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Oil prices are rallying — Goldman Sachs says trade these stocks for big gains

There are some bullish trades to put on in the oil patch to ride the new gusher in prices for black gold and natural gas, says Goldman Sachs analyst Neil Mehta.

Mehta reiterated Buy ratings and aggressive upside price targets on oil majors ConocoPhillips (COP) and ExxonMobil (XOM) Monday. The analyst sees ConocoPhillips delivering a 20% return for investors over the next 12 months.

"The company should deliver 30%-40% of cash flow back to shareholders in the form of dividends/buybacks, has proven a core competency around M&A execution, offers a better geographic diversification than many E&Ps [exploration and production companies], but higher oil leverage than the U.S. majors. In addition, the stock trades at the highest free cash flow yield among the majors in 2022 and lowest EV/DACF multiple," Mehta contends.

Meanwhile, the analyst is even more optimistic on an ExxonMobil that has endured a challenging year that includes a board battle loss to activist Engine No. 1. Mehta believes ExxonMobil's stock has 24% total return potential in the course of 12 months.

Says Mehta, "Exxon is one of our most out of consensus ratings, where most investors we speak to are concerned about (a) the sustainability of earnings execution given weaker EPS surprise ratios than the S&P in recent years and (b) the premium valuation versus U.S. oil peers. However, we argue a premium valuation is justified by a strong asset base and historical trading patterns. We also see earnings beats continuing well into the future."

Year-to-date, ConocoPhillips and ExxonMobil shares are up 64% and 44%, respectively. The S&P 500 has gained 19%.

Mehta is the most bearish on Chevon (CVX) among the oil majors, assigning it a Hold rating.

Traders should brace for other sell-side oil analysts to follow Mehta's lead with upbeat calls into year-end. To be sure, oil and natural prices are rallying hard — which only lifts the case to be a long sector likely to see increase in profit forecasts for the fourth quarter and early 2022.

Oil prices tacked on their fifth straight day of gains Monday amid concerns over tight supplies as global economies recover from the pandemic. Brent crude oil touched levels not seen since October 2018, around $80 a barrel.

Natural gas prices have continued to soar since mid-August — prices are up 40% since Aug. 23, according to data from SunDial Capital Research.

Mehta's colleagues that cover the oil sector said Monday prices will likely still head higher from here.

"We forecast that this rally will continue, with our year-end Brent forecast of $90/bbl vs. $80/bbl previously. While we have long held a bullish oil view, the current global oil supply-demand deficit is larger than we expected, with the recovery in global demand from the Delta impact even faster than our above consensus forecast and with global supply remaining short of our below consensus forecasts," said Damien Courvalin, Goldman's head of energy research.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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