M IdeaEnergy | Europe2024 Outlook: Two to Own; Three to Avoid; Sector back to 'In-Line'Morgan Stanley & Co. International plc+Martijn Rats, CFAEquity Analyst and Commodities Strategist Martijn.Rats@morganstanley.com +44 20 7425-6618 Sasikanth Chilukuru, CFAEquity Analyst Sasikanth.Chilukuru@morganstanley.com +44 20 7425-3016 Guilherme LevyEquity Analyst Guilherme.Levy@morganstanley.com +44 20 7425-6616 EnergyEuropeIndustry ViewIn-Line Exhibit 1 : Europe Energy Majors: Summary of Preferences CompanyTickerCcy%%OldNewOldNewChangeUpsideTTEF.PAEUR74.772.4(3%)16%TTE.NUSD82.979.7(4%)17%BP.LGBp620610(2%)29%BP.NUSD46.946.8(0%)31%SHEL.LGBp2,7572,714(2%)5%SHEL.NUSD69.569.50%5%ENI.MIEUR16.416.40%6%E.NUSD36.436.1(1%)6%Aramco2222.SESAR35.531.0(13%)(6%)RepsolREP.MCEUR16.415.6(5%)14%EQNR.OLNOKEWUW355264(26%)(21%)EQNR.NUSDEWUW33.326.4(21%)(18%)GalpGALP.LSEUREWUW13.912.8(8%)(10%)OMVOMVV.VIEUR37.937.90%(5%)PTTotalEnergiesBPShellEniUWEWEWEquinorRatingOWOWOWOWEWEWEWEW Source: Morgan Stanley Research estimatesHeading into 2024, we lower our sector rating back to 'In-Line'. However, we see opportunities in selected stocks. We reiterate Overweight ratings on TotalEnergies and BP, offset by Underweight ratings on Equinor, Galp and OMV. Sector rating back to In-Line: The fundamentals of oil & gas markets have turned relatively 'soft' and interest rates and inflation expectations are unlikely to provide the tailwinds they did in 2023. Also, we foresee modest negative revisions to consensus estimates for earnings and shareholder distributions. The sector is still highly cash generative and valuations are not demanding, particularly on certain metrics. However, with this set of factors, the case for the sector outperformance has weakened. Total (Overweight; Top Pick) - resilience in a weaker environment: TotalEnergies offers a differentiated portfolio consisting of both a thriving oil & gas business with growth prospects and a new-energies segment that is profitable, growing, and turning FCF positive in the not-too-distant future - a rare combination. BP (Overweight) - large upside potential in case catalysts emerge: Two consecutive quarterly earnings misses and the lack of a permanent CEO have taken the wind out of BP's sails. Yet, BP is the only major where shareholder distribution as % of CFFO can rise and the distribution yield has room to compress. That combination offers substantial upside if quarterly performance were to improve and concerns over strategic directions were to diminish - still a compelling risk/reward.Equinor (Underweight) - lower distributions ahead in weak European gas market: We have a relatively bearish view on European gas, which is typically the key driver of relative performance for Equinor. Also, consensus earnings estimates have most downside, we'd argue, and we see a faster-than-consensus decline in distributions.Galp (Underweight) - distributions likely to lag peers: Galp's shares reflect most of the operational pos...
