Morgan Stanley Reduces European Oil and Gas Stock Holdings Due to Weak Demand

Morgan Stanley recently updated its outlook for major European oil and gas stocks, lowering ratings and price targets due to concerns about declining demand. Analysts have highlighted a weakening macroeconomic environment that is anticipated to impact oil and gas prices in the coming years.

The firm expects Brent crude to stabilize at approximately $75 per barrel, while European gas prices could decrease to around $7.00 per million cubic feet by 2026. These forecasts underscore the challenges facing the industry, particularly in Europe, where current gas prices are about $11/mmcf.

In the exploration and production (E&P) sector, Aker BP, Energean, and Ithaca Energy are notably affected by these changes. Aker BP, once viewed as a strong performer, has now been downgraded to “underweight.” Analysts have cited declining near-term production and significant capital expenditure demands as critical reasons for this revision. The company’s free cash flow yield is projected to average only 6% between 2025 and 2026, which is relatively low compared to peers. In a bearish scenario where Brent crude prices drop to $60 per barrel, Aker BP’s free cash flow could turn negative, raising further concerns about its financial outlook. Consequently, the stock’s price target has been cut from NOK 307 to NOK 240.

Energean has also been moved to an “equal-weight” rating, with its price target reduced from 1,430p to 1,100p. This adjustment stems from increased geopolitical risks and asset concentration concerns, particularly given the company’s focus on offshore Israel in the Karish and Katlan fields. Although Energean’s planned sale of its Egyptian and Italian assets may be strategic, it further heightens concentration risk, potentially limiting diversification benefits.

Despite these issues, Energean does have strong cash flow and dividend yields bolstered by long-term contracts, which can mitigate some commodity price volatility. However, the company’s increased risk profile has led to a more cautious approach.

Ithaca Energy has experienced similar revisions, with its price target decreased from 150p to 127p and marked as “equal-weight.” Although solid free cash flow generation is expected in the near term, uncertainties linked to the UK’s fiscal regime, including frequent adjustments to the energy profits levy and ongoing government reviews of capital allowances, pose significant challenges.

Despite the overall negative outlook, not all European oil and gas stocks have suffered downgrades. Harbour Energy and Var Energi are highlighted as strong performers, both maintaining “overweight” ratings due to their robust cash flow profiles and appealing dividend yields. Harbour Energy has performed notably well since its acquisition of Wintershall Dea’s assets, supported by a diversified portfolio across multiple countries, including Norway, the UK, and Argentina. It is projected to deliver an impressive free cash flow yield of 16% annually between 2025 and 2027, alongside an 8% dividend yield and a 5% share buyback program.

Var Energi is set to benefit from anticipated near-term production growth, particularly from the Johan Castberg and Balder X projects, with production expected to increase by 33% over the next 15 months. This growth will help maintain strong cash flow amidst broader oil and gas market weaknesses. Var Energi’s average free cash flow yield is forecasted at 16% for 2025-2026, with a substantial dividend yield of around 14%. Even in a bearish scenario, where oil prices fall to $60 per barrel, the company’s free cash flow yield is expected to remain resilient at 11%, thanks to low-cost production and a solid balance sheet.

As Morgan Stanley revises its price targets for several significant players, attention is shifting to companies with strong near-term cash flows and diversified portfolios, like Harbour Energy and Var Energi, which are well-positioned to weather the challenging landscape. In contrast, Aker BP, Energean, and Ithaca Energy face a more complicated path ahead due to production challenges, fiscal risks, and geopolitical exposure that cloud their future prospects.