Saudi Drone Attack Pushes Energy Stocks Higher 

(Bloomberg) -- Oil & gas stocks were the biggest gainers among industry groups in Europe Monday after a drone attack on the heart of Saudi Arabia’s oil production led to a spike in crude.

Among the three top gainers were Tullow Oil Plc and Aker BP ASA, also identified by analysts as among the biggest short-term winners from a higher Brent price. Even so, Citigroup Inc. noted the performance of energy stocks hasn’t been as tightly correlated with the oil price as in the past. Among airlines, British Airways parent IAG SA is better hedged against higher fuel prices this year than Air France-KLM, according to Bernstein.

The Stoxx 600 Oil & Gas Index climbed as much 3.2% on Monday, before paring gains slightly to 3.1% as of 2:07 p.m. CET. In Saudi Arabia, Aramco officials are growing less optimistic about a rapid recovery in oil production, a person with knowledge of the matter said.

Here’s what analysts are saying:

Mediobanca, Alessandro Pozzi

• “Saudi Arabia is likely to keep its customers fully supplied drawing from its worldwide storage network”
• Oil services are likely to benefit the most from higher oil prices, including Saipem (neutral) Tenaris (outperform); followed by the integrated oil sector, including ENI (outperform), and Galp (neutral)

Stifel, Chris Wheaton and Robin Haworth

• The weekend attacks are “a reminder that geopolitical risk has not gone away,” even though oil market players remain focused on the impact of GDP growth on demand, and continuing increase of U.S. shale oil output
• Key picks to benefit from higher Brent prices would be Aker BP, Cairn Energy, DNO, Gulf Keystone, Jadestone, SDX and Tullow Oil; all rated buy

Santander CIB, Jason Kenney

• Jump of $4-$5 per barrel for Brent on Monday is “justified,” but for it to remain higher for six months to one year, it would be necessary to see “an escalation event or other significant outages to further disrupt trade flows of oil/product”
• Considering a scenario of a specific trading boost for oil prices on the back of attacks, Equinor, Eni and Galp are most sensitive to short-term oil upside
• Preferred pan-European peers are BP and Eni on a 12-month view; reiterate buy ratings for BP, Eni, Galp and Repsol and hold for Shell, Total and Equinor

Jefferies, Laurence Alexander and Daniel Rizzo

• If oil prices step higher ~$5 per barrel to price in increased geopolitical risk for supplies, swings in demand prospects will likely continue to dominate chemical share trading
• Each $5/bbl increase in oil prices clips the sector’s warranted P/E multiple ~20bps
• “The effect would likely be magnified if higher oil prices due to a supply shock are viewed as a sufficient demand risk to move corporate credit spreads wider”

Bernstein, Daniel Roeska and Alex Irving

• For airlines, higher fuel prices in an environment of aviation overcapacity particularly in European short haul are “the last thing the sector needs”
• IAG is cited as the best hedged, least sensitive after it disclosed a hedge ratio of 95% for the third quarter, with a 4% EPS sensitivity to fuel over 12 months and 9% over 13-24 months
• Lufthansa seen as “quite reasonably positioned,” with a hedging level of 79% for the third quarter and 78% for the fourth quarter while Air France has higher sensitivity as it is less hedged for this year than the other legacy carriers

Citi

• Attacks over the weekend “left a crucial supply hole in global crude production,” driving prices higher by an estimated ~$5-$10/barrel “most likely through year-end”
• While energy stocks are seen as benefiting from higher prices in theory, the relative performance of the hydrocarbon sector “has not been as tightly correlated with crude as seen in the past,” possibly as a result of “continued poor returns on equity”

--With assistance from William Canny, Ksenia Galouchko, Albertina Torsoli, Sam Unsted and Hanna Hoikkala.

To contact the reporter on this story: Filipe Pacheco in Dubai at fpacheco4@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Kasper Viita, John Viljoen

©2019 Bloomberg L.P.