Goldman recommends these energy stocks to play the slump in crude oil

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Goldman recommends these energy stocks to play the slump in crude oil

An emission comes out of a smoke stack at the Phillips 66 Refinery on February 6, 2024, in Linden, New Jersey.

Gary Hershorn | Corbis News | Getty Images

The sharp slump in crude oil this month has driven down energy stocks, but the pullback also presents an opportunity for investors to gain exposure to some high-quality companies, according to Goldman Sachs.

U.S. crude oil as well as the global benchmark Brent closed Tuesday at their lowest levels since December 2021, as bearish sentiment overtook markets due to worries that future demand is softening.

Crude oil futures rebounded somewhat Wednesday, but the U.S. benchmark and Brent are still down about 8.5% and 10.4%, respectively, in September.

“For those looking to add to Energy on weakness, we recommend companies with high quality asset bases, valuation support and strong balance sheets that can withstand a ******* of heightened uncertainty/volatility,” Goldman analysts led by Neil Mehta told clients in a Wednesday note.

Among so-called U.S. majors, companies with both exploration and production and refining and marketing operations, Goldman sees value in ConocoPhillips, “especially as the company leans into its shareholder returns through year-end,” Mehta said. Conoco is down 9.7% this month and 11.5% for the year.

Wall Street analysts have an average stock price target of $139 on Conoco, implying upside of nearly 37% from Wednesday’s close of $102.57 per share, according to FactSet data.

The investment bank prefers Talos Energy when it comes to independent producers, “given strong earnings **********,” though the company recently announced that its CEO Tim Duncan has stepped down. Talos is off 5.9% this month and 24% this year.

The Street has an average price target of $18 on Talos, suggesting nearly 70% upside from Wednesday’s close of $10.84 per share, according to FactSet.

Among natural gas producers, EQT Corp is poised to have the highest free cash flow yield in 2026, based on Goldman’s forecast for mid-cycle natural gas prices of $3.50 per million BTUs (MMBtu). EQT is slightly lower this month, down nearly 2%, and has now pulled back about 15% this year.

Though Goldman still sees risks that natgas may still weaken in the near-term, the spot price is “closer to the bottom” and growing power demand and expanding use of liquified natural gas should provide support in coming years, Mehta wrote.

EQT has an average target price of $43, based on the Street consensus among analysts, representing a return of 31% from Wednesday’s close of $32.88 per share, according to FactSet.

— CNBC’s Michael Bloom contributed to this report.

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