- In a macro update, UBS is raising its fiscal 2021 forecast for oil prices - to $67.50/barrel from $65.80/barrel - and cites that in support of its bullish view on global integrated oil/gas players.
- The new prices recognize the trading range the market seems to have identified in recovery even as it shows some caution around winter expectations for the northern hemisphere, the bank says.
- And it followed that boost with a raise of expected fiscal 2022 prices, to $68.50/barrel from $62.00/barrel. But it expects an "underlying slowing of demand growth" in time, with the post-pandemic recovery and full availability of Iranian production eventually, and so is leaving 2023-2025 unchanged at the bottom of its $60-$80/barrel incentive range.
- Correspondingly, it's raising earnings per share estimates for U.S. and European integrated companies by an average 3.8% for 2021, and by 13.7% for 2022, continuing a sharp increase in its expectations (it's now raised 2021 EPS estimates 73% since the beginning of the year, and raised 2022 estimates by 46% over that span).
- "Moreover, as capex remains disciplined, (free cash flow) significantly benefits with net debt by end-21 expected to be 425 bps lower than pre-pandemic level despite the challenges of 2020, and 7/11 companies actively repurchasing shares," the bank says.
- So far this year, the integrated firms have risen an average of 25% (including a post-April stall) - "good, and justifying our positive stance, but hardly stellar set against crude oil's ~46% rise and the strong natgas/LNG and petrochemicals conditions," UBS says.
- But on 2022 enterprise value to debt-adjusted cash flow, the sector's still at a 5.2x multiple, 12% below its five-year average - implying a 2022 free cash flow yield of 12.2%, and a distribution yield of 9.4%.
- Overall, it says the sector is pricing in about $55/bbl at its target multiples, below its long-term pricing expectations, and it calculates average sector upside of about 19%.
- Among its Buy-rated stocks, the highest upside is seen in: BP, where it's raising 2021 EPS estimates to $0.56 from $0.53 and 2022 to $0.66 from $0.58, and where it has a target of 410 pence (implying 33% upside); Royal Dutch Shell (RDS.A, where its 1,860-pence target implies 25% upside); and Eni (E, where a €13 target implies 23% upside).