Morgan Stanley's latest report indicates that the European energy sector may experience a significant "deceleration" in the fourth quarter of 2025: the industry's combined net income is expected to decline by 15% to 20% quarter-over-quarter, reversing the improvement trend seen earlier in the year.
Weakened Profit Expectations: Triple Pressure Combined
The bank believes that the pressure on this quarter's earnings is not due to a single factor, but rather a combination of falling prices, trading business performing below expectations, and several one-off projects common at the end of the year.
Within this framework, the sensitivity of upstream to oil and gas prices has been amplified, and trading and optimization revenues have not provided sufficient buffer.
Price Aspect: Falling Average Prices for Brent, TTF, and LNG
Morgan Stanley notes that during the fourth quarter, Brent crude oil, Dutch TTF natural gas, and global LNG prices showed a quarter-over-quarter decline of about 8% to 9%, which is expected to directly suppress upstream profits in the sector.
Although Henry Hub natural gas prices in the US rose by about 32% quarter-over-quarter, the bank emphasizes that European companies have limited exposure, primarily centered on a few companies like BP and Repsol.
Trading and Refining: Mid-term Improvement in Refining but Limited "Capture"
The report mentions that refining margins showed strong performance mid-quarter, but company trading updates suggest that many firms may not fully realize this improvement.
Additionally, trading activity typically slows at the end of the year. Morgan Stanley states that both Shell and BP expect trading and optimization gains to be in the "neutral to weak" range for the fourth quarter, making it difficult for trading businesses to offset the pressure from declining prices.
Cash Flow and Buybacks: Free Cash Flow around $8 Billion, Some Companies May Hit Pause
When comparing shareholder returns and cash flow, Morgan Stanley estimates that the total free cash flow for the sector this quarter is about $8 billion (accounting for hybrid note interest and lease payments), while dividends and buybacks total about $15 billion.
During this period, several companies have offset balance sheet pressure through asset disposal gains, expecting net debt to remain largely stable; dividends are still likely to see moderate growth, but the bank also expects Equinor and BP to possibly pause stock buybacks to prioritize maintaining balance sheet resilience.
Overall, Morgan Stanley maintains a "cautious" stance on the European energy sector, believing that weaker commodity prices combined with softer trading will continue to suppress short-term earnings expectations.
