Goldman says buy these 7 underperforming energy stocks

Published Mon, May 22 20233:03 PM EDTUpdated Mon, May 22 20234:30 PM EDT

Goldman Sachs believes the current downturn in the energy sector has created attractive opportunities for investors. The Energy Select Sector SPDR Fund (XLE) was down about 8% year to date through last Friday, according to FactSet. The overall energy sector is down 9.4% in 2023, the largest decline among the 11 major S & P 500 sectors. Meanwhile, the broad market index is up 9.4%. Goldman attributes the energy sector's underperformance to a combination of macroeconomic conditions. Mild winter temperatures drove down natural gas prices, and Russian oil supplies were as well higher than expected. Concerns about industrial demand also are an overhang on diesel, Goldman noted. The firm's analysts added there has been a broader market shift into large-cap tech stocks as the Federal Reserve appears to be nearing the end of its rate hiking cycle. With this in mind, Goldman analysts named seven buy-rated energy companies that have underperformed relative to peers but look to improve in the coming months. Take a look at the stocks below, and where analysts' expectations are for them in the future: Natural gas company Antero Resources has been a "meaningful underperformer" in 2023, according to Goldman, with shares off more than 23% year to date. The firm attributes the weakness to lower natural gas liquids (NGLs) prices due to lower heating demand, as well as oversupply. "While the outlook is less favorable today, we continue to believe AR is favorably set up to benefit from (1) its low cost Appalachia assets and strong balance sheet, which can support greater cash returns; (2) its ability to achieve premium pricing for 75% of its gas sold in the Gulf Coast, which is priced at a premium to Henry Hub; and (3) our favorable long-term estimate for NGLs prices with improvement in chemical demand," analyst Neil Mehta wrote in a note Friday. Goldman believes Antero shares have 43% upside over the next 12 months. ConocoPhillips also was named as an underperformer that nonetheless has a promising business outlook. The stock was down 13% as of Friday's close. Goldman says Conoco shares could rally 21% over the next 12 months. "Importantly, despite the sell-off in oil, we have high conviction that COP will be able to deliver on its commitment to return $11 bil[lion] in cash to shareholders in 2023," said Mehta. ConocoPhillips offers a "unique combination of high returns, strong execution, differentiated growth projects (eg. LNG), and consistent share repurchases/dividends," he added. Goldman also picked oil services company Halliburton as an underappreciated energy name. Shares have lost more than 23% year to date and are trading at more than double the discount to peers. To be sure, Goldman admits Halliburton could potentially fall further due to near-term uncertainty. "That said, for investors looking out one year, if oil prices firm back up towards $85/bbl Brent as we expect and Henry Hub returns to above $3/MMBtu as we expect, we see a clear path for HAL to move higher as well. We see 51% upside to our $45 12-month price target," Mehta said. HF Sinclair was another year-to-date underperformer on the bank's list of recommended trades. Goldman estimates the oil refiner could rally 39% in the next six months. Other names included Imperial Oil and oil exploration and production company Kosmos Energy , which have both notably lagged over the past month, with shares down 12% and 5.8%, respectively. Nonetheless, Mehta says Kosmos could gain 43% in the next six months as it makes progress in deleveraging. —CNBC's Michael Bloom contributed to this report.