By Ron Bousso
LONDON (Reuters) - JPMorgan (NYSE:JPM) has upgraded its outlook for Europe's top oil and gas companies, forecasting sharp growth in shareholder returns while striking a downbeat note on the pace of a transition to low-carbon energy.
The note, titled "Reality check needed on 'Black Gold'", was published on Monday, when crude prices surged nearly 20% following weekend attacks on Saudi Arabian oil facilities. Crude's gains pulled up the share prices of oil firms.
JPMorgan's bullish tone comes amid calls from some investors and activists for reduced investment in oil and gas companies due to a gradual shift towards cleaner, renewable energy.
The brokerage Redburn downgraded the sector earlier this month, citing increased risks from a global transition to renewables.
JPMorgan said firms including Royal Dutch Shell (L:RDSa), BP (L:BP) and Total (PA:TOTF) had in recent years started adapting to lower oil demand by cutting costs and reducing greenhouse gas emissions from their operations.
"While some progress is being made on (European majors') carbon intensity ... there is further work to do," Christyan Malek, JPMorgan's top European oil and gas analyst, said in the note.
"We believe decarbonising will be far harder than current consensus assumes, especially in the industrial and transport sectors."
The European oil majors have lagged major stock indices including London's FTSE (FTSE) so far this year and underperformed relative to Brent crude futures (LCOc1).
JP Morgan, in upgrading Europe's top energy companies, cited a stronger oil price outlook, a relatively weak share performance and a lower carbon intensity from the firms' operations.
It also pointed to forecasts that shareholder returns would rise to 28% of the companies' market capitalisation by 2022.
The top U.S. investment bank forecast oil demand by 2040 would grow by 4% from current levels, peaking between 2035 and 2040, similar to projections by a number of oil companies.
The projection nevertheless falls short of targets set out in the 2015 U.N.-backed Paris Climate Agreement to lower carbon emissions to "net zero" by the end of the century, a move aimed at limiting global warming to "well below" 2 degrees Celsius.
European oil producers have faced investor pressure in recent years to hit the Paris goals, setting targets to cut emissions and increasing spending on renewable energy.
Graphic: European oil majors' fiscal breakevens , https://fingfx.thomsonreuters.com/gfx/editorcharts/OILMAJORS-JPMORGAN/0H001QX7E8G8/eikon.png
The bank maintained its "overweight" recommendation on Shell and BP while upgrading Total from "neutral" to "overweight".
The three firms, it said, were best positioned among their peer group to reduce carbon emissions and adapt to the energy transition while offering strong cash returns.
JPMorgan upgraded Norway's Equinor (OL:EQNR) to "neutral" while downgrading Italy's Eni (MI:ENI) to an "underweight" recommendation and initiating coverage of Austria's OMV (VI:OMVV) with an "overweight" rating.
The rating changes mean the outlook for the group of companies has shifted to bullish, Malek said.