ARC Resources Ltd T.ARX

Morgan Stanley

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Morgan Stanley’s research department highlights U.S. equity strategist Michael Wilson’s faith in oil stocks in the coming months,

“MS Chief US Equity Strategist Mike Wilson highlights that with the Fed appearing to be less concerned about inflation or looser financial conditions, reflation trades are coming back into vogue. Mike thinks that the internals of the market appear to be onto this with some of the strongest breadth coming from the commodity cyclicals. On this front, Mike points out that large cap Energy is a classic late cycle winner that has underperformed the market materially since last September, but has shown strong relative performance and breadth recently. Mike thinks this recent outperformance continues. He recommends staying up the cap and quality curve within the sector. He points out that the sector’s relative performance versus the S&P 500 has lagged the price of crude year-to-date, and Morgan Stanley’s Global Commodities Strategist, Martijn Rats, recently raised his Brent forecast to $90/bbl by 3Q given incrementally tighter supply/demand balances. This view on the commodity plus inflecting relative earnings revisions, strong breadth and compelling valuation (8th percentile of historical EV/EBITDA levels) suggest to Mike that the divergence between oil prices and the sector’s relative performance is likely to close via a catch up in Energy equities”