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    Morgan Stanley says to buy these 26 economically sensitive stocks poised to outperform as oil prices spike 10% by year-end


    Morgan Stanley says to buy these 26 economically sensitive stocks poised to outperform as oil prices spike 10% by year-end


    oil texas

    Workers extracting oil from oil wells in the Permian Basin in Midland, Texas on May 1, 2018. Oil production has been causing a sudden influx of money especially for local Texans despite the consequences for the natural environment.

    Benjamin Lowy/Getty Images

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    • Morgan Stanley and Goldman Sachs have both upped their bullish oil forecasts, based on a recovery in demand.
    • The energy sector is now “attractive,” Morgan Stanley said in a note published Monday.
    • For those not wanting to trade oil itself, here are 26 stocks geared to get good exposure from the recovery in crude prices.
    • Visit Business Insider’s homepage for more stories.

    Oil is set to stage a recovery after one of the worst years for the commodity that has been the backbone of economic growth for the past century.

    In 2020, oil took a huge hit, with tensions in the Middle East remaining from 2019 followed by the lockdown-induced evaporation of travel – demand fell through the floor. By April,  Western Texas Intermediate prices went negative, with the WTI hitting lows of  -$40.32 a barrel, making the barrel storing the oil more valuable than the crude itself.

    However, in 2021, oil’s fortunes are changing. Leading banks including Morgan Stanley and Goldman Sachs are optimistic on the short term outlook, according to research notes published this week. Oil prices have already rallied sharply this year, with global benchmark Brent trading at a post-COVID high of $55 a barrel – a far cry from the lows around $27 a barrel last spring.

    “Our oil strategists upgraded their oil price forecasts, seeing a backdrop of improving fundamentals, the return of inflation and further dollar weakness translating into oil prices moving higher,” Morgan Stanley said in a note published Monday.

    The Morgan Stanley team upped their oil price forecasts by $5 for 2H 21 and 2022.

    MS OIL Forecast Morgan Stanley strategists’ oil price forecasts for both Brent and WTI

    Morgan Stanley Research Estimates

    Morgan Stanley base their bullish oil position on these five reasons:

    1. Oil market in balance: Oil demand is ~6mb/d below last year’s levels but the physical market is still in healthy territory, the note said, judging by observable inventories and with major crude benchmarks in backwardation.
    2. Demand set to recover: With markets still broadly down 18% on pre-Covid levels, and in particular aviation reduced 44%, the expected 2021 vaccine-fueled economic recovery should boost oil demand, the note said. The strategist estimate total product demand to recover ~4mb/d by 4Q, it added.
    3. OPEC meeting a positive: Continued cohesion within OPEC and last week’s announcement of a supply cut “improves the narrative around commodity prices,” the note said, highlighting the limited spare capacity from non-OPEC countries.
    4. Macro backdrop is favorable: Rising inflation expectations and the weakening USD usually aid commodity prices, including oil, the note said.
    5. Short-term signals in positive territory
      1. Brent above its 25-day moving average
      2. Time spreads are positive and showing positive momentum
      3. Positioning is improving from low levels

    Goldman Sachs has accelerated its bullish oil price expectations by six months, forecasting Brent prices will average $60/bbl in 2Q21 and reach $65/bbl in July vs. December previously, according to a note published Wednesday.

    In addition, the oil and gas sector offers very compelling valuations, the note said, with relative dividend yield of 1.75x  – still at the upper end of its historical range.

    “On top, the average FCF yields of 9% is nearly double the market’s, and price-to-cash flow below 4x is also at a discount to historical levels,” it added.

    With this positive outlook for oil, Morgan Stanley is getting bullish on certain oil majors, including Total and Shell. However, the team are bearish on Repsol and ENI, the note highlighted.

    Morgan Stanley also remain constructive on mining, the note said, arguing that it will be a reflation beneficiary, “offering cheap/reasonable valuations and fewer structural/ESG concerns than energy,” the strategists wrote.

    But, the valuations are nowhere near as cheap, they noted, as the mining sector has somewhat still kept up with the rise in commodity prices.

    For investors looking to play the oil recovery, but are weary of directly playing the energy sector or commodities, there are also many cyclically-linked stocks which offer opportunities, the note said.

    “We are cognisant of the fact that many investors are restricted in their ability to invest in oil stocks directly given ESG concerns,” the note said, offering the following stock picks to play the recovery.

    OMV AG

    OMV AG OMV share price

    Markets Insider

    • Ticker: OMV.VIE
    • Sector: Energy
    • Overweight
    • % upside to PT: 19%

    Analyst commentary:

    “Given the strong dividend cover, we believe that the company has potential to increase dividends at a perpetual growth rate of 3% (up from 2% previously) and lower our target dividend yield to 5% from 6%. As a result, we raise our price target to €44, up from €36.7, which provides an 19% upside from current levels,” a note published on Friday said.


    Total Total share price

    Markets Insider

    • Ticker: TTA.LON
    • Sector: Energy
    • Overweight
    • % upside to PT: 17%

    Analyst commentary:

    • “Total has emerged as the strongest and most consistent performer amongst the global majors in recent years. Return on capital is the highest amongst the seven majors across the US and Europe, quarterly earnings volatility is lower and balance sheet gearing has been managed. As a result, Total was the only European major who was – credibly – able to maintain its dividend in 2020,” a note published on Friday said.

    Royal Dutch Shell A

    Royal Dutch Shell Royal Dutch Shell A share price

    Markets Insider

    • Ticker: RDSA.LON
    • Sector: Energy
    • Overweight
    • % upside to PT: 11%

    Analyst commentary:

    “When setting our price target, we assume a period of 10% annual dividend growth for 4 years starting in 2023, after which dividend growth reverts back to 4% pa and eventually 2% pa into perpetuity. Discounting this dividend stream at 7% p.a. yields our new price target of 1630p. Together with Shell’s current yield of ~4%, this implies a target TSR of ~14% over the next 12 months,” a note published Friday said.

    Aker Bp

    Aker Bp Aker Bp share price


    Analyst Commentary:

    “Similar to Lundin Energy, we set our price target for Aker BP using a weighted average of our base case (50%), bull case (40%) and bear case (10%) valuations. In our base case valuation of 260 NOK, we use our house-view of oil prices, including the long-term Brent oil price forecast of $47.5/bbl and our bull case valuation of 343 NOK and our bear case valuation of 153 NOK incorporate a long-term oil price of $60/bbl and $35/bbl, respectively. Together with the 2021e dividend yield of ~5.4%, our end 2021 price target of 280 NOK implies a total return of ~27% by end-2021,” a note published on Friday said.

    Lundin Energy

    Lundin Energy Lundin Energy share price

    Markets Insider

    • Ticker: LUNE.STO
    • Sector: E&P
    • Overweight

    MS is overweight on Lunedin for these three reasons, according to a note published Friday:

    1. Robust financial outlook leading to resumption of strong dividend growth

    2. New credit facility removes the tail-risks of limited liquidity headroom

    3. Favorable ESG characteristics

    Get the latest Oil WTI price here.

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