Investing.com -- JPMorgan has updated its views on the European oil and gas sector, downgrading Equinor (NYSE:EQNR) to Neutral from Overweight, while reinforcing positive stances on Shell (NYSE:SHEL), TotalEnergies (EPA:TTEF), and Eni SpA (BIT:ENI).
The revisions come as the bank recalibrates its models based on a flat $60 per barrel Brent scenario, assessing valuations as fair rather than cheap and emphasizing the need for value-led capital discipline.
"Equinor now exhibits EU Oils’ greatest negative rate of change in gearing to end-26 in our scenario," JPMorgan analysts led by Matthew Lofting wrote in a note, noting rising balance sheet risk, asset-specific issues at the U.S. Empire Wind project, and slower near-term project delivery.
The bank warns that a cancellation of the Empire Wind project could push Equinor’s net debt to capital employed ratio to 26%, up from 6.9% in Q1 2025.
By contrast, JPMorgan reaffirmed its Overweight ratings (OWs) on Shell, TotalEnergies, and Eni, citing strong resilience and free cash flow (FCF) yields at $60 oil.
“We now further emphasize resilience by concentrating OWs on Shell, TotalEnergies, Eni,” the analysts wrote.
Shell, in particular, stands out with a forecast 2026 free cash flow yield of 10.2% under the $60 scenario, supported by strong balance sheet efficiency and exposure to oil and gas volatility. JPMorgan analysts reiterated the U.K. oil giant as its top pick.
TotalEnergies was also highlighted for its relatively low breakeven and commitment to shareholder returns, including a minimum $2 billion per quarter in buybacks under “reasonable” oil price conditions.
Meanwhile, Eni is viewed favorably among the more leveraged players, with falling gearing and a projected 10.3% FCF yield in 2026.
JPMorgan’s base case now assumes Brent at $65, down from $70, with gas prices and the euro/dollar also revised lower. This led to an average 9% cut in target prices across the sector.
For Equinor, the price target was lowered 16% to NOK 270. The analysts also removed a previous gas premium and applied a 5% total shareholder return (TSR) discount “owing to projected 2026+ FCF/gearing compression.”
Sector-wide, JPMorgan expects a 20% rebase in cash distributions by 2026 versus 2024 levels, driven by reductions in buybacks rather than base dividends. At $60 Brent, the average 2026 cash yield is estimated at 11.1%.
The Wall Street firm concludes that, absent a firmer macro floor, valuations are unlikely to attract broad generalist capital in the near term.