Morgan Stanley Sees ‘Mixed’ Earnings for Oil & Gas; Upgrades EOG, Downgrades PXD

By Investing.com Staff

Morgan Stanley Oil & Gas analysts said while they remain constructive on the sector into next year, third-quarter results are seen as “somewhat mixed.” They see strong messaging on capital discipline and shareholder returns amid continued inflationary pressure, with declining capital efficiency for some operators.

The analysts highlighted that since the start of 3Q, the sector is up ~20% versus front-month WTI being down ~15%. This is the first time during the post-covid recovery that the sector has seen a prolonged period of multiple expansion, which the analysts view as justified. That said, they ask if strong stock performance can continue amid expected mixed earnings results. For now, they think the decoupling between the equities and commodities could take a pause over the next few weeks as earnings come out.

Amid the quarterly preview, the analysts upgraded shares of EOG Resources (NYSE:) to Overweight, while downgrading Pioneer Natural Resources (NYSE:) to Underweight.

On the EOG upgrade, the analysts highlighted peer-leading cost control and operations at an attractive valuation. “Next year, EOG has the lowest increase in capex/boe across our E&P coverage largely due to the company’s ability to offset inflation with continued efficiencies and longer-term contracting approach for services,” they commented. “To this point, management is expecting only mid-single digit well cost increases this year (vs peers +15-20%) and a similar amount in 2023 (peers +10-15%).” Further, the company should see FCF tailwinds from exposure to international gas pricing. The price target on EOG is now $147, down from $149.

On the Pioneer Natural downgrade, Morgan Stanley calls PXD the “most expensive U.S- focused large cap under coverage,” trading at ~1.5x above the peer median 2023 EV/EBITDA with an FCF yield of 9%, below the median of 14%. Further, the analysts see FCF headwinds from degrading well performance and a shift to paying cash taxes next year. The firm set a $261 price target on PXD, down from $267.

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