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

Morgan Stanley headquarters in New York.
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Morgan Stanley headquarters in New York.

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 dateSource: FactSet

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