Macquarie Group holds an “outperform” rating on Royal Dutch ShellandBG Group. Despite geopolitical uncertainty, Jason Gammel, head of European oil and gas research at Macquarie, said that these oil stocks are ripe for investment as winter approaches.
With tensions in Syria on the rise, the outlook for oil prices may look unstable. “We’re looking for about $105 through the end of the year and probably into next year,” Gammel said. “The oil market has essentially moved to the level of equilibrium right now.”
Beyond uncertainty in the Middle East, Gammel said the overarching concern in the sector is weak growth in China. He explained that Chinese demand for energy, the overall driver of the big bull market in oil prices, has significantly slowed over the past six months. “We need to see Chinese demand numbers come back into the market,” he said.
While a significant increase remains to be seen, Macquarie expects Chinese oil demand to improve later in 2012. If this is the case, select oil stocks may be in a position to pop.
Gammel called BG the “premier growth company” within Europe. Macquarie expects the stock to grow by 14 percent in 2013. It is anticipating an additional 8 percent growth per year through 2020. Macquarie has a $19.50 price target on the stock.
Royal Dutch Shell is another European oil stock favored by Macquarie. “Shell is a company that benefits from the oil price environment,” he said. “They have good growth in the near term and very strong free cash flow yields.” Macquarie expects Shell to outperform with a 12-month price target of $25.50.
Gammel’s confidence in Shell may come as a surprise to investors. The oil company recently reported disappointing second-quarter earnings of $5.7 billion. The miss was attributed to maintenance costs and shutdowns in the U.S. Gulf and in Australian Liquefied Natural Gas.
Earlier in the month, Shell also abandoned its bid for Cove Energy which holds a promising stake in east African gas.
While these setbacks may signal weakness, Gammel remains confident in the stock and the management.
“I think on the missed M&A, that was actually an exercise in good capital stewardship on the management’s part,” Gammel said. He explained that Shell was getting into a bidding war that had reached a level that looked a bit too high for Cove. “Backing away is good for the investor,” he added.
Gammel is expecting European gas producers to do well moving into the winter. “We expect that the MMB can trade around the equivalent of $10 per MMBTU which is a pretty strong market,” he said.
—BY CNBC.com’s Madeline Laskoski
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Jason Gammel does not have a position in Shell or BG Group.