Goldman says it's time to be a stock picker with energy stocks. Here are the firm's favorites

Published Thu, May 26 202212:55 PM EDTUpdated Thu, May 26 20221:38 PM EDT

Energy stocks are outperforming this week, month and year, and Goldman Sachs believes that while there's still value to be found in the space, investors need to be selective going forward. "We remain bullish the Energy and Oil & Gas equities complex despite YTD outperformance...That said, we see strong dispersion," the firm said Thursday in a note to clients. With this in mind, analysts led by Neil Mehta identified eight stocks with above-average upside, due to differentiated assets or discounted valuations. Goldman likes ConocoPhillips among super majors, Phillips 66 within refiners and Halliburton within oilfield services companies. Shares of Conoco hit a record high on Thursday, and Goldman envisions the stock climbing another 17% to $130. The firm pointed to Conoco's target of returning more than 30% of its cash flow from operations to shareholders through buybacks and dividends as a reason for investors to own the stock. "We also note our confidence in COP's through-the-cycle repurchasing strategy with the company having bought back stock during the pandemic when various US Major and E & P peers were more focused on balance sheet repair over the same time frame," Mehta wrote. Phillips 66 meantime hit the highest level in more than two years on Thursday as the refiner benefits from high prices for petroleum products. The national average for a gallon of gasoline hit a record $4.60 per gallon on Thursday, according to AAA. Diesel and jet fuel prices have also jumped, which means refiners are selling their products at higher prices. Shares of Phillips 66 are up 37% for 2022, lagging the broader sector's 56% gain. Goldman attributed this underperformance to several factors, including challenged execution around earnings and operations. The company's valuation now looks attractive relative to peers, and Goldman called the company its top pick among the refiners. "We see room for a strong earnings/cash flow inflection in 2Q in the current refining margin environment, particularly given the company's distillate leverage, and continue to see value in the more stable earnings streams from non-refining businesses," Mehta said. The stock is on Goldman's conviction list, and the firm's $112 target is roughly 13% above where the stock traded Thursday. Oilfield services company Halliburton hit a 52-week high in April, but is now trading about 5% below that level. Part of the underperformance is due to uncertainty around the price environment. "While we believe that 2H22 is more likely to be an international story, given the recent pullback, continued strength in US pressure pumping pricing and exposure to the international markets, we believe HAL shares have room to perform," Goldman said. — CNBC's Michael Bloom contributed reporting.