LONDON (ShareCast) - (Sharecast News) - Analysts at Morgan Stanley on Tuesday downgraded their recommendation on the European Oil & Gas sector, arguing that the favourable tailwinds which had helped compress its relative dividend yield back to its historical norms had now largely passed.
The investment bank's analysts lowered their view on the sector from 'attractive' to 'in-line', adding that expectations for free cash flow from companies in the space were now "demanding" in the wake of "large" upgrades over previous months.

On top of that, the forward curve for oil prices was now moving into so-called 'contango', which they said was a 'bearish' sign.

To take note of, the sector outperformed its benchmark in 2016 and 2017 and had been the best performer in 2018 too, as cost savings, cuts to capital expenditures and the recovery in the oil price swelled companies' free cash flow.

In turn, that had helped put oil majors' dividends on a more secure footing, bringing them back to 1.3 times's that for the MSCI Europe; indeed, on 90% of the occassions since 1982 it had been above 1.1 times.

Nevertheless, within the same research note, Morgan Stanley stood by its 'overweight' recommendation for shares of BP (target price: 650p) and Total (target price: €57.0), saying that they were the two that still offered the greatest room for dividend yield compression and growth in free cash flow.

Repsol (target price: €18.1) was also kept at 'overweight' due to its exposure to downstream activities, namely its refining unit, with Morgan Stanley saying that analysts were underappreciating of the tailwind it would receive from the new International Maritime Organisation rules on pollution from shipping.

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