In a recent report, Goldman Sachs analysts identified the most idiosyncratic buy stocks across the commodity sector, discussing factors such as catalyst path, assessments of current levels, and investor resistance.
1) Calumet (CLMT): CLMT is highlighted as the stock with the most peculiar Buy rating in Goldman’s coverage of Integrated Oil and Refiners.
The key catalyst for Calumet is the potential approval of a Department of Energy (DOE) loan that would allow the company to significantly increase its Sustainable Aviation Fuel (SAF) production from 60 million gallons per year to 230 million gallons per year. This expansion could make the company a leading North American SAF producer.
On the other hand, some investors remain concerned about the company’s strategy should the DOE loan fall through, citing risks related to the current challenging margin environment for renewable diesel (RD). Despite these uncertainties, Goldman Sachs remains bullish on Calumet, especially given the expectation that earnings will improve starting in 2025.
2) Kodiak Gas Services (KGS): KGS stands out in the midstream sector, especially after the recent acquisition of CSI Compressco (NASDAQ:).
“We continue to like KGS against the positive S/D backdrop, which continues to support an upcycle in compression pricing, a focus on compression of larger, higher quality HP (NYSE:) stocks, and a clear capital allocation framework,” the analysts wrote.
Synergy effects are expected from the acquisition. Short-term catalysts include potential revenue synergies and the completion of non-core divestments.
However, the lack of detailed growth commentary in the second quarter of 2024 has weighed on the stock. Investors are primarily concerned about the Kodiak sponsor’s secondary offering and the overall growth outlook for 2025. Nevertheless, Goldman Sachs expects the stock’s upside drivers to remain intact for the second half of 2024.
3) PG&E Corp (NYSE:): Goldman Sachs views PCG as the most idiosyncratic stock in the utilities sector, primarily due to the valuation mismatch caused by California’s historic wildfire risks. The company’s significant improvements in operational and financial risk management, as well as above-average earnings growth driven by robust capital investments, position it favorably.
Catalysts for the stock include possible credit upgrades and further cost efficiencies.
Meanwhile, the key debate among investors is whether the “California discount” due to wildfire risk will ever go down, despite progress by both the company and the state.
4) Shoals Technologies Group (SHLS): SHLS is highlighted as the most idiosyncratic stock in the clean technology space.
The company’s key strengths include its strong technology leadership and its influence on growth in the U.S. solar energy sector.
On the other hand, near-term sentiment is dominated by concerns about liability for cable residues and ongoing intellectual property litigation. The company is expected to receive an initial judgment on August 16. The upcoming analyst day in early September is seen as a significant event that could provide clarity on multi-year financial targets.
5) Baker Hughes (BKR): Analysts view BKR as the most idiosyncratic large-cap stock in the energy services sector.
“We continue to value BKR for its internal efforts to increase efficiency and rationalise its businesses, which we believe should help achieve management’s 20% margin targets at OFSE and IET in 2025 and 2026 respectively,” they said.
Key catalysts include cost optimization initiatives and the conversion of a higher margin backlog in IET.
On the other hand, some investors are raising concerns about the potential decline in LNG orders and the company’s long-term margin profile. Nevertheless, Goldman Sachs believes that Baker Hughes’ diversified offering will continue to provide order strength, particularly in the new energy and non-LNG segments.
6) Talos Energy (NYSE:): Finally, Talos Energy, a unique pure-play producer in the Gulf of Mexico, is considered a unique stock in the exploration and production sector.
Goldman points out that the company’s recent acquisition of QuarterNorth and ongoing organic growth projects put it in a competitive position, especially given the positive outlook for the oil commodity market.
Despite the share price performance having been below average in the past due to various challenges, investor confidence is expected to improve with the implementation of new projects and the company’s deleveraging efforts.
Investors’ biggest concerns remain Talos’ execution capabilities and the volatility of operations in the Gulf of Mexico, particularly with regard to weather and maintenance impacts.
