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Energy Stocks Remain Undervalued Despite Long-Term Oil, Gas Outlook, UBS Says

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UBS maintained a positive long-term outlook for crude oil and natural gas, saying energy stocks remain undervalued despite improving commodity fundamentals, the firm said in a note on Monday.

UBS continues to expect stronger 2027 crude oil and natural gas prices than implied by current forward strips of $71 per barrel for West Texas Intermediate and $3.35 per million British thermal units for Henry Hub.

The firm assessed producers across scenarios ranging from $55-$65/bbl Brent, $51-$81/bbl WTI and $2.75-$4.25/MMBtu Henry Hub.

Using an 8% free cash flow-to-enterprise value yield and a 5.5x enterprise value-to-EBITDA sector midpoint, UBS estimates exploration and production stocks currently reflect $60 WTI and $3.50 Henry Hub for 2027.

Under a $75 Brent and $3.75 Henry Hub scenario, oil producers would generate an average 12.2% free cash flow-to-enterprise value yields and trade at 3.9x enterprise value-to-EBITDA.

Gas producers, excluding Comstock Resources (CRK), would generate an average 11.5% free cash flow-to-enterprise value yield and trade at 4.6x enterprise value-to-EBITDA, UBS said.

The same commodity deck would leave year-end 2027 net debt-to-EBITDA at about 0.2x to 0.3x if companies maintain current capital return programs.

UBS said those valuations remain below the historical 4.5x to 6.5x range, implying more than 20% upside to the 5.5x midpoint.

A $10/bbl move in crude oil and a $0.50/MMBtu change in Henry Hub prices would shift average free cash flow-to-enterprise value yields by 450 to 480 basis points.

Enterprise value-to-EBITDA multiples could move 0.5x to 0.7x or more, particularly for gas producers, UBS said.

UBS kept capital spending and production assumptions unchanged, although WTI prices below $60/bbl and Henry Hub prices below $3/MMBtu would likely prompt exploration and production companies to reduce both investment and output.

Since the conflict began, the S&P 500 Energy Index has gained 1.3% but has trailed the broader S&P 500 by 8%. During the same period, front-month WTI has risen 16%, the 2027 WTI forward strip has gained 15%, while the 2027 Henry Hub strip has fallen 10.3%, UBS said.

UBS said energy-sector valuations have weakened since the conflict began despite stronger long-term oil prices, with APA (APA) and Chord Energy (CHRD) leading gains, while Comstock Resources, Weatherford International (WFRD) and Gulfport Energy (GPOR) have posted the weakest performance.

UBS continues to favor Ovintiv (OVV), Devon Energy (DVN) and Antero Resources (AR) among exploration and production companies, while National Energy Services Reunited remains its top oilfield services pick.

Price: $12.87, Change: $-0.37, Percent Change: -2.79%

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