, geopolitical risks and oil price instability, some bulls see the downdraft as an opportunity to buy these pipeline stocks on the dip.
UBS views lower capital spending, forecast to decline 11% in 2019, as aiding the industry turnaround. Fundamentals should continue to improve as more pipelines and other cash-generating projects come online, boosting free cash flows and Ebitda, according to Gershuni.
Goldman Sachs analyst Michael Lapidis echoed the upbeat sentiment in a note to clients, highlighting trends supporting improving free cash flows for energy companies. In particular, he expects pipeline producers to gain on an expansion of export terminals and processing plants along the Gulf Coast. Goldman notes that several companies should benefit form rising exports of natural gas liquids and related products. A difference in the price of West Texas Intermediate crude, produced domestically, and Brent crude oil, produced abroad, implies that “opportunities will exist to export oil to capture the wide spread,” according to Goldman, per Barron's.
Lapidis likes a broad range of pipeline stocks, including: Kinder Morgan, a leading integrated midstream company, and upgraded shares of master limited partnership Plain All American Pipeline to buy. Goldman’s other top picks include liquefied natural gas export terminal company Cheniere, as well as large cap producers Energy Transfer and Targa Resources.
Positive drivers aside, the risk is that energy stocks may suffer more if oil prices fall too far, leaving inventories inflated. Meanwhile, decelerating global economic growth, slowing earnings, macroeconomic uncertainty and broader geopolitical instability threaten energy markets at large and could curb demand. “We can scream into the wind how this time is different. However, in the short term macro headlines will dominate,” wrote Gershuni. So, while investors may profit off a longer-term rebound, a full blown recovery may be far off.