Goldman Sachs says oil prices are set to move 'meaningfully higher' into next year. Here are 7 reasons why the firm is bullish, and 5 stocks it recommends buying in advance

  • Oil has faced a rough week with BP suggesting demand may have peaked in 2019 and the International Energy Agency cutting its 2020 demand forecast.
  • Goldman Sachs remains bullish on oil services stocks, providing 7 reasons to invest and 5 stocks to watch in a note on Wednesday.
  • “The sector offers an opportunity for a significant update into 2021, with appreciation potential of over 50% in many cases,” Goldman Sachs analyst, Angie Sedita, said.
  • Despite questions over the long-term energy outlook, in the immediate term it remains highly relevant, Sedita said.
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The pull-back in the energy sector offers investors an opportunity to enter into oil services stocks they might have missed early in the year, Goldman Sachs analyst, Angie Sedita, said in a note on Wednesday.

"In our view, the long-term positive macro thesis for an oil price recovery in 2021 remains very much intact and the sector offers an opportunity for significant upside into 2021, with appreciation potential of over 50% in many cases," Sedita said.

Oil services companies cover anything from repairing and maintaining equipment and infrastructure at an oilfield, to drilling wells.

On the surface, the outlook for oil investing this week seemed bleak. On Monday, BP released a report that oil demand may have peaked in 2019 and the Organization of the Petroleum Exporting Countries slashed its forecast for global demand in 2020 by 400,000 barrels a day. The following day, the International Energy Agency, which advises Western governments on energy policy, also cut its global oil demand forecast for 2020 and 2021. 

The coronavirus pandemic has taken a heavy toll on the oil sector. The US benchmark crude price has lost more than a third of its value since the start of 2020 and is trading around $40 a barrel.

While this is a long way off 2008's record above $147, crude oil has staged a remarkable recovery since it plunged to around -$40 in April, during the depths of the crisis.

Demand will be slow to recover, as use of transportation fuels, in particular, hinges on national governments stemming the spread of Covid-19 and keeping road, air and sea travel alive.

In spite of a fairly fragile outlook for oil over the coming year or two, Goldman Sachs still sees opportunities in the energy sector.

"We believe the stage has been set for oil prices to move meaningfully higher into 2021-2022," Sedita said. "The stocks should track both oil prices and positive earnings revisions."

Business Insider breaks down the seven reasons why Goldman Sachs is bullish about oil services and the five stocks it says you should own.

  • "Sector service stocks are still down ~40%-70% year-to-date"

In recent weeks, the oil services sector has seen profits and yet the stocks are still down

around 40% to 70% year-to-date. Sedita sees this as an opportunity, as the economy starts to slowly reopen and leads to a stronger macro environment in 2021.

  • The recent pull-back creates investing opportunity

The long-term theory for oil price recovery in 2021 remains intact, Sedita said.

"Additionally, the often seen seasonal trade of the sector rallying into the end of the year, and early in the year lies ahead," Sedita said.

The oil price recovery in 2021 and the recent pull-back in energy creates an opportunity for investors to enter into oil services stocks at a discount rate and potentially experience an appreciation of over 50% in many cases, Sedita said.

  • "Intermediate term energy remains highly relevant"

Despite questions around the long-term outlook for energy as more companies focus on their Environmental, Societal and Governance goals, Sedita said in the immediate term, energy will still remain highly relevant.

"We see another cycle playing out with attractive stock-price upside from today's levels," Sedita said.

  • Aggressive cost-cutting has led to positive earnings revisions

Some oil service companies have already seen positive earnings revisions following the implementation of aggressive cost-cutting strategies. This has resulted in some companies beating earnings estimates in the second quarter and the raising of earnings forecasts for 2020-2021.

"While earnings revisions will be a driver of the stocks near-term, we ultimately expect oil prices to recover into 2021 (weighted to 2H-21), which will drive the stock prices well before a broad based activity recovery," Sedita said.

  • "We expect a modest recovery in US land activity in 2021"

Sedita expects a modest recovery in US land activity in 2021 driven by the intent of US exploration and production companies to try to keep oil production flat versus in a state of decline. Then in late 2021 expects international activity to slowly recover and then gain momentum into 2022.

 

  • "Expect the National Oil Companies to grow in importance and become larger drivers of activity growth longer-term"

"Unlike U.S. shale, [National Oil Company] markets are driven by technology, complexity, have high barriers to entry, higher margins, and fewer players, all of which benefits the largest and most capitalized oil service companies (SLB, HAL, BKR, NOV)," Sedita said.

Saudi Aramco tops the list of state-owned and run NOCs. It regularly vies with Apple for the position of world's most valuable company. Norway's Equinor, Brazil's Petrobras and Mexico's Pemex are some of its competitors.

  • Consolidation and attrition has already started happening

As smaller companies face financial distress, or exit the industry, Sedita expects to see escalating levels of equipment attrition in 2020, as well as consolidation.

"Additionally, we have seen the start of the much-needed consolidation with Liberty and SLB (OneStim JV) joining forces, and expect to see further consolidation," Sedita said.

 

Oil services stocks to buy

Goldman Sachs recommends owning these five stocks if interested in investing in oil services in the current market.

  • Halliburton Co. (HAL)     
  • Baker Hughes Inc. (BKR)
  • Schlumberger N.V. (SLB)
  • National-Oilwell Varco Inc. (NOV)
  • NexTier Oilfield Solutions Inc. (NEX)

Get the latest Goldman Sachs stock price here.

Get the latest Oil WTI price here.

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