Morgan Stanley Revises European Oil and Gas Outlook

Morgan Stanley issued a note on Monday revising its outlook for key European oil and gas stocks, cutting ratings and price targets over concerns of weakening demand.

The analysts noted a softening macroeconomic environment that is anticipated to negatively impact oil and gas prices in the upcoming years.

Price Projections

Morgan Stanley projects that Brent crude will stabilize at around $75 per barrel, while European gas prices are expected to decline to approximately $7.0 per million cubic feet by 2026. These projections highlight the industry challenges as supply is outpacing demand, particularly in Europe, where current gas prices hover around $11/mmcf.

Affected Companies

In the exploration and production (E&P) sector, companies like Aker BP (OL:AKRBP), Energean (LON:ENOG), and Ithaca Energy (LON:ITH) were notably impacted. Aker BP has been downgraded to 'underweight', attributed to declining near-term production and high capital expenditure needs.

The company’s free cash flow yield is expected to average just 6% between 2025 and 2026. In a pessimistic scenario where Brent crude drops to $60 per barrel, Aker BP could face negative cash flow, further jeopardizing its financial outlook. Its price target has been cut from NOK 307 to NOK 240.

Energean was shifted to an 'equal-weight' rating, with its price target lowered from 1,430p to 1,100p due to heightened geopolitical and asset concentration risks, especially related to its offshore Israel operations.

Ithaca Energy

Similarly, Ithaca Energy’s price target dropped from 150p to 127p and was also marked as 'equal-weight.' While solid cash flow generation is expected, uncertainties related to the UK’s fiscal regime pose significant risks.

Positive Outliers

Despite the generally negative sentiment, not all European oil and gas stocks faced downgrades. Harbour Energy (LON:HBR) and Var Energi (OL:VAR) maintained 'overweight' ratings. Harbour Energy, recently transformed via the acquisition of Wintershall Dea’s assets, is a top pick with a projected free cash flow yield of 16% from 2025-2027 and an 8% dividend yield.

Var Energi is set to benefit from near-term production growth, expecting a 33% increase over the next 15 months. Its free cash flow yield is projected at 16% on average for 2025-2026, with a robust 14% dividend yield. Even in a bearish scenario with oil prices at $60, its free cash flow yield would remain resilient at 11%.

As Morgan Stanley lowers price targets for various major players, the emphasis is now on companies with solid near-term cash flows and diversified portfolios, like Harbour Energy and Var Energi. However, Aker BP, Energean, and Ithaca Energy face tougher challenges ahead due to production setbacks, fiscal uncertainties, and geopolitical risks.