Morgan Stanley keeps the faith in BP and Shell

Morgan Stanley kept the faith in European Energy stocks, telling clients their earnings growth was set to beat that of all other sectors over the coming three years - even under its worst assumptions for the oil price.

That was also true in terms of energy firms' current and expected dividend yields. They were already twice that of the market and with forecasts now rising and dividend cover improving that should drive a re-rating in yields, Matthew Garman, Krupa Patel, Graham Secker and Lilian Huang.

With the sector's valuation relative to Mining at its cheapest ever and at the same time the cheapest in Europe relative to US peers, the analysts believe there was "an interesting entry point" given recent share price falls, which come on top of the 6% underperformance year-to-date.

The broker forecasts oil will end 2017 at $62.5 per barrel as global crude stocks draw-down over the summer, but even at $58 the sector was expected to see the fastest pace of earnings growth over the next three years.

Even assuming prices in the so-called forward curve at $58 were spot on, Energy would see earnings per share grow at a compound annual rate of 26%, more than twice the 12% estimated for European equities as a whole.

Indeed, even a 'bear' case scenario of $51 per barrel in 2019, oil majors' earnings would grow the quickest of any sector, they said.

Morgan Stanley therefore said it remained 'Overweight' the sector in its European Model Portfolio, holding BP and Royal Dutch Shell among the majors and Technip-FMC and Vallourec within oil services.

"Energy is the only sector positively geared to reflation that has underperformed in the last 6M, while the sector's underperformance has come despite stability in relative EPS."