Energy was the best performing S&P sector last week, this month, and this year, but recent strength did not make up for years of poor performance.
However, Goldman Sachs believes there are still winners in this sector. The bank has found some stocks that have had negative total returns over the past five years, and believes these stocks are ripe for a turnaround.
Goldman Sachs said in a note to customers that the energy selection industry SPDR ETF (XLE) has dropped from an average of $67 per share over the past five years to $48 per share. “Assuming that capital discipline and return on capital improve, this ETF should be a good opportunity to identify turning points in the energy sector.”
The sector's decline made its trend lag behind oil prices. Since September 2016, the price of Brent crude oil has risen from a 2-year average of $52 per barrel to $70 per barrel.
The catalysts for companies on the company's turnaround list include strategic changes, leadership development, and macro-level improvements, all of which can drive a return to average. Goldman Sachs gave each of the stocks mentioned a buy rating.
General giant Exxon Mobil (XOM) is a prominent stock on Goldman Sachs's list. The stock is already up nearly 40% this year, but it's still down 32% over the past five years. Goldman Sachs said that in terms of total return, or if the company's dividends were taken into account, the stock had already fallen 14%. According to the company's analysis, this makes Exxon Mobil the worst performer compared to other oil giants.
A number of factors affected the stock, including a downward correction in earnings, weakness in downstream business, and unclear long-term emissions reduction plans. However, Goldman Sachs said, “A meaningful turning point is taking place”.
Analysts led by Neil Mehta wrote in a note to clients: “The company has cut costs, experienced a surprising reduction in capital expenditure, surpassed our expectations in the downstream and chemical sector, and developed an excellent resource in Guyana.” Mehta also pointed out that the company's earnings have been more transparent in recent quarters. Previously, Exxon Mobil was one of the companies with the biggest difference in earnings data and analysts' expectations among S&P 500 constituent stocks.”
Exploration and production company Occidental Petroleum (OXY) is another company on the list, with total returns falling 54% over the past five years, according to Goldman Sachs data. Mehta attributed this weak performance in part to the company's acquisition of Anadarko Petroleum before COVID-19 weakened demand for petroleum products.
Goldman Sachs said, “Under current favorable commodity prices... we have seen the success of OXY's low-carbon venture capital business through improved balance sheets and over time, so stock prices are likely to improve. The company's leadership hasn't changed, but we do think the company's strategy has fundamentally shifted from growth to deleveraging.”
When it comes to energy service companies, Baker Hughes (BKR) is viewed by Goldman Sachs as having the most obvious turning point in the future. The company's total return over the past five years was negative 23%.
Goldman Sachs said the stock had been shaken due to the poor performance of the company's traditional business. Recently, however, Baker Hughes has moved to high-growth commercial areas with higher profit margins, including carbon and hydrogen end markets.
“BKR plans to operate its industrial and traditional energy businesses separately, which shows that management is considering all options on how to best unlock value,” Goldman Sachs said in response to Baker Hughes's review, and the company was included in Goldman Sachs's belief list.