JP Morgan has told clients to stay 'overweight', or hold above-benchmark positions, in Shell and BP ahead of third-quarter results, saying the UK supermajors remain its top picks in European oil and gas.
The bank's analysts, led by Matthew Lofting, said macro forces continue to dominate the sector, with faltering energy inventories across multiple products and regions becoming increasingly hard for investors to ignore as hopes of sustained Middle East de-escalation fade.
JPM said marking its earnings estimates to current oil and gas forward prices implies a 2027 free cash flow yield of 10.9% for the sector, based on Brent crude at $85 a barrel.
It added that the same exercise puts earnings per share an average of mid-single digits above consensus forecasts, suggesting the market may be underestimating profitability.
The bank said third-quarter earnings across the sector are likely to be strong, driven primarily by refining margins, though it cautioned that those margins have shown signs of softening more recently.
On the back of that, JP Morgan said investors should tread carefully with smaller oil companies following their strong run this year if the moderation in refining conditions persists.
Within the midcap space, the bank said it favours Galp, the Portuguese energy company, citing catalysts that are not dependent on oil prices, while it is underweight, or below-benchmark, on OMV, the Austrian group.
JPM also reiterated its overweight stance on Eni, the Italian energy company, pointing to leverage to oil and gas prices, improving operational trends and the potential for special dividend payments.
The bank flagged European energy policy as a risk to monitor into year-end, noting recent moves to curb diesel use and a renewed debate over windfall taxes on energy producers.
JPM said the sector's recent outperformance relative to the broader European market suggests much of the positive news is already reflected in share prices, with a rising tide tending to lift all boats through balance sheet improvements rather than stock-specific gains.
