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The sector has been affected by the weakness of oil prices and in the last 30 days of trading it appears to be the one that has performed worst in Europe, losing more than 7% and underperforming the Old Continent market as a whole by almost 6 percentage points.

The barrel suffers, the gas does not

But what conditions are the oil and natural gas markets in? Stephen Ellis, energy and utilities strategist at Morningstar, summarizes the situation: “At the last meeting on June 2nd, the OPEC countries decided to extend the three production cuts until 2025, for an overall reduction of 5%. .86 million barrels of crude oil per day. The oil market, however, is still suffering from excess supply. This is demonstrated by the press release from the producing countries, which specifies that the monthly increases that will gradually eliminate production cuts can be put on stand-by or reversed based on market conditions”. The gas market, however, does not seem to worry analysts: “Natural gas storage levels in Europe are high. Now, the European Union’s task will be to maintain the current status quo, in terms of gas reserves and market price,” adds Ellis.

Expectations on the oil and gas market

Morningstar analysts’ expectations, between now and the end of 2024, are for a barrel price between 65 and 70 dollars for 2024, if not even lower. “The sale of shares of the Aramco company by Saudi Arabia, for 11 billion dollars, testifies not only to the need to finance the Vision 2030 program, which aims to achieve greater diversification of the country’s economy, but also to the Saudi inability to defend oil prices,” adds Ellis.

Regarding the natural gas market, Morningstar analysts attribute the recent price strength to timely production cuts and in the long term forecast strong growth in consumption, between now and 2030, driven by demand in the artificial intelligence and data sectors center.

Energy: discounts are on US price lists

If we extend the observation period to the last three months, we notice how energy stocks have largely outperformed the market. In the USA, the Morningstar US Energy index rose by 8.27% (in euros as of 05/30/2024), exceeding the benchmark by almost 6 percentage points. In Europe, the sector’s outperformance stood at around 5 percentage points. The reason for this behavior, according to Stephen Ellis, is to be found in the announcements of new M&A, such as those between Diamondback and Endeavor and between ConocoPhillips and Marathon Oil, which promise to consolidate the sector and therefore make it more profitable.

European energy stocks, despite having shown a similar trend to their American competitors in recent months of trading, are traded at higher market valuations. Of the 11 European companies in the oil & gas sector covered by the Morningstar analysis, only Tenaris is rated with a 4-star rating, while of the almost 40 American companies covered by our analysts, those trading at a discount to fair value are 25%.

“There are several reasons behind this difference in terms of market valuations. American companies are reinvesting more in the core oil & gas business, which has higher capital return expectations than the low carbon activities in which European competitors are investing.

“Additionally, US energy companies will benefit most from increased demand for gas from technology companies active in the AI ​​and data center industries and growth in liquefied gas exports. In our view, the market has not yet adequately priced gas ‘positive impact that these elements will have on the profitability of American companies in the sector, which is why they show more favorable stock market valuations”, concludes Ellis.

3 energy discounts

Morningstar’s key metrics for Schlumberger

Schlumberger has lost more than 10% since the beginning of the year (in euros as of 06/14/2024), underperforming its American competitors and the US stock market as a whole. The stock now trades at a 30% discount to its fair value of $60 (report updated June 3, 2024). According to analysts, the recent investment in digital solutions and integrated services will have the effect of creating an additional and high value-added revenue stream. Furthermore, high exposure to non-US markets will mitigate the negative effects of oil and gas sector volatility.

Morningstar’s key metrics for Exxon Mobil

Analysts give Exxon Mobil an Economic moat in the Medium category due to its integrated business model (from oil exploration to its refining) which guarantees it an advantageous position over its competitors. By 2027, ExxonMobil expects to double the earnings and cash flows recorded in 2019 thanks to the combination of three factors: structural reduction of operating costs, improvement of the asset portfolio and revenue growth. Since the beginning of the year, the stock has gained almost 15% (in euros as of 06/14/2024) but continues to trade at a discount compared to the fair value of 138 dollars (report updated to 3 June 2024).

Morningstar’s key metrics for Tenaris

Tenaris is one of the world’s largest manufacturers of tubulars which are mainly used in the oil & gas sector. Analysts expect that the growth of offshore drilling activity in international markets will have the effect of increasing demand for Tenaris’ premium products, for which the company is able to extract higher prices, although this will not be enough to avoid a decline in profits over the next five years. The market, however, seems to be too pessimistic about the company’s future prospects and discounts the stock by 30% compared to the fair value of 20 euros (report updated to 11 May 2024).