The US investment bank Morgan Stanley is predicting a difficult quarter for Europe’s energy companies. These are the reasons.
• Morgan Stanley expects European energy sector profits to fall sharply in the fourth quarter
• Lower oil, gas and LNG prices as well as weak trading are weighing on operational development
• Despite headwinds, dividends are expected to grow moderately, while individual buybacks will be suspended
Why Morgan Stanley is becoming more cautious for Europe’s energy companies
According to estimates by the US investment bank Morgan Stanley, the European energy sector is under considerable pressure. As Investing.com reports, the investment bank expects a noticeable decline in aggregate net results in the fourth quarter.
The background is a combination of weaker raw material prices, declining trading dynamics and higher costs due to seasonal factors. The fourth quarter is traditionally considered a structurally vulnerable period, as one-off effects and lower trading volumes occur more frequently.
Accordingly, Morgan Stanley describes its stance towards the sector as cautious. The profits recently achieved from previous quarters are likely to be partially eroded. For investors, this means a phase of increased earnings volatility in which positive surprises are more difficult to realize.
Price declines and weak trading weigh on results
A key negative factor is the fall in energy prices quarter-on-quarter, as Investing.com reports, citing Morgan Stanley. As a result, prices for Brent crude oil, Dutch TTF gas and global LNG each fell by around eight to nine percent.
This development has a direct impact on income from the promotional business. Although US gas prices at the Henry Hub rose significantly, the relevance for European corporations was limited and essentially concentrated on individual companies.
In addition, higher refining margins were only partially reflected in the results. Morgan Stanley also points to weaker trading and optimization earnings, as trading activity typically declines towards the end of the year.
All in all, this creates an environment that is likely to noticeably dampen operating performance in the final quarter.
Cash flows, dividends and buybacks: stability despite headwinds
Despite the declining profits, experts expect a certain degree of financial stability in the sector. The bank estimates aggregated free cash flow in the fourth quarter at around eight billion US dollars, including hybrid instruments and leasing payments.
However, this is offset by significantly higher distributions through dividends and share buybacks. In order to strengthen their balance sheets, individual companies are likely to adjust their capital repatriations.
Morgan Stanley expects certain corporations to temporarily suspend share buyback programs in order to keep their debt levels stable. At the same time, there should be moderate growth in dividends, supported by efficiency measures and portfolio adjustments. Proceeds from sales could also help to secure financial flexibility.
Individual cases defy the trend: Where Europe’s energy sector appears more robust
A report from Reuters shows that not all companies are likely to bow to the gloomy trend equally.
Accordingly, TotalEnergies expects fourth-quarter results to be at the same level as the previous year, as high refining margins should compensate for weaker oil and LNG prices. According to Reuters, RBC analyst Biraj Borkhataria said TotalEnergies took advantage of short-term strength in its refining business, while additional upstream production continued to support cash flow.
TotalEnergies’ European refining margin improved significantly year-on-year, giving a boost to its downstream business. At the same time, the LNG segment remains burdened, including by lower prices and maintenance work. Such individual cases underline the differences within the sector. However, they do not change the overall cautious assessment that Morgan Stanley sets for Europe’s energy companies.
Editorial team finanzen.net
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