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Morgan Stanley cuts European oil and gas stocks amid weak demand

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

The analysts point to a softening macroeconomic environment, which is expected to drag on both oil and gas prices over the coming years. 

This comes as Morgan Stanley forecasts that  will stabilize at around $75 per barrel, while European gas prices are expected 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.

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 declining near-term production and high capital expenditure requirements as key reasons behind the revision. 

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

Worse yet, in a bear-case scenario where Brent crude falls to $60 per barrel, Aker BP’s free cash flow could turn negative, casting further doubt on its near-term financial performance. 

The stock’s price target has been slashed to NOK 240, down from NOK 307, reflecting these risks.

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

The company’s focus on offshore Israel, particularly the Karish and Katlan fields, makes it vulnerable to geopolitical tensions. The planned sale of Energean’s Egyptian and Italian assets, while seen as strategic, further heightens its concentration risk, limiting the diversification that typically helps buffer companies 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 upside. However, the elevated risk profile has prompted a more cautious stance.

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

While Ithaca is expected to generate solid free cash flow in the near term, there are looming uncertainties tied to the UK’s fiscal regime. Frequent amendments to the UK’s energy profits levy, along 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 capitalize on its production potential, especially given its exposure to UK-focused projects.

Despite the overall gloom, not all European oil and gas stocks have been downgraded. Harbour Energy (LON:) and Var 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. 

Harbour Energy, which recently completed a significant transformation with the acquisition of Wintershall Dea’s assets, has emerged as one of the firm’s top picks. 

With a diversified portfolio spanning multiple countries, including Norway, the UK, and Argentina, Harbour Energy is forecast to deliver an impressive free cash flow yield of 16% per annum between 2025 and 2027. 

In addition, the company’s hedging strategies, particularly in gas, provide a cushion against potential declines in commodity prices, ensuring that 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 preferred stock, is poised to benefit from its near-term production growth, driven by the Johan Castberg and Balder X projects.

Production is expected to rise by 33% over the next 15 months, ensuring strong cash flow despite the 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 under a bear-case scenario, where oil prices fall to $60 per barrel, Var Energi’s free cash flow yield would still stand at a resilient 11%, backed by the company’s low-cost production and strong 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 Harbour Energy and Var Energi, which are well-positioned to navigate the difficult landscape. 

For companies like Aker BP, Energean, and Ithaca Energy, however, the path forward appears more fraught, as production challenges, fiscal risks, and geopolitical exposure cloud their prospects. 

Commodities

Exclusive-Brent oil traders use little known rule to reroute US cargoes

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By Florence Tan, Alex Lawler and Robert Harvey

LONDON (Reuters) – Big energy merchants trading oil cargoes that form the basis of the Brent benchmark have used a little known rule to reroute U.S. shipments from Europe, in a practice that raises doubts over whether reforms to the crude price marker have succeeded.

Brent, the most significant benchmark across commodity markets, is used to price more than 60% of globally traded crude and underpins oil futures. Its value affects fuel prices paid by consumers and businesses.

The 2023 addition of to the benchmark had the potential to limit the scope for trading plays that can distort Brent prices, analysts said at the time. But the reroutings have renewed concern in the market about how well the benchmark reflects supply and demand.

Platts, a unit of S&P Global Commodity Insights, last year allowed U.S. WTI Midland crude delivered to Europe to be included in its Brent price assessment, called dated Brent. This was to boost liquidity as supplies from the mature North Sea Brent and other oilfields have dwindled.

But in recent months, some WTI cargoes that traded for delivery to Europe via the Platts system, known as the window, never arrived, at least five trading sources said, declining to be named because they were not authorised to speak publicly. The later rerouting has not been previously reported.

Trading companies that deal in the U.S. oil used a clause in the Platts methodology for all commodities, called bookout, to change destinations from Europe to Asia or to keep oil in the United States. The methodology in which bookouts are noted is publicly available on Platts’ website.

Although allowed under Platts’ rules, the sale and later rerouting of the cargoes can impact prices including that of dated Brent, traders and industry analysts said, because it creates a perception demand in Europe is stronger than it is.

Reuters has not, however, been able to establish any conclusive link between the cargo trading activity and prices over the period.

“The issue is traders watch the delivered trades and count barrels arriving to Europe. Those barrels set dated Brent,” said Adi Imsirovic, a trader, who has published books and papers on Brent and runs consultancy Surrey Clean Energy.

“If you then book out those trades, the barrels – which you think there were plenty of, and which have already set the dated price – suddenly disappear.”

Platts said it had not received any complaints about the practice and it was aware “a small minority of cargoes” changed their sales basis from a delivered cost, insurance and freight (CIF) basis to free on board (FOB), which can go anywhere.

“Such contract amendments are typical in many markets,” Joel Hanley of S&P Global Commodity Insights said.

Platts said more market participants have joined its dated Brent process since WTI was added – in a vote of confidence in the reforms.

NO PLAN TO DISCLOSE

Trading firms Trafigura, Gunvor and Vitol are among those that have used bookouts to change the destinations of WTI cargoes traded into dated Brent, the trade sources said.

A Trafigura spokesperson said: “As set out in the Platts methodology and is common across industry participants, we seek to agree requests from our buyers for additional discharge options where market forces dictate re-direction of cargoes.”

Gunvor and Vitol declined to comment.

Platts assesses dated Brent’s price based on the cheapest of five North Sea crudes – Brent, Forties, Oseberg, Ekofisk and Troll – and WTI Midland on the day.

Thomson Reuters (NYSE:) competes with Platts in the provision of news and price assessments about the oil market.

Imsirovic said Platts should be informed if physical Brent trades are booked out because if the original deal set the price, Platts may need to adjust the assessment.

Platts has no plan to make CIF to FOB conversions transparent by publishing them or to retroactively change its assessments if cargoes change destination, Hanley said.

He said mutual agreements post-trade are normal practice and the fair value of the oil delivered into Europe was reflected on the day by the CIF trade.

U.S. regulator the Commodity Futures Trading Commission (CFTC) declined to comment as did the European Securities and Markets Authority (ESMA), which referred Reuters to the Dutch Authority for the Financial Markets (AFM).

AFM declined to comment, saying this was because Platts’ crude oil benchmark does not fall under the EU Benchmarks Regulation and AFM does not supervise it.

SHIPMENT TO CHINA

In one WTI deal that was booked out, Trafigura on Oct. 2 2023 sold three cargoes for delivery to Rotterdam and later negotiated a destination change to China, trade sources said.

On that day, Forties, Brent and WTI crude’s differentials to dated Brent rose on strong demand, with Forties hitting its highest in over a year according to LSG data. Platts said WTI and Brent were the cheapest grades and helped establish the dated Brent price.

futures dropped by almost 5% and dated Brent as assessed by Platts dropped by 1.8% to $94.555 on Oct. 2.

Other trading companies including Vitol and Gunvor have since bought 700,000-barrel cargoes of WTI on a delivered basis to Europe that later converted to FOB, the sources said.

Reuters could not quantify the exact number involved. Platts said it had seen six instances of cargoes switching from CIF to FOB in 2024 to be combined in a larger ship.

Jorge Montepeque, who developed dated Brent and later left Platts and became a critic of the WTI addition, also said changes of cargo destinations must be disclosed.

© Reuters. A pump jack is seen at sunrise near Bakersfield, California October 14, 2014. REUTERS/Lucy Nicholson/File Photo

“One could say that the bidding by traders for WTI cargoes helped distort the perception of demand in Europe where there was no demand for such cargoes,” he said.

Hanley of Platts disagreed, saying it was not possible to create a perception that demand is higher than it is in pricing terms, because if you bid higher a seller will take up your bid.

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Commodities

Oil prices jump more than 2.5% as Israel, US vow retaliation for Iran attack

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By Paul Carsten

LONDON (Reuters) – Oil prices climbed more than 3% on Wednesday as Israel and the United States vowed retribution over Iran’s biggest ever direct attack on its regional adversary, firing more than 180 ballistic missiles.

With Israel also ordering more soldiers into Lebanon to battle Iran-backed militant group Hezbollah, the conflict has rapidly intensified with little sign of de-escalation despite international pleas.

That has sent oil prices surging, with futures up $1.94, or 2.6%, to $75.50 a barrel. U.S. West Texas Intermediate (WTI) crude jumped $2.02, or 2.9%, to $71.85 at 1256 GMT.

Both crude benchmarks on Tuesday surged more than 5% before closing around 2.5% higher.

Iran said early on Wednesday that its missile attack on Israel was over barring further provocation.

Israeli and U.S. retaliation “could include damaging or obliterating Iran’s oil facilities,” said Tamas Varga of oil broker PVM.

Tehran said any Israeli response to the attack would be met with vast destruction.

Varga noted Iran’s or its allies’ retaliation could strike Saudi oil facilities like in 2019 or see the closure of the Strait of Hormuz. “Any of these events would irretrievably send oil prices considerably higher,” he said.

In another escalation of the conflict, the Israeli military on Wednesday sent regular infantry and armoured units to join ground operations in southern Lebanon against Iran-backed Hezbollah.

The United Nations Security Council scheduled a meeting about the Middle East for Wednesday, and the European Union called for an immediate ceasefire.

Iran’s oil output rose to a six-year high of 3.7 million barrels per day (bpd) in August, ANZ analysts said.

“A major escalation by Iran risks bringing the U.S. into the war,” Capital Economics said in a note. “Iran accounts for about 4% of global oil output, but an important consideration will be whether Saudi Arabia increases production if Iranian supplies were disrupted.”

A panel of ministers from OPEC+, which includes Russia, meets later on Wednesday to review the market, with no policy change expected. The group is set to raise output by 180,000 bpd each month from December.

© Reuters. FILE PHOTO: A pump jack is seen at sunrise near Bakersfield, California October 14, 2014. REUTERS/Lucy Nicholson/File Photo

“Any suggestion that production hikes will proceed could offset concerns of supply disruptions in the Middle East,” ANZ analysts said.

However, Saudi Arabia’s oil minister said that oil prices could drop to as low as $50 per barrel if OPEC+ members do not stick to agreed-upon production limits, the Wall Street Journal reported on Wednesday citing delegates from the oil producers group.

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Oil prices dip as prospect of additional supply offsets Mideast fears

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By Arunima Kumar

(Reuters) -Oil prices edged lower on Tuesday as a stronger supply outlook and tepid global demand growth outweighed fears over escalating conflict in the Middle East and its impact on crude exports from the region.

futures for December delivery slipped by 49 cents, or 0.7%, to $71.21 a barrel by 1117 GMT. U.S. West Texas Intermediate (WTI)crude futures lost 55 cents, or 0.8%, to $67.62.

Brent fell as much as 2.5% earlier in the session and WTI crude plunged by 2.7% before paring losses.

A panel of top ministers from the OPEC+ producer group meets on Oct. 2 to review the market, with no policy changes expected. Starting in December, the OPEC+ comprising the Organizations of the Petroleum Exporting Countries (OPEC) plus allies such as Russia is scheduled to raise output by 180,000 barrels per day (bpd) each month.

The possibility of Libyan oil output recovering also weighed on the market. Libya’s eastern-based parliament agreed on Monday to approve the nomination of a new central bank governor, which could help to end a crisis that drastically reduced the country’s oil output.

“Opposing forces are keeping oil sideways trading for now,” said UBS analyst Giovanni Staunovo, pointing to Chinese stimulus, U.S. oil demand growth and slowing supply growth on the positive side and a looming resumption of Libyan output on the negative side.

In China, manufacturing activity shrank sharply in September, a private sector survey showed on Monday.

Analysts say a slew of stimulus measures over the past week are likely to be enough to bring China’s 2024 growth back to about 5% after several months of below-forecast data cast doubts over that target, though the longer-term outlook remains little changed.

Israel began ground incursions in Lebanon on Tuesday, with its military saying troops had begun raids against Hezbollah targets in the border area.

The attacks follow Israel’s killing on Friday of Hezbollah head Hassan Nasrallah and represent an escalation in a conflict that now threatens to suck in the United States and Iran.

“Risk weighting for front-month oil futures is currently contingent upon what Israel might do next and if there is a direct confrontation with Iran,” said independent oil analyst Gaurav Sharma.

© Reuters. An oil pump is seen in Lagunillas, Ciudad Ojeda, in the state of Zulia, Venezuela, March 18, 2015. REUTERS/Isaac Urrutia/File Photo

In the United States, crude oil and fuel stockpiles were expected to have fallen by about 2.1 million barrels in the week to Sept. 27, a preliminary Reuters poll showed on Monday.

The poll was conducted ahead of a report from the American Petroleum Institute industry group due at 2030 GMT on Tuesday.

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