Morgan Stanley Upgrades Diamondback Energy, Valero Energy, Sees 'Sustained Rally' For Oil Stocks

This year has been a historically brutal one for oil stocks, with a collapse in demand driven by COVID-19 travel restrictions and shutdowns pushing WTI crude oil prices briefly into negative territory for the first time in history.

Yet the oil market has since stabilized, and one analyst said Friday it may finally be time for investors to start dipping their toes in the space in 2021.

The Analysts: Morgan Stanley analysts Devin McDermott and Benny Wong issued rating and price target updates throughout their oil coverage, including the following upgrades:

• Diamondback Energy Inc FANG, upgraded from Equal Weight to Overweight, price target raised from $51 to $65.
• Murphy Oil Corporation MUR upgraded from Underweight to Equal Weight, price target raised from $12 to $14.
• Range Resources Corp. RRC upgraded from Underweight to Equal Weight, price target raised from $6 to $7.
• HollyFrontier Corp HFC upgraded from Underweight to Equal Weight, price target raised from $24 to $34.
• Valero Energy Corporation VLO upgraded from Equal Weight to Overweight, price target raised from $50 to $74.

The Thesis: In his note on oil E&Ps, McDermott said market conditions are ripe for a "sustained rally" in 2021.

Related Link: Why BofA Securities Is Overweight Energy Stocks In 2021

“Not only are E&Ps potential outsized beneficiaries of ‘reopening,’ but structural changes underpin a new value proposition: competitive, through-the-cycle FCF generation,” the analyst said.

Morgan Stanley’s bullish comments on oil stocks come after Bank of America said in November that it is overweight energy stocks heading into the end of the year.

McDermott is projecting Brent crude oil prices will rebound to $55 per barrel by the second half of 2021, and said many E&Ps finally have the capital discipline required to take advantage of that environment.

In addition to the upgrades, McDermott named ConocoPhillips COP, Cimarex Energy Co XEC and Diamondback as his top E&P stock picks.

In the refining space, Wong said valuations aren’t necessarily as compelling, making stock picking more critical.

“We prefer high quality R&M exposure paired with idiosyncratic elements that will drive performance beyond the refining recovery trade,” the analyst said.
Wong’s top refining stock picks include Marathon Petroleum Corp MPC, Phillips 66 PSX and Valero Energy.

Benzinga’s Take: Consensus analyst estimates are calling for WTI and Brent crude prices to average $48 and $45 per barrel in 2021. BP plc BP recently projected global oil demand will not peak until at least 2030, so the oil companies that have survived the multiyear downturn could now be well-positioned for a long-term upswing in the next oil cycle.