JPMorgan analysts are bullish on European energy equities, urging investors to buy the dips in anticipation of an oil supercycle tightening from mid-decade.
Analysts highlight premium free cash flow (FCF) in the sector, supported by well-placed “committed” cash breakevens at $50-55 per barrel.
With the 1 June OPEC meeting approaching, JPMorgan notes that the case for production increases remains unclear, as detailed in their GES report.
“A reassessment of capacity quotas across the balance of 2H24 and targeted in 2025 should remove a key overhang for oil markets and ultimately strengthen (rather than dilute) collaboration into next year,” JPMorgan analysts said.
“In turn, this should help underline the group’s strong LT [long-term] pricing power,” they added.
JPMorgan stresses that first-quarter cash generation for European oil companies met expectations. The Wall Street giant’s post-reporting forecasts, assuming $80 per barrel oil and €35 per megawatt-hour EU gas, indicate that earnings per share (EPS) expectations are well-supported, with predictions broadly in line for 2024 and up 5% for 2025.
At these levels, 2024/25 free cash flow yields exceed 10%, and the valuation gap with US companies may keep discussions about US listings active through the summer reporting period.
“Fundamentally, we believe oil & gas is significantly underrated and undervalued in the context of the need for a reality check on Energy Transition,” analysts continued.
They favor companies with exposure to oil and advantaged global liquefied natural gas (LNG) over spot gas, recommending overweight positions in Shell (SHEL), Eni (E), TotalEnergies (TTE), and Repsol (OTC:REPYY), while underweighting BP (NYSE:BP), Equinor (EQNR), and Neste.