Energy stocks have had a tough year, but Goldman Sachs sees promise in European Big Oil. “We are currently at a turning point as EU Big Oils started to outperform U.S. Big Oils, to potentially close their 40% valuation gap against their U.S. peers,” the investment bank’s analysts, led by Michele Vigna, wrote in a Dec. 12 note. Oil prices were driven up in the wake of Houthi attacks in the Red Sea , though they’ve since settled as shipping disruptions eased. And the 2024 outlook for oil has been underwhelming, with the International Energy Agency expecting the slowdown in demand to continue next year. Year-to-date, Brent oil prices were up 0.2% to $79.21 on Dec. 27. Even so, Goldman noted that “EU Big Oils now screen as attractive thanks to enhanced buyback programs, leading to double digit cash returns to shareholders.” Optimism on European Big Oil has also picked up among ESG investors, who have been reducing their underweight positions on oil and gas producers, the investment bank’s analysts wrote. They added that the implementation of the EU’s taxonomy list — a classification system that helps investors channel money into projects aligned with the bloc’s goal of decarbonizing the economy — is another factor behind the shift toward EU Big Oil. Top picks British oil giant Shell is among Goldman Sachs’ top picks. The bank said it has the “highest quality combination of assets in the sector.” The company – which is in the business of producing liquefied natural gas and chemicals — has a strong pipeline of projects that can “help sustain high cash flows for a number of European Big Oils,” the investment bank’s analysts wrote. Goldman has a buy rating on the stock, which is on its conviction list. However, it revised its price down by 3.4%, or $3 to $85 — giving it around 28.6% upside potential from its Dec. 27 close. Other oil companies that were given a buy rating and among the bank’s top picks include Italian oil giant Eni and British player BP . Goldman has a price target of 18 euros ($20.03) on Eni — giving it nearly 16.8% potential upside — and £620 ($793.55) on BP, or around 33.3% upside. The investment bank said Eni is “transforming into a higher return business on our estimates, driven by leading exploration success, disposals and a strong pipeline of project start-ups.” The analysts see the company’s variable dividend policy and share buybacks as “attractive for shareholders.” As for BP, Goldman said it “continues to demonstrate strong operational execution in upstream and trading results.” Other merits include its increasing focus on capital discipline and cost efficiency, and the introduction of an “enhanced” decarbonization strategy, the investment bank’s analysts wrote. — CNBC’s Michael Bloom contributed to this report.