Morgan Stanley cuts Repsol to “equal-weight” as refining margins cool off

Investing.com -- Morgan Stanley has downgraded Spanish energy producer Repsol SA (OTC:REPYY) to “equal-weight” from “overweight,” saying the recent strength in refining margins that lifted the stock’s performance is unlikely to last.

The brokerage said Repsol’s refining margin indicator in Spain rose about 50% quarter-on-quarter to $8.8 per barrel in the third quarter of 2025, supported by steady European demand, tighter emission rules in the Mediterranean, refinery shutdowns such as Lindsey in the U.K., and temporary supply disruptions including the Dangote RFCC stoppage and strikes on Russian refinery infrastructure.

However, Morgan Stanley expects these short-term drivers to fade, with margins already moderating to around $8 per barrel and likely to normalise further from the second half of 2026. The brokerage projects margins at roughly $6 per barrel over its forecast horizon.

Repsol’s stock has rallied strongly since midyear, outperforming the median of European oil majors by about 15 percentage points since July. 

The shares closed at €14.55 on October 14, compared with a price target of €15.80, implying an upside of 8%.

The analysts said the company’s free cash flow yield is expected to stay low at 0.5% in 2025, and total payout yield, including buybacks and dividends, to reach 11.3%. 

They estimate Repsol’s net debt at €10.3 billion in 2025, and gearing at about 30%, broadly in line with Eni and TotalEnergies and well below BP’s 45%.

Morgan Stanley added that disposal proceeds from Repsol’s ongoing portfolio optimisation program should fund about €550 million in buybacks next year. 

The analysts expect the company’s earnings per share to ease from €2.77 in 2024 to €2.56 in 2025, while its dividend per share is projected to rise from €0.98 to €1.07.

The brokerage maintained a cautious stance on the European integrated energy sector, preferring Shell and TotalEnergies for their broader exposure and cash generation strength. 

It cited limited near-term catalysts for Repsol beyond its exposure to U.S. gas, which represents roughly 30% of its total oil and gas portfolio, and the upcoming liquidity event planned for its exploration and production unit with partner EIG.

Morgan Stanley said the downgrade reflects that Repsol’s refining-led rally has largely run its course and the valuation now offers limited room for outperformance as margins return to normal levels.