YPF Tops Morgan Stanley's List Of Most Preferred Emerging Market Oil Stocks

With the price of oil reeling from a potential new Iranian nuclear deal, analyst Mayank Maheshwari and the rest of the Morgan Stanley Emerging Markets Oil & Gas team released a new report that focuses on the global outlook for the oil & gas industry. Morgan Stanley believes that cost deflation could provide a big boost to upstream cash flows for emerging market (EM) oil companies if the current oil cycle mirrors previous cycles.

Deflationary Trends

According to the report, the global oil industry is already witnessing lower service costs, wages and materials prices and an increase in operational efficiency. During the last major downward price cycle in oil in the 1980’s, the industry endured a 30 percent decline in capex and opex. Morgan Stanley predicts that this type of reduction could generate a $245 billion increase in free cash flow for EM oil companies between now and 2020.

Opportunity In Offshore And High-Cost Fields

The report indicates that the greatest cost deflation impact during the last oil cycle was seen in offshore projects due to the larger scale and the more advanced technology required for these projects. Maheshwari describes the methods that Morgan Stanley uses to pick winners in the space.

“Our methodology cross-references potential FCFF upside with the current EV of each company, allowing us to differentiate winners based on capital structure and other company-specific issues currently priced into the stocks,” he explains.

Top Picks

In the report, Morgan Stanley names YPF SA YPF its top U.S.-listed EM oil & gas stock pick.

In addition to the YPF, Morgan Stanley includes the following U.S.-listed companies in its EM portfolio: CNOOC Ltd CEO, Sinopec Shanghai Petrochemical Co Ltd SHI, PetroChina Company Limited PTR, Ecopetrol SA EC and Petrobras PBR.