Berenberg upgrades BP, Harbour Energy to ‘buy’

The bank said capital discipline has been maintained, driving strong free cash flow generation. At its commodity price assumptions, it expects the integrateds to deliver more than 25% FCF over 2022/23E, with 13% upside to consensus 2022E earnings per share on a forward price-to-earnings of 7.9x.

"Commodity prices are back above 2019 levels and the companies are further along in their energy transition plans; earnings and FCF generation look set to be materially better; and on average, the group is still trading 8% below end-2019 levels."

Berenberg’s preferred way to play this strength is through Shell and Equinor, both of which are rated ‘buy’.

The bank lifted BP to ‘buy’ from ‘hold’ and upped the price target to 425p from 310p. Harbour Energy got the same rating upgrade, while the price target was boosted from 380p to 425p.

Berenberg said BP’s stock has lagged peers this year, but is well positioned to benefit from higher commodity prices, and should generate strong free cash flow in coming quarters, enabling both attractive shareholder returns and rising investments into lower carbon businesses.

The bank has estimated a 16% FCF yield for 2022 at its new estimates, and expects total shareholder returns of more than 11% with a $6bn buyback at its $75/bbl Brent assumption.

Berenberg said the valuation remains "highly attractive", with the stock trading on 6.8x forward price-to-earnings

As far as Harbour Energy is concerned, the bank said it was updating its model to incorporate its revised price deck.

"The result is a significant increase in our near-term estimates, with EBITDA up by 11% and 31% in FY21/FY22 respectively.

"Our forecasts also show significant free cash flow which could result in the company having a net cash balance sheet as early as 2024."

Tullow Oil was also bumped up to ‘buy’ from ‘hold’, with the price target increased to 65p from 55p. Berenberg said its updated forecasts show a significant increase in near-term estimates, with EBITDA up by 17% and 30% in FY21/FY22 respectively, and increased FCF which results in significantly quicker net debt reduction - 25% over 2021-23 versus a 6% in its previous model.

Berenberg cut Jadestone Energy to ‘hold’ from ‘buy’ but upped the price target to 100p from 90p. The bank said progress on delivery of the Maari acquisition in New Zealand and the Nam Du gas development in Vietnam has been slower than expected. Upside to the current share price is reliant on the company securing further accretive acquisitions, it said.