3 More Goldman Sachs Energy Stock Picks Offer Rich Total Return Potential

Markets

Share price appreciation and higher dividends are two highly visible ways to judge the value of the stocks in investors’ portfolios. They often indicate, among other things, whether investors can expect to see more of the same in the future.

Given today’s hot economy, inflationary pressures and rising interest rates, investors have been wary about taking a flyer on growth stocks and have been more interested in companies that pay solid dividends and promise to pay even more down the road.

In a recent review of energy stocks that offer the promise of higher rewards to investors willing to take on a bit more risk, Goldman Sachs analysts identified eight stocks that could return 19% to 49% total returns to shareholders over the next year. We looked on Thursday at five of those stocks and Goldman Sachs’s rationale for recommending them. Here, we look at the other three, two of which could return more than 40% to shareholders through a combination of dividends, share buybacks and debt reduction.

Ovintiv

Denver-based Ovintiv Inc. (NYSE: OVV), formerly known as Encana, produces oil and gas in Canada and the United States. When the company reported first-quarter results earlier this month, it lowered production guidance slightly and raised guidance on costs and capital spending to account for rising commodity prices, higher labor costs and royalty payments. Investors were not amused.

In Goldman Sachs’s view, Ovintiv de-risked its fiscal 2022 outlook and offers a substantial free cash flow yield of 28% for 2022 and 43% for 2023 compared with peer-average yields of 19% and 18% for the same years. The company also should have reduced its net debt from $4.5 billion at the end of the first quarter to $3 billion by the end of the third quarter. That reduction, analyst says, “will be able to support higher [free cash flow] after base dividend allocation (50%+ starting in 4Q22 vs. 25% currently) towards capital returns (including share repurchases).”

The firm’s 12-month price target of $73 per share implies an upside of 49% and a lower discount relative to its peers. Risks to that outlook include costs, well results, commodity price volatility and government pronouncements.

Diamondback Energy

Diamondback Energy Inc. (NASDAQ: FANG) is based in Midland, Texas, and it produces oil and natural gas from its properties in the Permian Basin. The stock has underperformed relative to peers (up 35% versus 54% for large-cap peers like Continental Resources, Devon and Pioneer) because investors would like more information about Diamondback’s plan for allocating its now-abundant free cash flow.

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