European oil majors face shrinking profits, Morgan Stanley says

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Morgan Stanley cut its forecasts for Europe’s biggest oil and gas companies, predicting that falling prices will put more pressure on shareholder returns next year.

Analysts at the bank cut their share price targets for BP, TotalEnergies, Shell, Equinor and Repsol by between 9% and 14%, warning there was a 10% downside risk to full-year earnings and cash flow forecasts future. section.

In a research note, Morgan Stanley said there have been four conditions when energy company share prices have historically boomed: when oil and gas prices, interest rates and inflationary expectations were rising and when the rest of the market was bearish.

“Going through the checklist, we find that none of these are in place at this time. In fact, most of these factors point in the opposite direction,” the analysts said.

Over the past year, the price of benchmark Brent crude has fallen more than 9 percent to about $76 a barrel, with demand slowing largely due to weaker economic growth in China.

Next year, Morgan Stanley believes oil demand will grow by 1.2 million barrels per day (b/d), but this will be outpaced by an increase in supply of up to 2.6 million barrels per day, both in both OPEC and non-OPEC countries. production increases. It predicted Brent crude would trade at $75 a barrel and gas prices would fall to €25/MWh by the end of 2025 due to a similar production glut.

As a result, Morgan Stanley analysts said they suspect “share buybacks are at an all-time high” and that energy stocks will lag behind the rest of the European market as a result.

Both Shell and BP have focused on shareholder returns in recent quarters, trying to demonstrate consistency and reliability to investors. Shell has bought back at least $3 billion in shares every quarter for the past 11 quarters, and Chief Executive Wael Sawan said in June that it would “maintain consistency not only in the good times but also in some of the more difficult ones”.

He added that Shell, which has returned 43 percent of its free cash flow to shareholders over the past four quarters, would continue to return 30 to 40 percent even if oil prices fall to $50 a barrel.

Morgan Stanley said that while Shell had low debt and strong operating performance, its long-term strategy remained unfocused and shareholder returns were cautious. It said that even with a 10% dividend increase, “we are struggling to see up.” The bank cut its price target for 2025 from 3,150p to 2,775p. Shell’s share price was 2,688p on Thursday after rising just over 4% this year.

At BP, Morgan Stanley said it was unlikely that shareholder distributions would be covered by free cash flow and that the company was operating in a “relatively tight financial environment”. He cut his price target from 540p to 490p. BP was trading at 431p on Thursday and its share price is down more than 8% so far this year.