Wolfe cuts oil stock price targets by 20% as tariffs and market slump hit sector

Investing.com -- The energy sector is under pressure from the combined effects of tariffs and falling oil prices, leading Wolfe Research to revise its stock valuations. 

Wolfe Research analysts have lowered price targets for most stocks they cover by 10% to 30%, reflecting the current forward curve and increased market volatility.  

Wolfe Research has adopted a $60 WTI price as a temporary "stress" case, resulting in an average 20% reduction in price targets.

Despite these reductions, the brokerage suggests that the sector’s performance is largely in line with the implied loss of free cash flow, indicating that selling may not be the best course of action. 

Wolfe Research analysts anticipate opportunities to re-engage in the energy sector as markets stabilize.  

The analysts at Wolfe Research acknowledge the debate around the duration of the pressures from tariffs and falling oil prices. 

However, they believe the current forward curve and equity market conditions provide an appropriate measure of what the market is likely to discount.  

Consequently, Wolfe Research has reset its sector valuations based on the current forward curve and higher assumed volatility, leading to the 10% to 30% reduction in price targets. The extent of these reductions is influenced by the capital structure of the companies.  

Wolfe Research views the $60 WTI stress case as temporary, citing the unlikelihood of WTI prices remaining below $60 per barrel long-term without triggering a response from US shale producers, who account for 14% of global supply.  

While acknowledging the pain of declining valuations, Wolfe Research maintains a rational perspective. 

They point out that physical oil markets are not more at risk of being oversupplied now than in the past four years, a period marked by OPEC+ curtailments. 

The key change, according to Wolfe Research, is the decision by Saudi Arabia and OPEC to increase supply to enforce compliance within the Declaration of Cooperation agreement. 

They note that the potential increase in physical production is less than what headlines suggest, indicating that the downward pressure on oil prices has characteristics of a technical move, without fully accounting for supply from Iran and Venezuela.  

Wolfe Research also emphasizes that none of the oil companies they cover are currently in distress and that most have stronger balance sheets compared to 2020. 

Their analysis suggests that the sector’s performance has largely kept pace with the discounted loss of free cash flow, leaving many stocks undervalued relative to their fair value.  

Given these factors, Wolfe Research advises against selling and suggests that the current market conditions offer an opportunity to re-engage in the energy sector as markets stabilize. 

The brokerage reiterates the vital role of OPEC in determining prices and the close tie between energy stock values and OPEC’s actions.  

Wolfe Research continues to advocate for companies to prioritize balance sheet strength over stock buybacks as a more prudent use of cash flow, especially as conditions improve.