Morgan Stanley - Bullish on Energy Sector

dan_s · Post by **dan_s** » Sat May 09, 2015 9:41 am

Oil & Gas: Our Global Call on Energy: Stay Overweight
Martijn Rats, CFA – Morgan Stanley
May 8, 2015 3:01 AM GMT

Around the world, our analysts are aligned in their positive stance on the energy sector, both top-down from an asset allocation and equity strategy perspective, as well as from a bottom-up industry and oil market perspective. This note summarizes our global call.

The commodity perspective: Oil is in the midst of a multi-year cyclical recovery. We do not expect it to be a V-shaped one and see volatility remaining at elevated levels. Still, demand is robust, primarily driven by transportation, and supply is decelerating due to substantial cuts to upstream investment. There is a bull case that hinges on significant underinvestment as capex cuts become too severe, and on continued US policy constraints. This could lead to a substantial overshoot in oil prices in 2017/18.

In our base case, Brent crude oil averages $72/bbl in 2016 and $85/bbl in 2017. < I think WTI will top $75/bbl by year-end 2015 because I think demand for refined products is going to accelerate this summer. - Dan

The industry perspective: Our roadmap for the industry's response to this downturn is based on the experience of the 1986 oil price collapse. During that period, the majors countered with aggressive cost savings and a sharp improvement in capital efficiency. On top, the integrated nature of their business model enabled them to benefit from the shift in value to other parts of the chain, i.e., downstream. We believe a similar dynamic is unfolding today, which sets the sector up for a historically rare confluence of rising prices and falling costs. This combination has the potential to drive significant yield contraction in the majors, and NAV expansion among the E&Ps. From depressed expectations, it can drive a rebound in oilfield service stocks.

The full report is too large to post here. If you'd like to see it, send me an e-mail and I will forward it to you. dmsteffens@comcast.net