In an article for Oilprice.com, Alex Kimani discussed three reasons why Goldman Sachs is bullish on the energy sector. The bank sees Brent and WTI crude oil trending higher to $100 and $95 per barrel over the next 12 months, respectively.
The bank sees faster growth in China as supportive of commodity demand overall. Regarding energy, it sees supply pressures from OPEC+ production cuts, embargoes on Russian crude shipments and global growth as key drivers.
Some other reasons cited for favoring energy are attractive valuations. Currently, it has a P/E ratio of 6.7 which is the cheapest among the 11 major sectors, and this is considerably cheaper than the S&P 500’s P/E of 22.
Despite a slowing economy and lower energy prices, Q1 earnings have remained quite strong. Net margins improved from 11.8% to 10.4%. This is in contrast to most sectors which are experiencing margin compression. Further, earnings are forecast to remain stable over the next couple of years due to low capex, higher costs for new projects, and geopolitical risk.
Overall, energy stocks offer investors attractive valuations and robust earnings growth potential. The longer-term picture remains attractive due to longer-term supply trends, while demand is expected to remain steady.
