Morningstar

Increasing Fair Value Estimates for Oil Majors on Higher Oil Prices

We think BP, TotalEnergies, and Shell are particularly well positioned in the current environment.

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Integrated Oil Stock Update

The launch of the Iran war has sent global oil and gas prices and refining margins higher. Incorporating the latest futures curves resulted in a revision to our fair value estimates for the major oil companies.

Why it matters: At the risk of stating the obvious, oil and gas companies benefit from higher prices. As integrated firms, oil majors are also benefiting from the strengthening of global refining margins. The recent increase in prices translates into higher near-term earnings and cash flow expectations.

The bottom line: We have increased our fair value estimates by an average of 14% after incorporating the latest near-term prices into our models: $85 per barrel for 2026 and $76/bbl for 2027. Our fair value estimates remain anchored on our $65/bbl midcycle price, which is unchanged.

  • Shares are at risk of a pullback if a quick resolution of the war is reached and oil begins flowing through the Strait of Hormuz again. Incorporating a lower futures curve into our model would result in lower fair value estimates.
  • However, we’d likely view any pullback as an opportunity, as each of these names, to varying degrees, should realize earnings and cash flow growth over the next five years, driven by improved portfolios and capital discipline. Also, the $65/bbl midcycle is the key driver of our valuations.

Coming up: We expect messy first-quarter earnings. The spike in prices late in the quarter will cause many firms to report paper losses on near-term hedging contracts due to timing effects between mark-to-market requirements and physical delivery. However, the bottom line stands, and these firms are benefiting from higher prices.

  • Given their relatively large trading organizations, BP, TotalEnergies, and Shell are particularly well positioned to capitalize on the current environment. Their trading updates already revealed strong trading profits in the first quarter.

Editor’s Note: This analysis was originally published as a stock note by Morningstar Equity Research.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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