Energy stocks soar more than 5pc

Morgan Stanley has lifted its target for Woodside, Santos and Oil Search as the outlook for crude prices turns up.

The three behemoths in the local energy space have surged as much as 10 per cent in Monday trade, after receiving a ratings upgrade from Morgan Stanley on a much improved outlook for crude prices.

At the head of the upgrade queue was WA-based Woodside, which was raised from equal-weight to overweight, while Santos and Origin Energy both improved from underweight to equal-weight in Morgan Stanley’s latest assessment.

The positive shift in sentiment followed a decision from the bank to lift its long-term oil price forecast from $US60 a barrel to $US80, despite retaining a cautious near-term view.

“We expect the oil price recovery to be volatile and it’s likely we will see lower oil prices from current levels near term. That said, oil markets are slowly rebalancing and, according to our commodity strategist, there is also risk that oil moves materially higher were there further supply disruptions,” Morgan Stanley said.

The report labelled Woodside as the top pick among the sector’s leaders, in part due to the negative views on the firm’s growth prospects within the market.

This was most recently highlighted by a downgrade from Credit Suisse analysts, who had slashed their target price on the firm as they saw little opportunity for it to surprise on the upside.

“Consensus is bearish given lack of growth and valuation looks undemanding,” Morgan Stanley said of Woodside.

“Yet there is protection to the downside should oil prices fall (given LNG floors) but still upside if oil prices rise. There is potential for M&A of discovered resources for sub $1 billion and in an increasing oil price environment some of the growth options may become commercial (that are assumed by the market to be worthless).”

Its price target for Woodside was upwardly revised from $24.94 to $32.56, a sharp contrast against Credit Suisse’s price target reduction from $27.10 to $25.65 earlier this month.

The upgrades at Santos and Origin were entirely tied to the adjustment in long-term oil forecasts, which could aid the two firms in hedging strategies and debt reduction plans, Morgan Stanley said.

“Of the two, we prefer Santos for clients seeking greater leverage to an oil price recovery but it is higher risk given leverage and cost structure, which takes us to equal-weight given our view on volatility,” the report read.

Its Santos price target advanced from $2.95 to $4.59, while its target for Origin climbed from $4.33 to $5.38.

At the close of trade, Woodside shares jumped 5.9 per cent to $27.47, Origin surged 9.4 per cent to $5.85 and Santos skyrocketed 9.6 per cent to $4.70.

The gains came against a 1.8 per cent rise in the broader market and a 5.3 per cent advance in the energy sector.