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Morgan Stanley has cut its forecasts for Europe’s largest oil and gas companies, predicting that waning prices will put more pressure on shareholder returns next year.
Analysts at the bank reduced their share price targets on BP, TotalEnergies, Shell, Equinor, and Repsol by between 9 per cent and 14 per cent, warning that there was a 10 per cent downside risk to next year’s earnings and cash flow forecasts across the sector.
In a research note, Morgan Stanley said there were four conditions under which the share prices of energy companies had historically flourished: when oil and gas prices, interest rates and inflation expectations were rising and when the rest of the market was subdued.
“Going through the checklist, we find that none of these are in place at the moment. In fact, most of these factors are pointing in the opposite direction,” analysts said.
In the past year, the price of benchmark Brent crude has dropped more than 9 per cent to around $76 a barrel, with demand slowing in large part because of weaker economic growth in China.
Next year, Morgan Stanley believes that demand for oil will increase by 1.2mn barrels a day (b/d), but that will be outstripped by a supply increase of as much as 2.6mn b/d as both Opec and non-Opec countries increase production. It predicted that Brent crude will trade at $75 a barrel and that gas prices will fall to €25/MWh by the end of 2025 because of a similar production glut.
As a result, Morgan Stanley’s analysts said they suspected “share buybacks are maxed out for now” and that energy shares would lag the rest of the European market as a result.
Both Shell and BP have focused on shareholder returns in recent quarters as they try to demonstrate consistency and reliability to investors. Shell has bought back at least $3bn in shares every quarter for the past 11 quarters and chief executive Wael Sawan said in June that he would “maintain consistency not just through good times but also some of the more challenging times”.
He added that Shell, which has returned 43 per cent of its free cash flow to shareholders in the past four quarters, would aim to keep returning 30 to 40 per cent even if oil prices fell to $50 a barrel.
Morgan Stanley said that while Shell had low debt and a strong operational performance, its longer-term strategy remained unfocused and its shareholder returns were cautious. It said that even with 10 per cent dividend growth “we struggle to see upside”. The bank cut its price target for 2025 from 3,150p to 2,775p. Shell’s share price on Thursday was 2,688p after rising just over 4 per cent so far this year.
At BP, Morgan Stanley said shareholder distributions were unlikely to be covered by free cash flow and that the company was operating on a “relatively tight financial framework”. It cut its price target from 540p to 490p. BP was trading at 431p on Thursday, and its share price is down more than 8 per cent so far this year.