Morgan Stanley picks 5 global stocks to play the energy market rally

Published Wed, Feb 2 20226:31 PM EST

Sam Meredith @in/samuelmeredith @smeredith19

Analysts at Morgan Stanley are bullish on energy markets through to the end of the year, identifying several global stocks they believe are well-positioned to outperform if oil prices continue to climb toward $100 a barrel. Oil prices jumped more than 50% in 2021, and analysts on Wall Street broadly expect this rally to persist in the coming months. Forecasters see escalating geopolitical risks, a robust demand rebound and receding fears over the impact of the omicron Covid-19 variant all aiding Brent crude's march to triple digits. International benchmark Brent crude futures traded at $89.22 on Tuesday morning, little changed for the session, while U.S. West Texas Intermediate futures stood at $88.15. Analysts at Morgan Stanley, led by chief commodities strategist Martijn Rats, said in a research note published Sunday that they expect a "triple deficit" in oil to send Brent above $100 by the second half of the year. This prediction is hinged on three key factors hitting oil markets simultaneously: low inventories, low spare capacity and low investment. To play the tight energy markets, Morgan Stanley highlighted several stocks they believe not only have earnings leverage to tighter markets but "bottom-up triggers" in the form of volume growth, asset divestments and upside in dividends. Among them, analysts at the bank identified British oil major Shell . The bank said the firm's dividend "will likely rise far faster" than the management-guided long-term rate of 4% and estimates Shell will repurchase up to 6% of its shares outstanding. With share buybacks expected to run at high rates in the next few years, the bank says it sees Shell's share price outperforming. It also notes the oil firm's current valuation remains low by historical standards and when compared to its peers. Analysts at Morgan Stanley said they believe U.S. oil company Occidental Petroleum offered "outsized leverage" to higher oil prices. The bank said the energy firm had de-risked the business in a multitude of ways since losing its investment-grade credit rating in 2020 . Morgan Stanley said the firm's so-called "Low Carbon Ventures" could also represent a "potential pillar of long-term growth." Australian gas producer Santos was identified by Morgan Stanley as another top global stock pick for energy investors. Analysts at the bank said Santos' recently completed merger with Oil Search provided it with a range of producing and development LNG projects across Australia, Papua New Guinea and Alaska. "Further to this, if Santos were to move its current 20-30% of free cash policy to more like 50% — dividends could double, with the stock yielding 8-10% compared to 4-5% now," analysts at Morgan Stanley said. China National Offshore Oil Corporation , or CNOOC, is expected to deliver "the highest and most visible growth" among China's three biggest oil companies, according to analysts at Morgan Stanley. The bank identified CNOOC as its top pick to play the tight energy markets, citing the firm's upstream exposure and competitive cost structure. Meanwhile, Russia's state-backed gas giant Gazprom could see an almost 14% upside to consensus 2022 earnings estimates, analysts at Morgan Stanley said, noting that this prediction was based on somewhat conservative European gas base-case assumptions. The U.S. bank said the same assumptions imply that Gazprom could offer a 2022 dividend yield of around 19% relative to between 5% to 9% in recent years.

A truck passes pumpjacks in the Belridge oil field near McKittrick, California, on Nov. 3, 2021.

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