Goldman Sachs: Buy EOG Resources, Valero Energy

In a report published Thursday, Goldman Sachs analyst Brian Singer maintained a CL-Buy rating on EOG Resources Inc EOG and Valero Energy Corporation VLO, saying that higher shale productivity and oil demand are likely to support the performance of the sector.

Analyst Brian Singer wrote, "We attended meetings with E&Ps, refiners and oil service companies in San Antonio and Oklahoma City earlier this week. Our meetings focused on improved shale technology/productivity improvements (one of the three key deflationary drivers of our lower-for-longer oil price environment) and how companies across sectors are navigating lower oil prices."

In the report Goldman Sachs noted three key takeaways from the meetings:

• Improvement in Shale technology continues, "with higher-density completions and landing zone optimization the next key areas of industry focus"
• Robust demand growth and sustained lower oil prices should boost the downstream sector
• Producers increasingly exhibit the ability to finance additional drilling and attractive well economics at current prices, although they are still waiting to ramp up activity for confidence in stability

In the Upstream segment, the key theme among producers was "rising shale inventory, improved productivity and falling costs, in both up-and-coming plays like SCOOP/ STACK/Springer in Oklahoma and more seasoned plays like Eagle Ford (EOG) and Haynesville (CHK)."

"While strategies for raising wells drilled varied, each company we met desires substantial increases," Singer said.

Although Goldman Sachs is neutral on refiners, after the outperformance year to date, Singer considers the sector as poised to benefit from higher global product demand growth and improved capture rates from lower oil prices.

The report added that VLO was the top pick among the refiners because:

• It has a focus on reducing capex/returning capital to shareholders
• It has strong Gulf Coast product cracks
• Its valuation is attractive

The 12-month price target for EOG is $113, while the 6-month price target for VLO is $74.