Morgan Stanley 'cautiously optimistic' about European energy sector, ups Equinor and Repsol

** Morgan Stanley evaluates that after steady underperformance in recent months, the risk/reward outlook for European Energy has improved

** "Oil markets have been tighter than we expected. Gas prices have declined sharply but are now back to pre-Ukraine war/pre-Covid averages," it explains

** The broker adds the sector hasn't adjusted to the recent rise in interest rates and inflation predictions yet, and that makes the current prices of stocks in the sector more attractive

** MS upgrades Norwegian Equinor EQNR to "equal-weight" from "underweight" as two negative catalysts, European gas prices and decreased shareholder distribution, had been well recognised and have now largely run their course

** It also ups Spanish Repsol REP to "overweight" from "equal-weight" and chooses it as Top Pick, expecting the Atlantic basin refining market, of which Repsol is a key beneficiary, to remain tight this summer

** It reiterates "overweight" on British BP BP., its second Top Pick, as it believes that meeting 2025 guidance would imply considerable earnings momentum in coming quarters, while an upgraded payout ratio signals sizeable distributions ahead

** Even though the broker says French TotalEnergies' TTE valuation is no longer as compelling, it reiterates "overweight" rating citing a differentiated portfolio with deep resources in its oil and gas business and a new-energies segment that is "profitable, growing, and turning free cash flow positive in the not-too-distant future"

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