Oil: Looking for undervalued resilience among price uncertainty – Goldman Sachs

Research Team at Goldman Sachs explains that mega-projects delivery (Top Projects) and short-cycle production (shale) could lead to an oversupplied oil market in 2018-19.

Key Quotes

“OPEC’s dilemma of lower prices vs. lower market share also adds to market uncertainty. In this uncertain environment, we believe that resilience is key to stock-picking and we focus on three metrics to screen our Big Oils coverage: cash flow volatility, free cash flow and Top Projects delivery. TOTAL and CVX stand out with low volatility and c.20% of unproductive capital employed coming onstream in the next 24 months.”

“Low volatility is rewarded in the market, but not in Big Oils

Stocks with low earnings volatility tend to trade at premium valuations. Across our European coverage, stocks with more stable earnings trade at a 2-3x P/E premium to the median, reflecting a lower cost of capital and more stable returns. In Big Oils, however, this relationship does not hold and creates a stock-picking opportunity, in our view.”