Morgan Stanley names Shell 'top pick', says sector still 'attractive'

Analysts at Morgan Stanley reiterated their "attractive" view on the European Oil&Gas sector, telling clients that many of the arguments that supported the sector's outperformance in 2021 remained "equally relevant" today.

And in the case of Royal Dutch Shell [target price: 2,136.0p] and Eni, Morgan Stanley labelled them as its 'top picks' in the space.

The first argument cited by the broker was the outlook for oil and gas prices, which it said were headed towards a triple deficit in the form of low inventories, low spare capacity and low investment later in 2022.

On the back of those deficits, the analysts were expecting the price of Brent to reach $90 a barrel in the back half of the year, while rising natural gas prices since the start of December signalled "higher-for-longer prices" in that market as well.

In parallel, Shell, BP, TotalEnergies, Eni and Equinor were seen more than doubling their combined organic free cash flows in 2022.

They estimated that, in turn, that would push dividends and buybacks for those five firms from $34bn in 2021 to $46bn in 2022.

The sector could also be expected to benefit from the rotation to value stocks, valuations were still "compelling" and investors were increasingly aware of the absence of a margin of safety in European energy to accomodate the transition to clean energies.