These are Goldman's favorite turnaround stories in the energy sector

Published Fri, Sep 24 20211:40 PM EDTUpdated Fri, Sep 24 20213:42 PM EDT

Energy is the top-performing S & P group this week, month and year, but the recent strength doesn't make up for years of underperformance. Still, Goldman Sachs believes there are winners in the sector. The bank identified a handful of stocks that have posted negative total returns over the last five years, but that are ripe for a turnaround. In a note to clients, Goldman said the Energy Select Sector SPDR Fund (XLE) has gone from a two-year average of $67 per share to $48 per share over the last five years, which "assuming improving capital discipline and returns, should be fertile ground to identify turnaround stories in energy." The group's downturn has lagged oil itself, with international benchmark Brent crude rising from a 2-year average of $52 per barrel to $70 per barrel since September 2016. Catalysts for companies on the firm's turnaround list include changes in strategy, leadership developments as well as macro improvements, all of which can drive mean reversion. Goldman has a buy rating on each name. Integrated giant Exxon Mobil is one of the names on Goldman's list. Shares of the company have rallied nearly 40% this year, but are still down 32% over the last five years. On a total return basis, or when the company's dividend is included, the stock has declined by 14%, Goldman said. This makes Exxon the worst performer relative to the other oil majors, according to the firm's analysis. A number of factors have weighed on the stock, including negative earnings revisions, weakness in downstream operations and a lack of clarity around long-term emissions reduction plans. Still, Goldman said a "meaningful turnaround is underway." "The company has reduced costs, surprised to the downside on capital spending, outperformed our expectations in Downstream/Chemicals and developed an outstanding resource in Guyana," analysts led by Neil Mehta wrote in a note to clients. Mehta also pointed to greater earnings transparency in recent quarters, after Exxon previously had one of the highest miss rates in the S & P 500. Exploration and production company Occidental Petroleum is another name that makes the list, with total return down 54% over the last five years, according to Goldman. Mehta attributes the lackluster performance in part to the company's acquisition of Anadarko Petroleum right before the pandemic sapped demand for petroleum products. "At current favorable commodity prices ... we see potential for shares to improve through balance sheet improvement, and over time with success in OXY's Low Carbon Ventures business," the firm said. "There has not been leadership change, but we do believe the strategy of the business has fundamentally changed from one of growth to deleveraging." When it comes to energy services companies, Baker Hughes has the clearest turnaround story going forward, Goldman said. The company's total return over the last five years is a loss of 23%. The firm said the stock has faltered thanks to the company's underperforming legacy businesses. But recently, Baker Hughes has shifted to higher margin and higher growth activities, including carbon and hydrogen end markets. "BKR plans to operate its industrial and traditional Energy businesses separately, as a sign that management is considering all options on how best to unlock value," Goldman said of Baker Hughes, which is on the firm's conviction list. —CNBC's Michael Bloom contributed reporting.

A view of the Exxon Mobil refinery in Baytown, Texas.

Jessica Rinaldi | Reuters

Energy is the top-performing S&P group this week, month and year, but the recent strength doesn't make up for years of underperformance.

Still, Goldman Sachs believes there are winners in the sector. The bank identified a handful of stocks that have posted negative total returns over the last five years, but that are ripe for a turnaround.