Upgrade of Energy Stocks#
Morgan Stanley has raised its outlook on European energy stocks from "In-Line" to "Attractive." This change is based on a significant shift in oil markets following disruptions in the Strait of Hormuz, which the bank believes will lead to a sustained increase in oil prices and a preference for higher-risk (higher-beta) investments.
Implications of Market Changes#
Analysts, led by Martijn Rats, noted that the oil market is unlikely to revert to its previous state. They highlighted three main consequences of the recent disruptions: 1. Lower Spare Capacity: Much of the spare oil production capacity is located behind the Strait of Hormuz, making it less accessible. 2. Increased Stockpiling: Companies are likely to stockpile more oil, tightening the overall supply. 3. Price Premiums: Crude oil that does not depend on the Strait will likely command higher prices.
Earnings Forecast and Cash Flow#
Morgan Stanley has increased its price forecast for Brent crude oil to $80 per barrel by 2027, expecting prices to stay above this level through 2026. Additionally, natural gas prices are projected to rise to around $30 per million British thermal units (mmbtu) in 2026 and $15 in 2027. This optimistic outlook has led to a significant upgrade in earnings estimates, with expected earnings per share (EPS) for 2026 rising by about 100% and by roughly 50% for 2027. Free cash flow yields are also expected to remain strong, around 12% in 2026 and 10% in 2027.
Stock Recommendations#
In light of these changes, Morgan Stanley has upgraded BP and Repsol to "Overweight," indicating a preference for these higher-risk stocks. BP is noted for its potential to reduce debt and resume buybacks due to higher oil prices. Repsol's position in refining markets is also seen as advantageous, with expected annual buybacks of around €1.4 billion. Equinor has been raised to "Equal-weight," benefiting from its high sensitivity to gas prices. Meanwhile, Shell and Galp have been downgraded to "Equal-weight" due to their more defensive strategies, which may offer less potential for growth compared to their more commodity-sensitive counterparts.