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Goldman Sachs released its top 40 stocks with the most potential upside this week. Roughly half were in the energy sector. This makes sense given the valuations in the sector, the huge expansion of domestic energy production and given the sector has underperformed the market over the last six months of the rally. Two drillers that look particularly cheap given their growth prospects are highlighted below.

Noble Corporation (NYSE:NE) is as an offshore drilling contractor for the oil and gas industry. The company offers contract drilling services for oil and gas wells.

4 reasons NE is a bargain at $40 a share:

  1. I last wrote about Noble when it traded at $34 a share in November. It is still cheap here at 9x 2014's projected earnings.
  2. Analysts expect revenues to grow better than 20% in both FY2013 & FY2014 and the stock sells for a five year projected PEG of 1.
  3. The stock sells for just 7x operating cash flow, yields 1.3% and is priced near the bottom of its five year valuation range based on P/S.
  4. Credit Suisse has an "outperform" rating and a $55 price target on the shares. Deutsche Bank raised its rating to a "Buy" earlier in the year and Goldman Sachs believes Noble can advance 35% from current prices.

Schlumberger (NYSE:SLB) is the leading oilfield services company and provides equipment and technology to the oil and gas industry worldwide.

4 reasons SLB has upside from $77 a share:

  1. The 21 analysts that cover the shares have a $91.50 a share price target on SLB. Goldman believes the shares have more than 25% upside potential.
  2. The stock sports a five year projected PEG of under 1 (.93) and analysts expect between 8% and 12% annual revenue growth over the next two fiscal years.
  3. SLB sells in the bottom third of if five year valuation range based on P/B, P/S and P/CF.
  4. The company has an A+ rated balance sheet, yields 1.7% and sells for 13.6x 2014's projected earnings. The company's five year average forward P/E ratio has averaged 18.3.

Disclosure: I am long NE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: 2 Of Goldman Sachs' Favorite Energy Names