JPMorgan has concluded that European oil and gas companies would be beneficiaries in a sustained $100-per-barrel oil environment, where stronger commodity prices would outweigh lost volumes tied to Middle East supply disruptions.
Analyst Matthew Lofting quantified the potential impact of shipping-route interruptions, estimating that volumes lost due to Strait of Hormuz disruptions equate to roughly $(6)/bbl in cash flow from operations for a typical company, extending up to $10/bbl for firms with the most direct exposure. By comparison, Lofting noted that oil prices have roughly increased by $30 since the conflict began.
On valuations, the bank projected that free cash flow yields for the sector could rise from about 10% under current forward prices to near 14% in a $100 oil scenario. Even with that improvement, JPMorgan described sector valuations as still "modestly cheap" when contrasted with levels observed during the 2022 energy crisis.
Stock performance to date has reflected the rally in commodities. Lofting observed that sector shares have climbed more than 10% since the onset of the conflict, describing the move as a case where a rising tide has helped most names across the sector.
Against this backdrop, JPMorgan identified four European oil and gas companies as its preferred picks: Shell, TotalEnergies, Eni and Galp. The bank cited these names for a combination of strong price leverage to higher oil, production profiles that are long in duration, and valuations that improve under higher commodity price scenarios.
Within that group, Eni and Shell were singled out for their higher sensitivity to oil prices. Galp was noted for having leverage that the bank believes is understated when looking only at near-term financial metrics.
JPMorgan also anticipates a contribution from trading operations if market volatility persists. The bank argued that a prolonged conflict would likely create trading volatility that could enhance earnings and partly offset production losses. In its modelling, a one standard deviation improvement in trading would include approximately $4 billion of upside for Shell.
Lofting emphasized remaining uncertainties. One modeled risk is the reintroduction of windfall taxes; JPMorgan considered an incremental 5% tax on cash flows based on prior precedents from 2022-23. The bank also highlighted differing levels of direct exposure to Middle East assets across firms: TotalEnergies, Shell and OMV were identified among the most exposed, while Equinor, Repsol and Galp were described as having little to no direct exposure. Firms with limited direct exposure are likely to show higher-than-usual relative sensitivity to near-term oil and gas prices, the analyst said.
Looking forward to the first quarter, JPMorgan expects that colder winter weather and recent market dislocations will support stronger trading performance for the sector.