Energy stocks have endured a challenging year, but European Big Oil companies caught the attention of Goldman Sachs. According to the investment bank’s analysts, led by Michele Vigna, there is a notable shift as European Big Oils began to outperform their U.S. counterparts. This has led to the potential closure of the 40% valuation gap against their U.S. peers. Despite the increase in oil prices due to Houthi attacks in the Red Sea, followed by the subsequent easing of shipping disruptions, the 2024 outlook for oil demand has been lackluster. Brent oil prices were seen trading at $77.54 on Jan. 1. However, Goldman Sachs sees European Big Oils as attractive due to their enhanced buyback programs, which result in double-digit cash returns to shareholders. ESG (Environmental, Social, and Governance) investors have also shown increased optimism towards European Big Oil, reducing their underweight positions on oil and gas producers.
Top Picks and Ratings by Goldman Sachs
British oil giant Shell is among the top picks favored by Goldman Sachs. According to the investment bank, Shell possesses the highest quality combination of assets in the sector. The company, involved in the production of liquefied natural gas and chemicals, has a robust pipeline of projects that can sustain high cash flows for several European Big Oils. Despite a 3.4% downward revision of its price target to $85, Goldman Sachs maintains a buy rating on Shell, considering it as one of its conviction list stocks with around 28.6% potential upside from its December 27 close.
In addition to Shell, other oil companies that received a buy rating and were listed as top picks by Goldman Sachs include Italian oil giant Eni and British player BP. Goldman has set a price target of 18 euros ($20.03) on Eni, indicating nearly 16.8% potential upside. For BP, the set price target is £620 ($793.55), representing around 33.3% upside potential.
Regarding Eni, Goldman Sachs highlighted its transformation into a higher return business driven by leading exploration success, disposals, and a strong pipeline of project start-ups. The investment bank
views the company’s variable dividend policy and share buybacks as attractive for shareholders. As for BP, Goldman emphasized its strong operational execution in upstream and trading results, increasing focus on capital discipline and cost efficiency, and the introduction of an “enhanced” decarbonization strategy.
Reasons Behind the Attractiveness of European Big Oil
One of the key reasons behind the increasing attractiveness of European Big Oil, as highlighted by Goldman Sachs, is the enhanced buyback programs that result in double-digit cash returns to shareholders. Moreover, ESG investors have displayed increased optimism and have been reducing their underweight positions on oil and gas producers. The implementation of the EU’s
taxonomy list, a classification system aiding investors in channeling funds into projects aligned with the bloc’s goal of decarbonizing the economy, has also contributed to this shift.
Conclusion
In conclusion, European Big Oil companies have garnered attention from Goldman Sachs, which has labeled them as ‘attractive’ investment opportunities. The enhanced buyback programs and the potential for double-digit cash returns to shareholders are key factors contributing to this attractiveness. The transformation of companies like Eni into higher return businesses and the strategic initiatives taken by BP further bolster the case for
investing in these European Big Oil companies. As the market dynamics continue to evolve, these companies are poised to deliver value to investors, attracting interest and optimism from both traditional and ESG-focused investors.
