European Big Oil stocks exposed to the recovery in transportation have a 20% to 50% upside potential in the next 12 months, according to Goldman Sachs analysts.
Transport-led oil demand has suffered a severe hit due to the Covid-19 pandemic, but the investment bank’s analysts said that the continuing vaccine rollout and gross domestic product forecasts can support a recovery in 2021. On average, around two-thirds of European Big Oil companies’ earnings comes from transport-led oil demand, with Galp, BP, Total and Repsol the most exposed.
The sector has climbed around 40% from the lows of October 2020, but has underperformed both the wider market and Brent’s recovery, following a weak set of fourth-quarter earnings, they noted.
“A transportation recovery can reignite momentum for the underlying commodity and Big Oils equities, which we expect could be one of the key recovery/value trades in the coming months,” they said.
The analysts, led by Michele Della Vigna, said there were three key potential catalysts for outperformance over the next 12 months; positive earnings revisions, a strong set of results in the first quarter after a challenging fourth quarter, and the start of share buyback programs by the end of the year.
“[The fourth quarter] was very challenging for the sector (mostly due to the sudden increase in prices at the very end of the quarter, hurting marketing, trading, refining and derivative positioning with no benefit to upstream due to delayed pricing. But we expect the business environment in the first quarter to be substantially better as commodity price increases happened early in the quarter,” they said.
Read:Clean Energy Stocks Are Soaring on Biden’s Climate Plan. Why Investors Should Temper Expectations.
Further into 2021, the oil price recovery, combined with improved downstream margins and cost-cutting could trigger positive earnings revisions for Europe’s major oil companies, they noted.
When it comes to individual stocks, BP has the largest potential upside—54% for the London-listed shares and 60% for the ADRs—and was one of Goldman’s top picks. They cited BP’s high leverage to the transport-related oil demand recovery and rising prospect of buybacks, while also noting its efforts to become net zero on carbon.
Read:Total Defies Big Oil’s Weak Quarter and Boosts Renewables Investment
Repsol was another top pick, with an 18% potential upside, and offering one of the most attractive cash returns to shareholders—an estimated dividend yield of 7.2% in 2021. “With the company having one of the most resilient downstream businesses in Europe, we believe it is well positioned to navigate the current macro downturn and generate resilient cash flow in the coming years,” said the Goldman analysts.
Total, for its strong cash flow generation, 7.7% estimated dividend yield this year, and strong balance sheet, was another top pick, along with Royal Dutch Shell for its decarbonization strategy, potential dividend hike and prospect of a share buyback program, and Italy’s Eni for its strong pipeline of project start ups. Total stock has a 26% upside potential, Shell has 30% upside, and Eni has 15%, they added.
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February 18, 2021 at 11:47PM
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The Big Oil Stocks That Goldman Says Have up to 50% Upside Ahead of a Global Recovery - Barron's
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