High oil prices don’t make Europe energy stocks attractive to all
Europe’s energy shares have hit seven-month highs, thanks to crude oil prices jumping to a 2023 peak and natural gas prices rising almost 40% in two months, but not all investors view this as the perfect opportunity to buy.
The STOXX 600 European oil and gas index .SXEP is at its highest since mid-February, having gained around 13.5% in the past two months. In the same period, benchmark Brent crude LCOc1 has risen 18% and European natural gas prices have gained 50%.
Oil and gas stocks tend not to outpace gains in the cost of crude, as integrated producers that both extract and refine oil take a hit to their margins in an environment of high prices.
Yet the energy-specific index has outpaced the broader STOXX 600 .STOXX, which has risen just 0.1%, in part because of brewing concerns about the impact of higher oil prices on inflation, which may require central bankers to fight harder against rising prices.
At over $90 a barrel, Brent crude is at its highest in 10 months, driven in part by concern about supply, now that Saudi Arabia and Russia plan to extend their voluntary supply cuts to the end of the year.
However, with the economy in China, a major energy consumer, showing signs of stabilising and as global interest rates near a peak, some strategists believe the oil and gas sector is at a turning point.
“We are bullish on the energy sector, with an overweight rating, as we think it is attractively priced, with strong balance sheet and high cash generation, especially in light of the rebound in the oil price that we are seeing most recently,” said Mislav Matejka, head of global and European equity strategy at JPMorgan.
Strategists at Morgan Stanley said in a note in early September they had turned positive on what they deemed an “attractive” sector.
The oil and gas index is also one of the cheapest in the STOXX universe, with a price-to-earnings ratio of just 6.8, compared with nearly 26 for healthcare, the most expensive, and with 12.4 for the STOXX 600 itself.
But cheap doesn’t always mean cheerful for everyone.
Emmanuel Cau, head of European equity strategy at Barclays said his team is sticking with a neutral ‘market weight’ rating on the sector.
“For now, things are moving very quickly, maybe short-term the oil price might stabilise. We are happy to be market weight in the sector, and fundamentally we believe the sector is interesting,” said Cau.
He said higher oil prices could prompt upgrades to earnings estimates, and potentially dividends too.
“The whole energy sector should benefit, but the downstream sector is looking very cheap and offers a high dividend which is attractive given higher interest rates,” said Cau.
Bank of America strategists have an underweight rating on European energy stocks.
“We are underweight energy stocks because there is scope for the oil price to decline from current levels if U.S. demand weakness starts to set in, and changes in spot oil prices are what typically matters for oil stocks’ relative performance,” said Andreas Bruckner, European equity strategist at Bank of America.
“We don’t think the trough in oil for this cycle is in, which, in turn, would mean that the energy sector relative to the market has not bottomed out yet,” he said.
Source: Reuters (Reporting by Lucy Raitano; Editing by Amanda Cooper and Miral Fahmy)