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Morgan Stanley upgrades US exploration, production space to 'attractive'

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Analysts at Morgan Stanley had some good news for U.S. exploration and production investors on Monday.

The investment bank upgraded its industry outlook to "attractive" from "in-line," while raising its long-term outlook on Brent crude to $80 from $77 and its U.S. oil outlook to $60 from $57. On Monday, Brent traded near $50.09 a barrel, down 0.52 percent, while WTI held about 0.96 percent lower, near $48.60.

"E&Ps are 40 percent off lows, up 17 percent year-to-date, yet 50 percent below their 2014 highs, in a broader market that is up 7 percent since mid-2014. Despite recent strength, we believe there remains significant relative upside in a sector recovery over the next several years that, for E&Ps, will have a North American focus," said Morgan Stanley, in a Monday note to clients.

"While we continue to believe the near-term commodity path will be volatile and a pullback is likely, we have confidence the oil market recovery is occurring and oil prices will need to be higher ($80) to deliver the production growth the world will need," they said.

The firm also upgraded shares of Concho Resources and Cenovus Energy, two North American exploration-and-production firms to "overweight" from "equal weight." Concho was little changed Monday, while Cenovus gained 1 percent.

In 2016, Concho shares have gained nearly 29 percent, while Cenovus' stock has advanced about 8 percent in the same time period.

Concho (green) and Cenovus (blue) year to date

Source: FactSet

Disclosure: Morgan Stanley has provided investment banking services to Concho and Cenovus.

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