Goldman Sachs On Oil: 5 Key Topics You Need To Know

Neil Mehta of Goldman Sachs recently discussed five key debate topics concerning the oil sector.

According to Mehta's research note, the past five years have certainly been "challenging" for major oil players given the decline in oil prices, project cost over-runs and poor volume growth. However, the analyst expects fundamentals to "finally bottom" in 2016, and oil prices will "modestly recover" to his 2017–2020 range of $50 to $60 per barrel of WTI crude oil.

Topic No. 1: Dividends

Mehta suggested that all the U.S. oil majors now offer "sustainable" dividend levels, even when factoring a "lower-for-longer" oil price outlook.

Specifically, ConocoPhillips COP's dividends are sustainable at $46 per barrel of Brent, Exxon Mobil Corporation XOM at $48 per barrel and Chevron Corporation CVX at $49 per barrel.

In addition, all three of these companies can even "modestly" grow their dividend payments in 2017 given a higher free cash flow level.

Related Link: Goldman On Midstream Group: Upgrades 4, Downgrades One

Topic No. 2: Exxon A Top Play

Mehta continues to recommend Exxon Mobil as "part of a beta-barbell strategy" due to its strong balance sheet, premium returns on capital and underweight investor positioning.

Topic No. 3: Micro Catalysts

Mehta stated that outside of the crude oil macro environment, investors should focus on :1) progress on major projects including Kashagan, Horizon and Gorgon, 2) whether Chevron boosts its dividends in the fourth quarter, 3) ConocoPhillips's upcoming analyst day presentation on November 10 and 4) any asset sale announcements or plans.

Topic No. 4: Canadian Equities

Mehta believes Canadian oil equities will rise over the next 12 months. The analyst recommends Buy-rated Suncor Energy Inc. (USA) SU and Cenovus Energy Inc (USA) CVE given their strong balance sheets.

Related Link: UBS Upgrades Xcel Energy, Expects Management To Maintain 4–6% EPS Forecast Through 2018

Topic No. 5: Downstream Segments

Finally, Mehta is projecting downstream earnings to be "well below" 2015's peak, but the chemicals and refining businesses are still viewed as an "attractive source" of free cash flow that could support dividend payments.

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