Morgan Stanley cuts European oil and gas stocks amid weak demand By Investing.com

Investing.com — Morgan Stanley revised its outlook for major European oil and gas stocks in a note on Monday, cutting its ratings and price targets amid concerns over weakening demand.

Analysts point to an easing macroeconomic environment, which is expected to affect both oil and gas prices in the coming years.

This comes as Morgan Stanley expects it to stabilize at around $75 per barrel, while European gas prices are expected to fall to around $7.0 per million cubic feet by 2026.

These forecasts reflect the challenges facing the industry as supply outstrips demand, particularly in Europe where gas prices are currently around $11/mmcf.

In the exploration and production (E&P) sector, Aker BP (OL: ), Energean (LON: ) and Ithaca Energy (LON: ) were among the companies most affected by these changes. Aker BP (NYSE: ), once seen as a solid performer in the space, has now been downgraded to “underweight.”

Morgan Stanley analysts cite lower short-term production and high capital expenditure requirements as key reasons behind the revision.

The company’s free cash flow yield is expected to average just 6% between 2025 and 2026, a relatively low figure compared to its peers.

Worse still, in a bearish scenario where Brent crude falls to $60 a barrel, Aker BP’s free cash flow could turn negative, casting even more doubt on its near-term financial performance.

The share price target was reduced to NOK 240, down from NOK 307, reflecting these risks.

Energean, another major player in the sector, was moved to an “equal weight” rating. Morgan Stanley cut its price target from 1,430p to 1,100p, citing geopolitical and higher asset concentration risks.

The company’s focus on Israel’s offshore, particularly the Karish and Katlan fields, makes it vulnerable to geopolitical tensions. The planned sale of Energean’s Egyptian and Italian assets, while considered strategic, further increases its risk of concentration, limiting the diversification that typically helps companies protect against regional issues.

Despite these challenges, Energean’s strong cash flow and dividend yields, supported by long-term contracts that protect it from commodity price volatility, offer some advantages. However, the high risk profile prompted a more cautious attitude.

Ithaca Energy also felt the impact of Morgan Stanley’s more bearish outlook. The company’s price target was cut to 127p from 150p and it was also marked as “equal weight”.

While Ithaca is expected to generate solid free cash flow in the near term, there are looming uncertainties related to the UK tax regime. Frequent changes to UK energy profits tax, together with the government’s ongoing review of capital allowances, add layers of risk to Ithaca’s operations.

In Morgan Stanley’s view, these factors make it difficult for the company to fully realize its production potential, especially given its exposure to UK-focused projects.

Despite the general gloom, not all European oil and gas stocks were downgraded. Harbor Energy (LON: ) and Lime Energi (OL:) 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.

Harbor Energy, which recently completed a significant transformation by acquiring the assets of Wintershall Dea, has become one of the company’s top picks.

With a diversified portfolio spanning several countries, including Norway, the United Kingdom and Argentina, Harbor Energy is forecast to deliver an impressive free cash flow return of 16% per annum between 2025 and 2027.

Additionally, the company’s hedging strategies, particularly in gas, provide a cushion against potential commodity price declines, ensuring cash flows remain strong even in bearish scenarios.

Investors can also expect substantial returns as the company is set to distribute an 8% dividend yield, complemented by a 5% share buyback program, further enhancing shareholder value.

Var Energi, another favorite stock, is poised to benefit from near-term production growth driven by the Johan Castberg and Balder X projects.

Production is expected to rise 33% over the next 15 months, ensuring strong cash flow despite broader weakness in oil and gas markets.

Morgan Stanley forecasts a free cash flow yield of 16% on average for Var Energi in 2025-2026, with a robust dividend yield of around 14%.

Even in a bearish scenario where oil prices fall to $60 a barrel, Var Energi’s free cash flow yield would still remain at a resilient 11%, supported by low-cost production and the company’s solid balance sheet.

As the brokerage lowers its price targets for several major players, the focus shifts to companies with strong near-term cash flows and diversified portfolios, such as Harbor Energy and Var Energi, which are well-positioned to navigate the challenging landscape.

For companies such as Aker BP, Energean and Ithaca Energy, however, the road ahead looks more difficult as production challenges, fiscal risks and geopolitical exposure cloud their outlook.