Morgan Stanley upgrades Occidental on higher oil prices, predicts 40% gain

Published Fri, Jun 18 20216:14 AM EDTUpdated Fri, Jun 18 20218:26 AM EDT

Jesse Pound @/in/jesse-pound @jesserpound

High oil prices and lower capital expenses should lead oil stocks to throw off cash, and investors should add a few winners from this sector, according to Morgan Stanley. While energy prices dipped on Thursday amid broad commodity weakness , the benchmark oil prices in the U.S. and Europe are still up about 80% over the past year. The industry has seen demand surge and reserves dwindle as economies reopen. Analyst Devin McDermott shuffled his ratings for energy stocks on Friday, upgrading Occidental Petroleum to overweight from equal weight and Marathon Oil to equal weight from underweight. McDermott said in a note to clients that these shifts were to gain more exposure to high oil prices in particular. "We reiterate our Attractive view of the sector and continue to favor a mix of 'quality stocks on sale' that offer outsized free cash flow yields and healthy balance sheets coupled with selective 'oil beta' exposure," the note said. Morgan Stanley's bullish stance does not require prices to continue to surge. The firm projects West Texas Intermediate crude to trade on average in the low $60s in 2021 and 2022. WTI was trading just above $70 per barrel on Friday morning. For Occidental, these prices are enough to generate substantial cash, the note said. "Rebounding margins and strong [free cash flow] position OXY to offer one of the more differentiated rate of change stories with its high quality upstream assets, above average FCF/equity yield of 17% (although FCF/EV still lags peers), and unique position in a lower-carbon energy future through OXY Low Carbon Ventures," the note said. The firm moved its price target for Occidental to $40 per share from $32, and on Marathon Oil to $15 from $12. Those new targets represent upside of 42% and 16%, respectively, from where the stocks closed on Thursday. Despite being bullish on the sector overall, Morgan Stanley did downgrade a few of the stocks as part of Friday's call. The firm moved its rating on Devon , EQT and Cimarex to equal weight from overweight. —CNBC's Michael Bloom contributed to this report.

Oil pump under the blue sky with beam pumping unit in the oil field.

Zheng Zaishuru | iStock | Getty Images

High oil prices and lower capital expenses should lead oil stocks to throw off cash, and investors should add a few winners from this sector, according to Morgan Stanley.

While energy prices dipped on Thursday amid broad commodity weakness, the benchmark oil prices in the U.S. and Europe are still up about 80% over the past year. The industry has seen demand surge and reserves dwindle as economies reopen.

Analyst Devin McDermott shuffled his ratings for energy stocks on Friday, upgrading Occidental Petroleum to overweight from equal weight and Marathon Oil to equal weight from underweight. McDermott said in a note to clients that these shifts were to gain more exposure to high oil prices in particular.