Morgan Stanley ups targets for BP and Shell, despite 'peak oil demand' concerns

Following three years of painful 'self-help' and restructuring, the oil majors were likely to see the full benefit of those measures flow-through in 2018, they said.

Hence, they revised their targets for the pair from 595p and 2,930p to 645p and 3,040p, respectively.

"Coinciding with an improvement in oil market fundamentals and a rally in prices, the impact on FCF could be dramatic," the broker said.

Their output was set to continue growing at roughly a 3.5% pace each year out to 2020, as new projects continued to ramp-up, while downstream earnings - which had doubled since 2014 - were seen rising further.

In parallel, cuts to capital expenditures and operating expenditures of approximately 40% and 20%, respectively, since 2014, were also likely to stick, they said.

Neither was there much cost inflation on the horizon and debt reduction would continue to be a priority.

"With the oil price collapse still fresh in the mind of managements,and the looming threat of 'peak oil demand', we expect the focus on cost and capital discipline to stay intense, aiding the FCF recovery."

"'Peak demand' concerns may weigh but probably won't prevent outperformance: 'Peak oil demand'has also become a bigger part of the debate however,ant it is therefore a genuine question whether the market will still value the sector in the same way as in the past. Inside we argue that this is still likely. History is still a guide to the future when it comes to Big Oil valuations."

In the same research note, Morgan Stanley also upped its targets for Eni (from €13.4 to €14.6), Statoil (from Nkr 159 to Nkr 173) and Total (from €55.0 to €56.0).