There are some bullish trades to put on in the oil patch to ride the new gusher in prices for black gold and natural gas, says Goldman Sachs analyst Neil Mehta.
Mehta reiterated Buy ratings and aggressive upside price targets on oil majors ConocoPhillips (COP) and ExxonMobil (XOM) Monday. The analyst sees ConocoPhillips delivering a 20% return for investors over the next 12 months.
"The company should deliver 30%-40% of cash flow back to
shareholders in the form of dividends/buybacks, has proven a core
competency around M&A execution, offers a better geographic
diversification than many E&Ps [exploration and production
companies], but higher oil leverage than the U.S. majors. In addition,
the stock trades at the highest free cash flow yield among the majors in
2022 and lowest EV/DACF multiple," Mehta contends.
Meanwhile, the analyst is even more optimistic on an ExxonMobil that has endured a challenging year that includes a board battle loss to activist Engine No. 1. Mehta believes ExxonMobil's stock has 24% total return potential in the course of 12 months.
Mehta, "Exxon is one of our most out of consensus ratings, where most
investors we speak to are concerned about (a) the sustainability of
earnings execution given weaker EPS surprise ratios than the S&P in
recent years and (b) the premium valuation versus U.S. oil peers.
However, we argue a premium valuation is justified by a strong asset
base and historical trading patterns. We also see earnings beats
continuing well into the future."
Year-to-date, ConocoPhillips and ExxonMobil shares are up 64% and 44%, respectively. The S&P 500 has gained 19%.