ASX 200 energy shares have been highly volatile this year.
The S&P/ASX 200 Energy Index (ASX: XEJ) is down by 17% in the year to date, compared to an 8.6% increase for the benchmark S&P/ASX 200 Index (ASX: XJO).
These are interesting times for the energy sector and oil and gas stocks, in particular.
The Brent Crude oil price sharply declined last week due to concerns about weak demand and a looming surplus.
Trading Economics analysts noted that the International Energy Agency has lowered its demand forecasts and OPEC has cut its projections for a third consecutive month, both citing weaker demand from China.
Meantime, the escalating conflict in the Middle East and talk of Israel potentially targeting Iran's oil facilities in a future strike have made investors wary of supply risks.
Recent new economic stimulus in China and lower US interest rates may support some kind of uplift in energy demand but this has yet to play out.
Meantime, Goldman Sachs has outlined its case for buying one ASX 200 energy share and selling the other.
Let's see what this top broker has to say about these two energy stocks.
Buy this ASX 200 energy share for 15% potential upside
Goldman has a buy rating on Santos Ltd (ASX: STO) shares and a 12-month price target of $7.90.
The Santos share price closed at $6.90 on Friday, so the target implies a potential 14.5% upside.
Santos released its third quarter update for the three months ending 30 September last week.
It revealed a 3% fall in sales revenue to US$1.3 billion. This was due to a 3% fall in production to 21.6 million barrels of oil equivalent (mmboe).
The company reported a 6% quarter-over-quarter rise in free cash flow from operations to approximately US$400 million.
Capital expenditure totalled $709 million, down 8% from the prior quarter.
In a new note published this week, Goldman said Santos' production was 4% higher than its expectations. Sales volumes were in line with the broker's estimates, and revenue was 2% lower than expected.
The broker rates this ASX 200 energy share a buy for the following reasons:
1) Attractive valuation trading at ~0.8x NAV, 2) Strong near term production growth offering 9% production CAGR over 3 years which could offset softening global commodity prices, 3) Stable returns trading on an average 5% dividend yield over the next 3 years.
… But sell this energy stock
Goldman is unenthusiastic about Beach Energy Ltd (ASX: BPT) shares.
The broker has a sell rating on this ASX 200 energy share with a 12-month price target of $1.26.
Beach Energy shares closed at $1.25 on Friday. Based on the broker's price target, they are fully valued in Goldman's eyes.
Beach Energy released its first quarter update last week.
The company reported a 10% quarter-over-quarter increase in production to 5.2 MMboe.
This was a result of the completed Enterprise development, which led to a 24% rise in production at Otway Basin, and the successful wellbore intervention program, which led to an 81% bump in production at Bass Basin.
Revenue was $427 million for the quarter, which was in line with the previous quarter.
Beach's production and revenue were both in line with Goldman's expectations.
The broker's latest note on this ASX 200 energy share was released a week prior to the quarterly report.
Goldman said it was sell-rated on Beach Energy because its shares were trading at 1x net asset value (NAV).
By comparison, Santos offered much better value, trading at a substantial discount of 14% below the broker's NAV estimate.
