The Future of European Oil and Gas Stocks: Morgan Stanley’s Latest Outlook
Morgan Stanley has revised its outlook for key European oil and gas stocks, cutting ratings and price targets due to concerns about weakening demand in the industry. With a softening macroeconomic environment expected to drag on both oil and gas prices in the coming years, the firm predicts that oil prices will stabilize at around $75 per barrel, while European gas prices are forecasted to decline to about $7.0 per million cubic feet by 2026.
These projections reflect the challenges facing the industry as supply exceeds demand, particularly in Europe where gas prices currently hover at about $11/mmcf. Companies in the exploration and production sector, such as Aker BP, Energean, and Ithaca Energy, have been most affected by these changes. Aker BP, once considered a solid performer, has now been downgraded to "underweight" due to declining near-term production and high capital expenditure requirements.
In a bear-case scenario where Brent crude falls to $60 per barrel, Aker BP’s free cash flow could turn negative. Similarly, Energean has been moved to an "equal-weight" rating, with its price target reduced due to higher geopolitical and asset concentration risks. Despite the challenges, Energean’s strong cash flow and dividend yields offer some upside, but the elevated risk profile has prompted a more cautious stance.
Ithaca Energy has also felt the impact of Morgan Stanley’s outlook, with its price target reduced and marked as "equal-weight." While the company is expected to generate solid free cash flow in the near term, uncertainties tied to the UK’s fiscal regime pose risks to its operations. Not all European oil and gas stocks have been downgraded, however. Harbour Energy and Var Energi remain bright spots in Morgan Stanley’s analysis, with both companies retaining "overweight" ratings due to their resilient cash flow profiles and attractive dividend yields.
Harbour Energy, with its diversified portfolio and hedging strategies, is forecasted to deliver an impressive free cash flow yield and substantial returns to investors. Var Energi, on the other hand, is poised to benefit from near-term production growth, ensuring strong cash flow despite market weaknesses. Overall, while some European oil and gas stocks face challenges, others present opportunities for investors seeking resilient companies with strong cash flow potential and attractive dividend yields.
