📝 Executive Summary
On September 3, Goldman Sachs noted that investors can still find attractive dividend-paying opportunities in energy despite the sector's sharp rally. The Energy Select Sector SPDR ETF (XLE) has gained about 45% year to date, compared with roughly 13% for the S&P 500, while Brent crude has moved above $95 per barrel amid the conflict in the Middle East. Goldman analyst Neil Mehta says the energy rally has made valuation more important when identifying new opportunities. His screen focuses on Buy-rated stocks offering above-average total-return potential while trading at below-average 2028 multiples. Within that framework, Goldman identifies Devon Energy Corporation (NYSE:DVN) and HF Sinclair Corporation (NYSE:DINO) as two different opportunities. For Devon, Goldman sees a valuation disconnect. The stock has gained roughly 33% this year, compared with about 40% for its large-cap E&P peers, and Mehta estimates that Devon is trading at an attractive 14% free-cash-flow yield based on average 2027–2028 estimates. Goldman also likes Devon's Delaware Basin position and its plan to return up to 70% of free cash flow to shareholders. Its $55 price target implies about 12% upside, while the stock offers a roughly 2.3% dividend yield. For HF Sinclair, the argument is less about being an undiscovered stock and more about valuation despite the large rally. The shares have risen roughly 131% year to date, yet Goldman believes the company still trades at a discount to refining peers because of uncertainty surrounding its interim CEO and CFO. Mehta also sees value in the company's Lubricants, Renewable Diesel and Midstream businesses, as well as its exposure to the West Coast/Rockies and Mid-Continent refining markets. Goldman's $114 target implies about 7.5% additional upside, with a dividend yield of around 2%. Energy transmission lines. Photo by Snapwire on Pexels Goldman's strongest argument for Devon Energy Corporation (NYSE:DVN) is the combination of relative underperformance and high forward free-cash-flow potential. Despite participating in the energy rally, Devon has lagged its large-cap E&P peers. If the market closes that performance gap, the stock could have room to re-rate. The company's Delaware Basin exposure is another important part of the thesis. Devon itself describes the Delaware as the core of its portfolio and is directing more than 60% of its 2026 capital spending to the Permian. The company expects approximately $4.9 billion of 2026 capital investment and production of around 1.38 million barrels of oil equivalent per day. Importantly, Devon's management is also pursuing the same portfolio optimization that Goldman views positively. Devon says it is reviewing its portfolio with the objective of concentrating around its premier Permian position. At the same time, the company expects to capture $600 million of synergies in 2027 and reach a $1 billion annual pretax synergy run rate by the end of 2027 following its combination with Coterra. Shareholder returns provide another potential catalyst. Devon targets returning up to 70% of free cash flow to shareholders through its fixed dividend and $8 billion share-repurchase authorization. Management also expects to retire approximately $1.25 billion of debt during 2026. This strengthens Goldman's valuation argument: if Devon can simultaneously improve its portfolio, capture merger synergies, reduce debt, and return substantial cash to shareholders, investors could have multiple reasons to revalue the stock. The main risk is that the attractive forward free-cash-flow yield depends on Devon successfully converting its larger post-Coterra portfolio into higher cash generation. The company is now significantly larger, but it also has a substantial capital program, with 2026 capital spending expected to be approximately $4.8–$5.0 billion. The portfolio review therefore becomes important. Devon has said it wants to concentrate the portfolio around the Permian, but the benefits will depend on how successfully management executes that strategy. If asset optimization takes longer than expected, the valuation discount Goldman identifies could remain. There is also considerable exposure to oil prices. Goldman's thesis is being presented against a backdrop of Brent above $95, driven partly by geopolitical tensions. If the geopolitical premium in crude prices reverses, Devon's free cash flow could fall, making the 14% forward FCF yield less compelling. The Coterra integration also remains an execution factor. Devon expects to achieve $1 billion of annual pretax synergies by the end of 2027, meaning a meaningful portion of the investment case depends on benefits that are still ahead rather than fully realized today. Overall, the Devon Energy Corporation (NYSE:DVN) bull case is that the market is undervaluing a larger, increasingly Permian-focused company with significant FCF generation and shareholder returns. The bear case is that commodity-price normalization, capital requirements, and slower portfolio optimization could prevent that valuation gap from closing. Goldman's HF Sinclair Corporation (NYSE:DINO) thesis is notable because it remains constructive even after the stock has risen approximately 131% year to date. The argument is that the rally has not completely eliminated the company's valuation discount to refining peers. One reason is the company's diversified earnings base. Goldman specifically points to Lubricants, Renewable Diesel, and Midstream alongside refining. This matters because it means investors are not simply paying for exposure to the refining cycle. HF Sinclair is also actively changing its portfolio. In July, the company announced plans to separate its Lubricants & Specialties business into a standalone publicly traded company. Management says the separation should create two more focused businesses and give each greater strategic and capital-allocation flexibility. Following the separation, HF Sinclair Corporation (NYSE:DINO) plans to focus on an integrated downstream business consisting of refining, midstream, marketing and renewables. The company says it intends to maintain an investment-grade financial profile and target a 50% payout ratio through regular dividends and open-market share repurchases. That portfolio restructuring could support Goldman's valuation argument. If the market assigns a higher valuation to the standalone Lubricants & Specialties business and a clearer valuation to HF Sinclair's remaining refining, midstream, marketing and renewable operations, the separation could help unlock value. The refining footprint itself is another advantage. HF Sinclair Corporation (NYSE:DINO) operates refineries across Kansas, Oklahoma, New Mexico, Wyoming, Washington and Utah, giving it exposure to the Southwest, Rockies, Pacific Northwest and Mid-Continent markets. The biggest concern is that HF Sinclair has already enjoyed an extraordinary rerating. With the stock up roughly 131% in the original Goldman news, the margin for further upside is naturally smaller than it was before the rally. Goldman's $114 target implies only about 7.5% upside from the reference price in the original report. The second risk is refining cyclicality. The current investment environment is unusually favorable for energy companies because of elevated crude and refined-product prices. If geopolitical tensions ease and refining margins normalize, HF Sinclair's earnings could come under pressure. Leadership uncertainty also remains directly relevant to Goldman's thesis. HF Sinclair Corporation (NYSE:DINO)'s CEO Tim Go took a voluntary leave of absence in February, with Chairman Franklin Myers assuming the CEO and president roles on a temporary basis. The company said at the time that its board had begun a process to determine the future structure of the position. The Lubricants & Specialties separation creates another execution variable. HF Sinclair expects the transaction to take 12–18 months and notes that completion remains subject to several conditions, including board approval, tax and regulatory matters, SEC registration and financing. The company is also retiring its Mississauga, Ontario base-oil refining assets, with the transition expected to be substantially completed during 2027. Although management views this as part of portfolio optimization, the transition creates additional execution requirements. Overall, the HF Sinclair bull case is that the market is still undervaluing its non-refining businesses and that portfolio simplification can unlock additional value. The bear case is that the huge stock rally has already priced in much of the improvement, while refining margins and geopolitical conditions could eventually normalize. Devon Energy appears to offer the stronger risk/reward opportunity, while HF Sinclair offers a more cyclical value proposition. Devon's 14% estimated 2027–2028 free-cash-flow yield, Delaware Basin focus, and commitment to return up to 70% of FCF support Goldman's view that the stock remains undervalued. Its $55 price target also implies greater upside than HF Sinclair's. Devon's newly expanded buyback authorization further supports the capital-return case. HF Sinclair still has upside, particularly from its refining exposure and the potential value unlocked by separating its Lubricants & Specialties business. But after a roughly 131% rally, the stock has less valuation cushion, while refining earnings remain sensitive to market conditions. Its strong Q2 results demonstrate the upside from the current environment, but also highlight the cyclical nature of the business. Overall, Devon looks more attractive for valuation-driven investors, while HF Sinclair is better suited to investors willing to take greater refining-cycle and execution risk for continued cash returns. While we acknowledge the potential of DVN and DINO as an investment, we believe certain AI stocks offer greater upside potential and carry less downside risk. If you're looking for an extremely undervalued AI stock that also stands to benefit significantly from Trump-era tariffs and the onshoring trend, see our free report on the best short-term AI stock. READ NEXT: Lululemon's Guidance Cut Raises Fresh Questions Over its Turnaround and ChargePoint (CHPT)'s 70% Surge: Is the EV Charging Turnaround Finally Taking Hold? Disclosure: None. This article is originally published at Insider Monkey.