Bank of America Identifies Europe's Oil Majors on the Verge of Recovery and Reveals Top Pick for Upcoming Earnings

Bank of America Predicts an Inflection Point for Europe's Oil Majors

Increasing Share Prices Reflect Investor Anticipation

Bank of America believes that Europe's oil majors are on the verge of a turning point. Despite a decline in oil and European gas, refining margins, share prices for most Big Oil firms have risen. Analysts at Bank of America attribute this trend to investor anticipation for an expected improvement in earnings momentum. The bank notes that consensus estimates for Big Oil companies have been adjusted, showing no further downside to 2Q23 earnings expectations.

Disparity Exists Between Companies

While Bank of America expects investors to reward some stocks more than others, it has named Shell as its "Big Oil top pick." The bank predicts that Shell will report strong second-quarter earnings and cash flows. Shell's investment case stands out as the company demonstrates financial discipline by reducing capital expenditure from 2023-2025 and showing above-average resilience in its cash flow framework. Shares of Shell have already risen 3% this year and are projected to rise another 31% over the next 12 months. On the other hand, BofA analysts paint a less promising picture for BP. Despite impressing investors with a share buyback and dividend guidance during the fourth quarter of last year, BP has faced challenges. Unfavorable working capital outflows in the first quarter have impacted BP's flexibility and put pressure on its shareholder distribution policy. As a result, BP's ability to distribute to shareholders is constrained. While BP's stock has remained flat this year, Bank of America expects it to rise by 16% over the next 12 months.

Forecasts for Other European Oil Majors

Bank of America forecasts an adjusted operating income of $7.7 billion for TotalEnergies' second-quarter earnings, below the consensus of $7.9 billion. However, the bank expects TotalEnergies' stock to rebound by 44% over the next 12 months, despite a decline of 8% year-to-date. Equinor, a Norwegian state-owned firm, also faces challenges in meeting earnings consensus. However, Bank of America believes that working capital inflows could provide a boost to free cash flow coverage of dividends and buybacks, potentially increasing stock prices. Although Equinor's stock has fallen by 12% this year, Bank of America expects it to rise by 17.5% over the next 12 months.

Conclusion: Implications for New Businesses

Bank of America's prediction of an inflection point for Europe's oil majors carries potential implications for new businesses, particularly those operating in related sectors or seeking investment opportunities. The increasing share prices of Big Oil firms, despite a decline in certain industry metrics, reflect investor anticipation for improved earnings momentum. This optimistic sentiment could offer advantages for businesses looking to enter the oil and gas market or collaborate with established players. However, it is important to note the disparity between companies within the industry. While Shell is highlighted as Bank of America's "Big Oil top pick" due to its strong financial performance and disciplined approach, other firms like BP face challenges in terms of shareholder distribution and flexibility. For new businesses, this indicates the importance of carefully assessing potential partners or investment opportunities within the oil and gas sector. Understanding the financial health and resilience of different companies is essential for making informed decisions. Additionally, the forecasts for TotalEnergies and Equinor provide valuable insights. Despite an earnings estimate below consensus for TotalEnergies, the expected rebound in its stock price suggests potential growth opportunities. Similarly, Equinor's working capital inflows and potential boost to cash flow coverage may result in increased stock prices. New businesses operating in peripheral sectors or seeking partnerships with these companies could leverage such positive trajectories for mutual benefit. In conclusion, the predicted inflection point in Europe's oil majors presents both opportunities and challenges for new businesses. By carefully assessing individual companies and identifying potential areas of collaboration or investment, entrepreneurs can position themselves advantageously within this evolving market landscape. Article First Published at: https://www.cnbc.com/2023/07/24/bank-of-america-names-its-top-stock-pick-ahead-of-big-oil-earnings.html