Morgan Stanley’s European Equity Strategy team has published a new research note today on the energy sector, which displays the bank’s bullish outlook for energy stocks regardless of a low oil price.

The report considers the current valuation of energy stocks and concludes that even if oil prices rise no higher than $58 (Morgan’s target is for $62) by the end of the year, energy should see the highest earnings per share growth of any sector over the next three years.

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Morgan: Even If Oil Remains <$51 Energy Stocks Will Outperform

Morgan’s equity analysts are bullish on the outlook for energy stocks for several reasons. Firstly, even though the wider equity market has rallied throughout the first quarter of the year, energy has lagged, not only other sectors but also the oil price. Oil price weakness has weighed on energy during the past few weeks, but even before this drag energy had already underperformed 6%.

Is this underperformance warranted? Yes and no. While substantially all oil sector companies are exposed to the price of oil, during the past three years of oil majors, have made drastic cuts to capital spending and operational spending budgets the net effect being that today oil majors are dramatically more productive than they were five or six years ago. With this being the case, and with further cost reductions on the horizon, Morgan’s analysts believe that even at $58 a barrel European oil companies are expected to report earnings per share CAGR of 26% over the next three years. European equities as a whole are expected to report EPS CAGR of 12% during the next three years.

Even if the target of $58 is not realized, and oil remains of $51, Morgan’s analysts believe European oil majors can still continue to grow faster than any other sector. The bull case is $62.5/bbl oil by the end of the year. Morgan’s oil analysts have penciled in this high target based on global stocks drawing over the summer. While a rise in US crude inventories has weighed on the oil price in the past couple of months, less visible inventory data such as floating storage figures has improved.