3 Big Oil Stocks to Watch as Market Decouples from Crude

The oil market is in a state of flux, with share prices of European oil majors decoupling from earnings momentum. This phenomenon, highlighted by bank of america (BofA), presents a unique opportunity for investors to capitalize on what the bank calls “mispriced” opportunities in Big Oil. As Brent crude prices have dipped 6% year-to-date, share prices for European oil majors have surged around 10%, indicating a shift in investor sentiment towards resilience and long-term stability over short-term earnings momentum.



Market Dynamics

The decoupling of share prices from earnings momentum is a significant trend that investors need to pay attention to. BofA analysts point out that while Brent crude is down 6% year-to-date, share prices for European oil majors are up around 10%. This discrepancy suggests that investors are looking beyond short-term earnings and focusing more on the long-term resilience and stability of these companies. BofA sees downside risk to consensus expectations on 1Q25 cash flows, pointing to weak free cash flow (FCF) generation that still “requires disposals to avoid additional net debt.” Despite this, the bank reiterates a preference for companies with strong balance sheets and low breakeven oil prices.

Company Spotlights

1. Shell

Shell is BofA's top pick due to its $65/bbl breakeven versus a sector average above $90/bbl. This resilience allows Shell to generate strong free cash flow yields, averaging around 5% for FY25. Shell's strong balance sheet and low breakeven oil prices make it an attractive investment option despite potential short-term earnings volatility.

2. TotalEnergies

TotalEnergies, along with Shell and Equinor, offers the highest free cash flow yields for FY25, averaging around 5%. BofA believes this represents a relative mispricing given these three also offer the strongest balance sheets in the sector. TotalEnergies' strong performance and potential for further growth make it an attractive investment option.

3. Equinor

Equinor has seen the biggest consensus upgrades year-to-date, but BofA believes it still shows the greatest further upside potential to both 1Q25 and full-year earnings, especially under its ~$13/mbtu TTF gas price assumption. Equinor's strong performance and potential for further growth make it an attractive investment option.

Policy Impacts

The decoupling of Big Oil share prices from earnings momentum presents an opportunity for investors to focus on the long-term resilience and financial health of European oil majors like Shell, Equinor, and TotalEnergies. These companies offer strong balance sheets, low breakeven oil prices, and high free cash flow yields, making them attractive investment options despite potential short-term earnings volatility.



Conclusion

In summary, the decoupling of Big Oil share prices from earnings momentum presents an opportunity for investors to focus on the long-term resilience and financial health of European oil majors like Shell, Equinor, and TotalEnergies. These companies offer strong balance sheets, low breakeven oil prices, and high free cash flow yields, making them attractive investment options despite potential short-term earnings volatility. Investors should consider these companies as they offer higher free cash flow yields and stronger balance sheets, making them more resilient to market fluctuations.

Ask Aime: What are the key factors driving the decoupling of European oil majors' share prices from earnings momentum, and how does this impact their long-term investment appeal?