Goldman Sachs upgrades Devon Energy to Buy, EOG Resources cut to Neutral

Goldman Sachs provided its views on Americas Energy, noting that U.S. E&Ps companies have underperformed other energy sub-sectors YTD due to declining , NGL, and gas prices, as well as a less favorable free cash flow outlook following last year’s cost inflation.

However, the firm noted that there is a positive outlook on cost trends, with an anticipated 5%-10% decrease in well costs heading into 2024. The firm is incrementally positive on (1) raw material deflation particularly on tubulars and sand, and (2) sees potential for modest softening in rig/completion pricing, where activity levels are down ~10%-12% YTD.

The firm upgraded Devon Energy (NYSE:) to Buy from Neutral with a price target of $58.00 (from $63.00) based on (1) anticipated free cash flow improvement due to cost deflation, (2) attractive valuation following underperformance, and (3) attractive capital returns.

Conversely, the firm downgraded EOG Resources (NYSE:) to Neutral from Buy, with a price target of $130.00 (from $137.00), driven by lower expected free cash flow for 2023/2024 compared to peers, influenced by a less optimistic outlook for prices.

Additionally, the firm sees lower impact on the cost structure from deflation given EOG is seeing less inflation this year due to its supply chain management and self-sourcing efforts.