Morgan Stanley upgrades BP to 'overweight' ahead of new capex cycle

Analysts at Morgan Stanley upped their rating and target price on oil giant BP on Wednesday, as they took a fresh look at the sector ahead of an expected new capex cycle.

While few companies outside the US were guiding towards higher capex, the broker suspected that a new cycle lay ahead, starting from 2019.

Morgan Stanley saw "good reasons to believe" that this period of constrained capex was slowly coming to an end and noted that, while majors would probably still advocate for strong capital discipline during the first half of 2019, from the middle of 2019 onwards, management teams would start to prepare shareholders for higher capex in 2020 and beyond.

The investment bank said this could prove a headwind for several major players, but it would also provide a tailwind for oil services.

"Consensus sees capex unchanged during 2017-21 for European majors. This is too optimistic, in our view. To maintain production capacity, we estimate investment needs to rise at least 25% over the next three years," the analysts explained.

Regarding BP, MS also said the giant had climbed in its relative ranking, moving its recommendation for the group from 'equal-weight' to 'overweight' and bumping its target price up to 695p from its previous 680p estimate.

Morgan Stanley acknowledged the fact that BP had underperformed the sector by roughly 5.0% since early June, but in the broker's view, BP offered a "compelling combination of strong FCF growth – on some measure the highest in the sector – and a high dividend yield, also the highest amongst the majors."

"The confluence of those tends to lead to outperformance," Morgan Stanley concluded.