Energy and utilities valuations are diverging, while stock-specific mispricing opportunities remain prominent
AI summary card
Energy and utilities valuations are diverging, while stock-specific mispricing opportunities remain prominent
Goldman Sachs believes the sector as a whole is not broadly undervalued, but names such as DVN, DINO, CVE, MTZ, HAL, KGS, TLN and FSLR show relatively clear valuation recovery potential versus historical levels or target prices.
- Oil-weighted exploration and production companies are up 36% year-to-date, above XLE's 33%; natural gas exploration and production companies are down 4%, showing significant valuation divergence.
- DVN's 2027 to 2028 free cash flow yield is about 14%, above comparable companies' roughly 10%, with 17% upside to the $53 target price.
- DINO trades at about an 11% 2027 free cash flow yield, above the industry's roughly 9%, and its $114 target price implies about 30% upside.
- MTZ's recent pullback has created a clear valuation dislocation, with its $409 target price implying about 50% upside.
- KGS and TLN have total return or price upside to target prices of about 47% and 39%, respectively, making them standout opportunities in midstream and independent power generation.
- Valuations in the midstream and steel segments are above historical averages, and future upside will require greater earnings growth, cash flow improvement, or commodity price support.
Report interpretation
Overview
Against the backdrop of sharp share-price volatility following second-quarter 2026 earnings releases, the report conducts a cross-sectional valuation review of subsectors across energy, utilities, clean technology, and metals and mining. The analysis compares current trading multiples, historical averages, Goldman Sachs target valuations, and target prices, while assessing valuation dislocations in light of commodity prices, balance sheets, capital returns, project execution, and the regulatory environment. Overall, opportunities are mainly concentrated at the individual stock level rather than in broad multiple expansion across all subsectors.
Core views
The exploration and production segment still implies a relatively high cost of capital, reflecting that the market continues to apply a discount even amid improved balance sheets and stronger capital discipline; there are high free cash flow yield opportunities in refining, integrated energy, and Canadian oil companies; grid construction, data centers, and electrification are creating long-term demand, but valuation differences among contractors are significant; improvements in midstream asset quality and growth have already pushed multiples higher, so future returns mainly depend on earnings; regulated utilities trade slightly below historical averages, while independent power producers await further clarification of data center interconnection rules; valuations in solar and water infrastructure remain below historical levels; steel sector multiples are elevated, but declining capital expenditures and improving free cash flow can partly support the premium.
Analysis framework
The report uses a cross-subsector relative valuation approach, comparing expected P/E ratios, enterprise value multiples, free cash flow yields, dividend yields, and implied costs of capital with historical ranges and peer levels. It also uses mid-cycle oil and gas prices, sum-of-the-parts valuations, and target multiples to derive target prices, and combines investor discussions to identify market controversies, catalysts, and reasons for discounts.
Methodology notes
Compare current P/E ratios and enterprise value multiples with historical averages and comparable company levels
Used to determine whether subsectors and individual stocks have valuation premiums, discounts, or mean-reversion potential.
Measure valuation attractiveness based on expected free cash flow relative to current market capitalization
The report focuses on 2027 to 2028 free cash flow yields to compare oil and gas, refining, midstream, independent power, and steel companies.
Value refining and other businesses separately and then aggregate enterprise value
Target prices for refining companies such as DINO are derived by combining normalized earnings P/E ratios with refining business enterprise value multiples.
Use mid-cycle oil prices, natural gas prices, and refining margins to assess sustainable earnings
Key assumptions include $75 per barrel Brent, $3.50 per MMBtu Henry Hub, and a mid-cycle refining margin of about $25 per barrel.
Back-solve the market-implied discount rate or long-term commodity price from share prices and cash flows
This method is used to assess the cost-of-capital discount for exploration and production companies, as well as the hot-rolled coil prices implied by steel company share prices.
Asset mapping & comparison
Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).
- Devon Energy Corp. (DVN)Undervalued exploration and production company
- Strengths
- 2027 to 2028 free cash flow yield of about 14%, clearly above peers, with 17% upside still remaining to the target price.
- Weaknesses
- Year-to-date performance has lagged comparable companies.
- Comparison
- Free cash flow yield is above the peer level of about 10% for FANG, EOG, OXY and COP.
- Risks
- Lack of clarity around the portfolio review after the acquisition of COTERRA ENERGY INC, and earnings exposure to oil price volatility.
- COTERRA ENERGY INC (CTRA)Assets related to DVN's completed acquisition
- Strengths
- The combined assets may provide a foundation for DVN's portfolio optimization and scale improvement.
- Weaknesses
- The report does not provide an independent valuation conclusion for CTRA.
- Comparison
- Its impact is mainly reflected through DVN's post-acquisition portfolio review.
- Risks
- There is uncertainty around integration progress, asset divestiture choices, and synergy realization.
- HF Sinclair Corp. (DINO)Key undervalued name in the refining segment
- Strengths
- Solid balance sheet, exposure to differentiated refining markets, lubricants earnings, and optionality from small refinery exemptions, with relatively strong capital return capacity.
- Weaknesses
- Current refining crack spreads are elevated, and sustainability remains debated.
- Comparison
- 2027 free cash flow yield of 11%, above the industry's roughly 9%.
- Risks
- China refined product export policy, a pullback in crack spreads, and changes in renewable fuels policy.
- Chevron Corp. (CVX)Attractively valued U.S. integrated energy company
- Strengths
- The $225 target price implies 14% upside, and the free cash flow yield based on Brent at $75 per barrel is attractive.
- Weaknesses
- The report discusses its specific growth projects less than COP's.
- Comparison
- CVX and COP have 2027 to 2028 free cash flow yields of about 8%, above XOM's 6%.
- Risks
- Oil price declines, rising project costs, and capital returns falling short of expectations.
- ConocoPhillips (COP)Integrated exploration and production company with long-term free cash flow growth
- Strengths
- Outstanding operating execution, low supply costs, inventory depth, and capital returns, with free cash flow per share expected to compound at about 20% to 25% through 2030.
- Weaknesses
- Growth depends on multiple large projects coming online on schedule.
- Comparison
- 2027 to 2028 free cash flow yield of about 8%, above XOM's 6%.
- Risks
- Delays in the NFE, NFS, Port Arthur, and Willow projects, as well as long-term Brent below $75 per barrel.
- Cenovus Energy Inc. (CVE)Canadian oil company with relatively high upside to target price
- Strengths
- West White Rose startup, Christina Lake additions, and deleveraging are expected to drive an inflection in production and free cash flow.
- Weaknesses
- It remains about C$1.4 billion away from its long-term net debt target of C$4 billion.
- Comparison
- The $40 target price implies 33% upside, making it a standout opportunity among the Canadian oil companies discussed in the report.
- Risks
- Project ramp-up, oil prices, and balance sheet repair may fall short of expectations.
- MasTec Inc. (MTZ)Valuation dislocation in power and communications infrastructure
- Strengths
- Benefits from long-term capital spending on the power grid, data centers, and electrification, with about 50% upside to the target price.
- Weaknesses
- Communications business project delays caused recent results to miss expectations.
- Comparison
- Expected 2027 enterprise value multiple of about 12x, below PWR's 22x; target valuation is 18x.
- Risks
- Lack of clarity on deferred projects, slow execution improvement, and delayed recovery in the communications business.
- Quanta Services (PWR)High-valuation power infrastructure leader and MTZ's main comparable
- Strengths
- Direct beneficiary of grid expansion, power demand, and data center capital spending.
- Weaknesses
- Expected 2027 enterprise value multiple of about 22x, already significantly above the five-year average of about 17x.
- Comparison
- Goldman Sachs uses a 30x target multiple and assigns a $902 target price, with the valuation level clearly above MTZ's.
- Risks
- High valuation creates elevated requirements for growth sustainability and project execution.
- Halliburton Co. (HAL)Relatively undervalued name in the oilfield services segment
- Strengths
- About 60% of revenue comes from international markets, providing geographic diversification, and the company is expected to maintain revenue and EBITDA growth.
- Weaknesses
- Post-earnings fund rotation has pressured the share price relative to peers.
- Comparison
- 2027 enterprise value multiple of about 7x, below SLB's 8x and BKR's 11x.
- Risks
- Middle East contract progress, North American activity levels, and weakening service prices.
- Kodiak Gas Services Inc. (KGS)Small-cap valuation dislocation opportunity in midstream
- Strengths
- The traditional compression business is solid, and the market assigns limited value to new power projects.
- Weaknesses
- The target valuation requires the company to deliver new power load projects.
- Comparison
- The $89 target price implies about 47% total return, making it one of the more notable opportunities in midstream coverage.
- Risks
- Power project contracting, construction, or execution scale by 2030 may fall below expectations.
- Talen Energy Corp. (TLN)Key undervalued name among independent power producers
- Strengths
- Pure PJM exposure, strong power prices, and the free cash flow per share outlook provide support.
- Weaknesses
- Valuation is constrained by uncertainty over data center interconnection and contract regulation.
- Comparison
- 2027 free cash flow yield is about 10%, 2028 guidance implies more than 13%, and the $509 target price implies 39% upside.
- Risks
- PJM regulatory progress, data center contract rules, and changes in regional power price basis differentials.
- First Solar Inc. (FSLR)Key clean technology valuation recovery opportunity
- Strengths
- Its U.S. domestic manufacturing footprint could benefit from Section 232 outcomes, and long-term earnings potential is not yet fully priced in.
- Weaknesses
- The solar industry remains affected by policy and market sentiment.
- Comparison
- About 9.5x P/E, below the historical average of 11.4x and the target valuation of 11.5x.
- Risks
- Changes in trade policy, fluctuations in project demand, and deterioration in industry supply and demand.
- Nucor Corp. (NUE)Key recommended name in the steel segment
- Strengths
- Average capital expenditure over the next three years is expected to decline by about 41% versus 2023 to 2025, and the ramp-up of the new West Virginia plant is expected to improve cash flow and buyback capacity.
- Weaknesses
- The current enterprise value multiple is above historical levels.
- Comparison
- Goldman Sachs expects an 8.3x enterprise value multiple, above the historical average of 7.4x; the $303 target price implies 11% upside.
- Risks
- Hot-rolled coil prices, tariff environment, and U.S. steel demand falling short of expectations.
- Commercial Metals Co. (CMC)Steel name with high free cash flow yield
- Strengths
- Declining capital expenditure and earnings growth from recent acquisitions are expected to accelerate free cash flow generation.
- Weaknesses
- The report does not provide a clear target price or upside.
- Comparison
- Free cash flow yield of about 11.4%, significantly above the historical average of 7.6%.
- Risks
- Falling steel prices, acquisition integration falling short of expectations, and delayed capital expenditure reductions.
Key data
- Year-to-date performance of oil-weighted exploration and production companies+36%XLE rose 33% over the same period, while natural gas exploration and production companies fell 4%.
- DVN free cash flow yieldAbout 14%Based on 2027 to 2028 forecasts, versus about 10% for comparable companies; the $53 target price implies 17% upside.
- DINO free cash flow yield11%Versus about 9% for the industry; the $114 target price implies about 30% upside.
- Upside to CVX and COP target prices14% and 15%Target prices are $225 and $146, respectively.
- COP incremental free cash flowAbout $7 billionFour large growth projects and about $1 billion of cost and margin improvements are expected to be realized by 2029.
- Upside to CVE target price33%Target price of $40; based on Brent at $75 per barrel, 2027 and 2028 free cash flow yields are about 9% and 10%.
- Upside to MTZ target priceAbout 50%Target price of $409; expected 2027 enterprise value multiple of about 12x, below PWR's 22x.
- HAL relative valuation7x enterprise value multipleBased on 2027 forecasts, below SLB's 8x and BKR's 11x, with 24% upside to the target price.
- U.S. midstream industry valuationAbout 11x 2027 enterprise value multipleAbout 1 to 1.5 turns above the historical average; free cash flow yield of about 6% and dividend yield of about 5%.
- Midstream industry growth and leverageAbout 7% compound growth from 2025 to 20302027 net debt to EBITDA ratio of about 3.2x.
- KGS potential total return47%The $89 target price incorporates compression business strength and expectations for execution of at least about 1.5 GW of power projects.
- Regulated utilities valuationAbout 17x 2027 P/ESlightly below the long-term average of about 17.5x.
- Upside to TLN target price39%Target price of $509; 2027 free cash flow yield of about 10%.
- FSLR valuationAbout 9.5x P/EBelow the historical average of about 11.4x and the target valuation of about 11.5x.
- Steel industry valuation9.0x forward enterprise value multipleAbove the five-year historical average of 7.3x; forward free cash flow yield of about 8.1%.
- NUE and CMC free cash flow yields6.7% and 11.4%Corresponding historical averages are 5.7% and 7.6%, respectively; NUE's $303 target price implies 11% upside.
Impact & implications
For sector allocation, investors should not chase gains solely based on overall industry multiples, but should instead prioritize companies with high free cash flow yields, solid balance sheets, clear capital return frameworks, and verifiable catalysts. For midstream, steel, and high-valuation power infrastructure companies, earnings growth and project execution will be more important than further multiple expansion. For exploration and production, solar, and some independent power producers, stable commodity prices, policy implementation, or regulatory clarification could drive discount narrowing.
Risks
- Middle East conflicts and sharp fluctuations in global oil and gas prices could change earnings and valuation assumptions.
- Ample near-term natural gas supply may continue to pressure Henry Hub prices and the performance of natural gas producers.
- Rising interest rates or delayed rate cuts may depress valuations for utilities and long-duration growth assets.
- If data center interconnection, power purchase agreements, and regulatory policies in PJM and other regions remain unclear, valuation recovery for independent power producers may be limited.
- China refined product export policy, U.S. renewable identification numbers, and changes in small refinery exemptions may affect refining margins.
- Delays or cost overruns in large energy, grid, communications, and power projects may weaken expected cash flows.
- Changes in Section 232, steel tariffs, and hot-rolled coil prices may lead to valuation repricing for clean technology and steel companies.
- Midstream and steel segments are already above some historical multiples, creating valuation compression risk if earnings growth falls short of expectations.
What to watch
- DVN's portfolio review and integration progress after acquiring COTERRA ENERGY INC.
- DINO's capital returns, crack spreads, China export policy, and progress on small refinery exemptions.
- COP's four large growth projects, cost reductions, and Willow's initial production target in early 2029.
- CVE's West White Rose startup, Christina Lake additions, and progress toward reducing net debt to C$4 billion.
- MTZ's communications business recovery, clarity on deferred projects, and awards for power and pipeline projects.
- HAL's contract renewals in the Middle East, as well as North American activity levels and service pricing.
- Whether KGS can deliver at least about 1.5 GW of execution scale for new power projects.
- Regulatory decisions in the PJM market regarding data center contracts and interconnection rules.
- FSLR's orders, pricing, and earnings delivery after Section 232 implementation.
- U.S. hot-rolled coil prices, steel demand, and the pace of capital expenditure reductions at NUE and CMC.