JPMorgan Cazenove on Sept. 16 reported ratings affirmations and changes for several European oil majors, citing projections for stronger crude prices and improved returns, although the pace of their decarbonization efforts may be slower than expected.
The analysts maintained "overweight" recommendations on top picks Royal Dutch Shell PLC and BP PLC and raised TOTAL SA from "neutral" to "overweight." JPMorgan said the three majors are well-positioned to reduce emissions from their operations amid the energy transition while still being able to generate healthy cash returns. The analysts also upgraded Norwegian state-controlled Equinor ASA to "neutral" but lowered Italy's Eni SpA to "underweight."
"We expect the majors to reposition their portfolios towards projects that not only sit at the low end of the cost curve but also screen best in class on (lowest) carbon intensity. Meanwhile, demonstrating sustained low or falling cash breakevens remains key to a resilient cash return proposition," the report said.
The generally bullish report, which follows the overall poor performance of the oil and wider energy sectors in recent years, was issued the same day that stock prices at many of the top oil companies, including Shell and BP, climbed alongside a crude price rally after the Sept. 14 drone attacks on key oil facilities in Saudi Arabia, the world's top crude exporter.
In the last several years, activist investors have been clamoring for large energy companies to take more serious action on climate change and trim emissions across their business models. While many of the European majors are moving into renewable energies and investing in low-carbon transportation fuels and technologies, the report cautioned that "decarbonizing will be far harder than current consensus assumes, especially in the industrial and transport sectors (e.g. refined products, aviation, and heavy duty trucks)."
JPMorgan said that although the European majors will continue to work toward alignment with the goals of the Paris Agreement on climate change, they must continue to invest in traditional oil and gas assets to meet growing global energy demand, which they estimate will rise 4% from current levels by 2040, peaking sometime between 2035 and 2040.
"Successful portfolio decarbonization through alignment with the Paris Agreement will be key to long run share performance. But, we caution that 'abandoning ship' through underinvestment in oil and gas will be harmful to companies' returns and future cash flow distribution and not least risk materially higher oil prices owing to lack of new supply," the report said.
