Why BofA Securities Is Overweight Energy Stocks In 2021

Energy sector investors have had another brutal year in 2020, with the Energy Select Sector SPDR Fund XLE on track to finish the year down more than 34%. Yet BofA Securities said this week that it is betting on a big rebound and rating the energy sector Overweight in 2021.

Oil and gas stocks have bounced in recent weeks on optimism that a coronavirus vaccine will help get oil demand back on a path to relatively normal levels in coming months. Analyst Doug Leggate said the upcoming OPEC meeting on Nov. 30 will likely go a long way in determining whether the recent oil stock rally will continue.

Related Link: 10 US Oil Stocks To Buy At Cyclical Lows

Oil Prices Are Key: Leggate said the majority of oil stocks he covers would see “significant upside” in 2021 and beyond if Brent oil prices can return to the $55 per barrel level or higher.

Brent prices have already rebounded from below $20 earlier this year to above $48 as of Wednesday. Brent prices were as high as $70 in January ahead of the pandemic.

“With reduced US oil growth from a lower absolute starting point, consolidation confirming a permanent reset in spending, sustained intervention by OPEC and skinny outlook for large capital projects we continue to believe all the pieces are in place to declare the bottom of the oil cycle is in – and 2021 with the potential to reset the investment case for energy after a decade of underperformance,“ Leggate said.

How To Play It: For now, Bank of America suggests investors focus on three types of oil stocks. First Leggate said he likes leveraged oil stocks that have bullish catalysts ahead, such as Hess Corp. HES and Apache Corporation APA.

In addition, Leggate likes more conservative oil stocks that pay sizable dividends, such as Chevron Corporation CVX, ConocoPhillips COP and Exxon Mobil Corporation XOM.

Finally, Leggate recommends companies that can grow their free cash flows via consolidation or other cost reduction measures, such as Devon Energy Corp DVN, EOG Resources Inc EOG and Pioneer Natural Resources Co PXD.

Benzinga’s Take: Consensus analyst estimates are calling for WTI and Brent crude prices to average $48 and $45 per barrel in 2021. BP plc BP recently projected that global oil demand will not peak until at least 2030, so the oil companies that have survived the multiyear downturn could now be well-positioned for a long-term upswing in the next oil cycle.