European Energy Thoughts after news of a peace deal

Research evidence excerpt

European Energy Thoughts after news of a peace deal

trapped in the Gulf, as well as a relief of sanctions on Iranian oil which could hit the nayoung.kim@ubs.com

market in relatively short order helps explain the recent move lower for oil prices. The key +44-20-7568 4010

items to watch over the next few weeks are the flows of oil leaving the Gulf, and more

importantly the pace of tankers coming back in, as this will determine the speed of any

production restart in the region. A rebound in crude demand should also support prices,

in our view.

Energy stocks are now pricing in $70/bl

Investor positioning for Energy stocks has been declining in recent weeks but remains in

a small consensus overweight position (see Figure 2). The sector is now down 9% from

the highs of April and has performed in-line with the wider European market since the

beginning of the conflict. On valuation, we now find the sector trading at an average P/E

of 8.5x in 2027E, a 7% discount to the 10-year average, with the stocks pricing in $70/bl

at a sustaining FCF yield of 8% at normalised gas ($6/mbtu) and refining margins ($4/bl).

In the near-term, further downside remains possible given the shares were pricing in ~

$65/bl before the conflict, although the difference now is increased earnings support

from elevated refining margins as well as more support to terminal values from the

energy independence theme.

Which stocks to own in the sector?

Our thesis (report link) around a rotation within the sector away from distributions

towards capex quality still holds, in our view. The stocks that are already resource rich

and are able to return excess cash to shareholders such as Eni (Buy) and TotalEnergies

(Buy) have already outperformed the sector, but we see scope for further price gains