Here are the top 5 energy stocks, according to Goldman Sachs

Goldman Sachs on Monday picked five of the biggest energy stocks ahead of their quarterly earnings, saying it maintains a “constructive” view of the sector thanks to cash flow and valuations, among other things.

Analysts at Goldman Sachs said investor sentiment turned “more negative” in the exploration and production sector, due to fears of a looming global recession. SPDR Energy Select Sector XLE Exchange Traded Fund,
+ 3.67%
It is down about 20% since it closed at an eight-year high on June 8 through Friday afternoon, while the S&P 500 SPX,
+ 0.13%
It lost 3.6% at the same time.

Analysts, however, said, “Maintain a long-term constructive/bullish stance given strong cash flow, discounted valuation, increased strategic value of US gas/oil, and improved returns on capital.”

Analysts said the “key focus” for the quarter will be on production execution, cost management ability amid rising inflation, capital return expectations, and commodity risk management through hedging.

Here are the top five Goldman Sachs analyst picks:

Diamondback Energy Company, FANG,
+ 5.78%
Analysts said the recent shift to higher free cash flow allocations toward capital returns “would help differentiate the company from its peers.”

Chesapeake Energy Corp. Highlights. chk,
+ 2.85%
Its assets are natural gas, which supports “attractive generation (free cash flow) backed by a strong balance sheet,” analysts said.

“We believe (Chesapeake Energy) is on track to provide strong capital returns to shareholders and close the value gap against its peers,” including a 16% dividend yield over the next four quarters.

Unlike Diamondback Energy and Chesapeake Energy, Pioneer Natural Resources Co. PXD,
+ 5.61%
Goldman analysts said it has outperformed its “peers since the last correction, which we believe is due in part to its strong balance sheet and attractive dividend yield.”

Goldman expects Pioneer to report a dividend of $8.24, which will be about 15% dividend yield annually, “We believe can be boosted in the long term by modest production growth and opportunistic buybacks.”

EQT Corp. EQT,
+ 6.51%
Well positioned to benefit from a favorable long-term natural gas outlook, and better capitalized
Efficiency from new well design plus exposure to price optimization.

“We see the potential for a revaluation of EQT shares with further improvement in the balance sheet and more FCF being allocated toward equity.”
Goldman Sachs analysts said.

Natural gas producer Ovintiv Inc. OVV,
+ 6.72%And the
Previously known as Encana, it’s on Goldman’s radar because allocating free cash flow toward share buybacks “can allow stocks to bridge the relative gap against their peers,” analysts said.

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