Morgan Stanley upgrades Petrofac and Hunting

Morgan Stanley upgraded Petrofac and Hunting on Wednesday as part of a broader note on the oil services sector.

It upped Petrofac to 'overweight' from 'equalweight' as it argued that risks are now skewed to the upside and the stock should outperform the sector and key peers from current levels.

"We recognise that the stock has rallied in absolute and relative terms from the June 2017 lows and is outperforming 2019 year-to-date. With 50% upside to our unchanged £8 price target, 25% downside to our bear case and 98% upside to our bull case, we see a compelling risk-reward with further upwards momentum for the stock," it said.

MS acknowledged that risks such as working capital and the Serious Fraud Office investigation are a concern for the market. However, it said these dynamics are increasingly understood and well reflected in the depressed valuation.

"The circa 3.5x EV/EBITDA for 2019e and 2020e and 8.0x price-to-earnings is a significant discount to peers such as Saipem and Tecnicas, despite superior return on equity and growth prospects."

Morgan Stanley bumped up Hunting to 'equalweight' from 'underweight' but cut the price target to 730p from 980p.

It pointed to an attractive valuation but said it was still biding its time before turning 'overweight' given the negative revisions it expects for shale-exposed stocks at full-year results.

"We are concerned that the outlook for well completions in US shale is less attractive than the market is hoping. Although we no longer expect Hunting to underperform the sector, we see it as too early to buy, and see greater upside risk in Petrofac," it said.

As far as the broader sector is concerned, MS expects the rebound to continue as stocks recover from the lows seen in late December and benefit from firming oil prices.

"With improved risk-reward for European Equities and our forecast for higher oil prices, we expect oil services to outperform versus European Energy," it said.

At 1455 GMT, Petrofac shares were up 0.9% at 542.80p and Hunting was up 1.4% to 554p.