The Oil Stocks Wall Street Recommends

As oil prices have rallied more than 40 percent this year, analysts and institutional investors have grown increasingly bullish on oil stocks, which, many believe, are still undervalued and primed for further upside. 

Earlier this week, U.S. oil prices hit their highest level in more than six years, before retreating amid an OPEC+ meeting deadlock that led to a bit of volatility. 

But the year’s rally so far still could enable U.S. oil firms to improve returns and pay down debts, considering that they are still cautious in spending on drilling, analysts say. 

The retuning demand for oil and the still wider-than-historical-standards valuation discount at which U.S. oil stocks trade relative to the S&P 500 index make a convincing case for gaining more exposure to energy stocks, analysts say. 

Wall Street analysts have some two dozen U.S. oil stocks with predominantly “buy” ratings and share price targets with a double-digit percentage of potential upside, according to data provided by FactSet to MarketWatch.

Those stocks include Energy Transfer (-1.78%) (NYSE: ET), Pioneer Natural Resources (-2.34%) (NYSE: PXD), Devon Energy (-1.11%) (NYSE: DVN), EQT Corporation (-0.63%) (NYSE: EQT), ConocoPhillips (-2.11%) (NYSE: COP), Marathon Petroleum (-1.73%) (NYSE: MPC), Valero Energy (-3.20%) (NYSE: VLO), Baker Hughes (-0.67%) (NYSE: BKR), Enterprise Product Partners (-1.19%) (NYSE: EPD), EOG Resources (-3.14%) (NYSE: EOG), and Chevron (-1.02%) (NYSE: CVX). 

Of those, each of Chevron, Valero Energy, and Energy Transfer have dividend yields of above 5 percent, while Enterprise Products Partners boasts a dividend yield of 7.32 percent, according to FactSet data. 

Energy infrastructure stocks continue to be cheaper than other sectors and are trading at levels below the record highs of the S&P 500 index, Rob Thummel, senior portfolio manager at TortoiseEcofin, tells U.S. News & World Report.  

Devin McDermott at Morgan Stanley raised his rating on Occidental (-3.38%) (NYSE: OXY) in the middle of June, expecting a 40-percent upside for the stock. Morgan Stanley also upgraded Marathon Oil (-2.12%) (NYSE: MRO) from “underweight” to “equal weight,” expecting oil-related stocks to benefit from the rise in crude oil prices. 

Morgan Stanley’s McDermott is also bullish on the U.S. supermajors – Chevron and Exxon (NYSE: XOM) – expecting their shares to rise more after they report what he expects would be earnings beating expectations for the second quarter. Both oil giants are set to report Q2 financials on July 30. 

Expected solid Q2 earnings above consensus estimates should also result in upgrades in future projections for Exxon and Chevron, according to Morgan Stanley.

Goldman Sachs, which has been bullish on oil all year and sees prices hitting $80 a barrel this summer, also has some favorite picks among U.S. oil stocks.  

“We project Brent will sustain $75-$80/b over the next 18 months in our financial models, enabling deleveraging and improved returns,” Goldman Sachs energy analyst Neil Mehta said this week in a note carried by Yahoo Finance.

Mehta is bullish on Occidental (-3.38%), Exxon (-1.56%), and Ovintiv (-2.02%) as “turnaround stories.” Goldman’s analyst also sees Diamondback Energy (-3.49%), ConocoPhillips, EQT Corporation, Pioneer Natural Resources, and Devon Energy as mergers and acquisitions (M&A) winners. 

Hess Corp (-2.16%) (NYSE: HES) and Schlumberger (-1.57%) (NYSE: SLB) complete Goldman Sachs’ list of stocks set to win in the coming months, due to company-specific reasons.  

Rallying oil prices have made some analysts more bullish on oil stocks than on renewables in recent weeks. 

Piper Sandler’s senior technical research analyst Craig Johnson prefers right now traditional energy stocks in the Energy Select Sector SPDR Fund (-1.63%) (NYSEARCA: XLE) compared to the solar stocks in the Invesco Solar ETF (-0.01%) (NYSEARCA: TAN). 

“I don’t think it’s too late to buy either of them. But if I’m going to buy it from a longer-term perspective, I’m going to favor the XLE over TAN,” Johnson told CNBC’s “Trading Nation” two weeks ago.  

Institutional investors are set to buy a lot of energy stocks to gain more exposure to the higher oil prices because they are “extremely underweight the energy sector” right now, he added.  

“And with this being the best performance for the energy names since 2005, up 45%, they’re going to have to buy them. They will not have a choice,” Johnson told CNBC.