In a notable shift, Morgan Stanley has upgraded the European energy sector to an “Attractive” rating, coinciding with ongoing disruptions in the Strait of Hormuz that have begun to significantly impact oil market dynamics. The firm has revised its price estimate for oil to $80 per barrel for 2027 while also increasing its earnings forecasts for 2026 by approximately 100% across major European energy firms. This adjustment highlights the market’s newfound understanding that disruptions to Hormuz flows are a real possibility.
Despite a robust rally of 15-30% in March, Morgan Stanley believes that substantial free cash flow yields of 12% for 2026 and 10% for 2027 indicate substantial opportunities for deleveraging and returning value to shareholders. Given this context, the bank is pivoting towards higher-beta stocks within the sector.
TotalEnergies has emerged as Morgan Stanley’s top recommendation, receiving both an Overweight rating and designation as a Top Pick. The firm cites the company’s exceptional upstream growth, disciplined capital management, and a buyback framework that adapts to various commodity environments. With a price target of €88.30, which suggests a potential upside of 16%, TotalEnergies is portrayed as a solid core investment for those looking to strengthen their European energy portfolios.
Following closely is BP, which has seen the most significant earnings revision in this analysis. Morgan Stanley has nearly doubled its earnings per share estimate for BP for 2026 by approximately 220%. The bank upgraded BP’s rating from Equal-weight, arguing that the current commodity environment is favorable for the company’s ongoing restructuring efforts. Higher oil prices are expected to expedite deleveraging, accelerate the return of buybacks, and minimize difficult decisions regarding capital allocation. The new price target for BP stands at 619p, indicating a 15% upside and an attractively “skewed positive” risk-reward profile.
Additionally, Repsol has been highlighted as a tactical pick due to its substantial exposure to refining and crack spreads, which are among the most directly affected segments of the energy supply chain as a result of Hormuz disruptions. Morgan Stanley estimates that Repsol will achieve a 13% free cash flow yield for 2026 and an 11% payout yield, both of which notably outperform mid-size competitor Galp. The bank anticipates approximately €1.4 billion in buybacks for Repsol in the upcoming two years, setting a price target of €28.00, which translates to a convincing 23% upside—the highest forecasted among the stocks covered in this latest report.
