European oil majors face earnings decline

Morgan Stanley analysts have cut their share price targets for BP, TotalEnergies, Shell, Equinor and Repsol due to falling fossil fuel prices.

The US bank also cut its forecasts for Europe’s largest oil and gas companies, expecting the price decline to put further pressure on shareholder returns next year.

According to CNBC, the bank’s analysts cut their share price targets for BP, TotalEnergies, Shell, Equinor and Repsol by between 9% and 14%, warning of a 10% downside risk to next year’s earnings and cash flow forecasts across the global sector.

In a research note, Morgan Stanley said that there are four conditions under which energy stocks have historically thrived: when oil and gas prices, interest rates and inflation expectations were rising and when the rest of the market was weak.

He added that by reviewing the checklist, he found that there is a downturn now. Most of these factors are actually pointing in the opposite direction, analysts said.

Brent crude, the benchmark, fell more than 9% last year to around $76 a barrel, as demand slowed largely due to weak economic growth in China.

Next year, Morgan Stanley believes oil demand will grow by 1.2 million barrels per day, but that will be outweighed by a supply boost of up to 2.6 million barrels per day as OPEC and non-OPEC countries ramp up production. It forecasts Brent crude to trade at $75 a barrel and gas prices to fall to €25 per megawatt hour by the end of 2025 due to a similar production glut.

As a result, Morgan Stanley analysts said they suspect “share buybacks have reached their limit for now” and that energy stocks will 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 show consistency and reliability to investors. Shell has bought back at least $3 billion of shares each quarter over the past 11 quarters, and Chief Executive Wael Sawan said in June that he would “maintain consistency not only during the good times, but also during some of the more challenging times.”

He added that Shell, which has returned 43% of its free cash flow to shareholders in the past four quarters, would aim to continue to return 30% to 40% even if oil prices fell to $50 a barrel.

On that point, Morgan Stanley said that while Shell had low debt and strong operating performance, its long-term strategy remained unfocused and shareholder returns were cautious. Even with 10% earnings growth, “we struggle to see the upside,” he said.

The bank cut its price target for 2025 to 2.775p from 3.150p. Shell’s share price was at 2,688p on Thursday after rising just over 4% so far this year.

On BP, Morgan Stanley said the shareholder dividend was unlikely to be covered by free cash flow and that the company was operating within a “relatively tight financial framework”. It cut its price target to 490p from 540p. BP was trading at 431p on Thursday and its share price has fallen more than 8% so far this year.