GOLDMAN: Now's Your Chance To Beat The S&P And Get In On 2011's Oil Boom

oil hands

Major oil stocks are going to outperform the broader S&P 500, if this year is anything like 2004 and 2007, according to Goldman Sachs.

They project that, right now, big oil firms are only projecting oil at $90 a barrel, and that’s way to low, according to GS analysts.

Instead, oil is heading to at least $110, and could go as high as $120 without demand being crimped. So, Goldman suggest buying call options on some of the industry’s biggest names.

Don’t miss: 8 chokepoints threatening the world’s supply of key commodities >

From Goldman Sachs:

Call buying remains our favourite strategy in the Energy sector as volatility is likely to remain high and we expect strong global demand to drive oil prices and stocks higher. Call prices for WTI options spiked recently, but calls on energy stocks have lagged. We see parallels to May-2004 and Jan-2007; both were followed by Energy outperformance vs S&P 500. We favour the limited loss of calls as Middle East unrest and continued Japan uncertainty could lead to high volatility.

Top trade: Buy calls on big oil basket

We select nine stocks for call buying based on our price targets, earnings estimates, and multiple expansion potential: CVE, XOM, MRO, DO, CVX, MUR, BHI, HAL, and HES. Analysts’ price targets imply 32% upside to the basket in six months, we see 250% return potential on average for individual calls and 300% return potential for basket calls.

Upside view on nine select names is based on:

(1) Oil price upside: We estimate oil stocks are discounting $90/bbl oil, but could comfortably price in $110/bbl oil. Our analysts have confidence that oil would need to move materially above $110-$120 before a significant demand response.

(2) Earnings upside: 51% EPS growth estimated for 2011; our analysts are 13% above consensus.

(3) Multiples could expand 30-55% and still be at 15 year average levels for P/E and EV/EBITDA.

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