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Investing.com -- Bank of America has named Shell, Equinor and TotalEnergies (EPA:TTEF) as top picks among European oil majors in a new note, arguing that equity markets are increasingly valuing resilience over earnings momentum, setting up what it calls “mispriced” opportunities in Big Oil.
Big Oil share prices have decoupled from earnings momentum YTD, analysts at BofA said.
While Brent crude is down 6% year-to-date, share prices for European oil majors are up around 10%, the bank noted.
BofA sees downside risk to consensus expectations on 1Q25 cash flows, pointing to weak free cash flow (FCF) generation that still “requires disposals to avoid additional net debt.”
Despite that, it reiterated a preference for companies with strong balance sheets and low breakeven oil prices, calling Shell its top pick due to a $65/bbl breakeven versus a sector average above $90/bbl.
Relative valuation gaps underline Shell and TotalEnergies mispricing, the analysts wrote, highlighting that these two, along with Equinor, offer the highest free cash flow yields for FY25, averaging around 5%.
“We believe this represents a relative mispricing given these three also offer the strongest balance sheets in the sector.”
While Equinor has seen the biggest consensus upgrades year-to-date, BofA said the Norwegian major still shows the greatest further upside potential to both 1Q25 and full-year earnings, especially under its ~$13/mbtu TTF gas price assumption.
Shell will kick off the sector’s 1Q25 trading updates next week, with BofA urging investors to position ahead of what it sees as an inflection point.
European Energy equities to the end of 2024 tracked the performance of Brent closely.
However, YTD they have outperformed the MSCI Developed World Index and Brent, which was down 6% year to date, helped by a recovery in Euro Stoxx 50