Bernstein Raises Oil Price Forecast, Reiterates FANG as Top Pick

Overview

This report is Bernstein's comprehensive update on Americas oil & gas coverage, centered on reassessing target prices based on new oil price forecast framework. The report raises 2026 Brent forecast to $93/bbl (reflecting year-to-date actuals and contract settlements), while maintaining $75/bbl for 2027 and beyond. Higher oil prices will improve 2026 cash flows and boost 2027 EBITDA, though valuation multiples may face pressure from declining investor interest in the sector. The report reiterates FANG as top pick and notes XOM has the highest integration among covered companies.

Core views

Oil price framework update: The report maintains long-term $75/bbl assumption post-2027, with 2026 forecast at $93/bbl - near YTD average but well below current $111/bbl spot price. The report uses 2022 as analogy - when Brent started at $80, peaked at $122 mid-year, fell back to $80 by year-end, averaging $101 for the year. Top pick rationale: FANG is reiterated as top pick, as companies lacking deep shale inventories will be forced into alternative strategies like costly M&A or higher-discount-rate international expansion during the coming decade of shale scarcity. FANG has best Permian inventory and cost structure, with 2026 production guidance raised from 500-510mb/d to 520mb/d. Integrated company comparison: XOM is highlighted as having the highest integration, benefiting from both oil prices and refining margins. The report notes YTD oil price rose ~50% while crack spreads rose ~100%, showing worsening market dislocations. If oil prices retreat, refiners and integrated players tend to recover more slowly. Regarding geopolitical risk, COP and CVX have relative advantages over XOM in a permanent Strait of Hormuz closure scenario, as ~20% of XOM's upstream production is exposed to the region. Q1 earnings overview: Multiple companies beat earnings but saw muted stock reactions. XOM revenue and EPS grew 5.5% and 21%, beating consensus by 21%; CVX adjusted EPS of $1.4 beat by 57%; COP adjusted EPS of $1.9 beat by 10%; FANG adjusted EPS of $4.2 beat by ~13%; EOG adjusted EPS of $3.4 beat by 6.2%; APA adjusted EPS of $1.38 beat by 24%; KOS EPS of -$0.07 missed consensus.

Analysis framework

The report uses top-down framework: first updating oil price curve (Brent forward curve collapsed from near-record $120/bbl to ~$85/bbl by early 2027), then applying this to company financial models. Valuation primarily uses EV/EBITDA multiples, with 2027 EBITDA as key driver. The report also modestly reduces multiples to reflect higher expected EBITDA. Scenario analysis includes geopolitical risks like Strait of Hormuz closure and assesses relative positioning.

Methodology notes

• Valuation MethodologyEV/EBITDA valuation

  EBITDA multiple-driven target price valuation

  The report uses enterprise value to EBITDA (EV/EBITDA) multiples to estimate target prices. 2027 EBITDA is the key driver, with higher oil prices boosting EBITDA, though multiples are modestly reduced to reflect declining investor interest in the sector.

• Industry Analysis FrameworkSupply-demand framework

  Oil price forecasts based on supply-demand balance

  The oil price framework considers both supply (e.g. geopolitical risks like Strait of Hormuz closure) and demand factors (e.g. declining investor interest affecting valuations).

• Event Analysis & Behavioral FinanceExpectation Gaps/Management

  Analysis of earnings beats with muted stock reactions

  The report notes multiple companies beat Q1 earnings but stocks closed flat/down, reflecting cautious sector sentiment and expectation gaps.

• Industry Analysis FrameworkUpstream-downstream transmission

  Integrated companies benefit from both upstream oil prices and downstream refining margins

  Analysis of integrated players considers both crude price movements and crack spreads. XOM, as the most integrated, benefits doubly with oil up ~50% and cracks up ~100% YTD.

• Competitive & Strategic FrameworkMoat / competitive advantage

  Shale inventory depth as core competitive advantage

  The report views shale inventory depth as key competitive advantage. FANG's superior Permian inventory provides strategic advantage in coming shale scarcity, while others may resort to suboptimal M&A or international expansion.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• FANG (Diamondback Energy)

  Top oil & gas pick, with best Permian inventory and cost structure

  Strengths

  Best-in-class Permian inventory, superior cost structure, crude marketing advantages (~300mb/d to Corpus, ~100mb/d to Houston)

  Weaknesses

  Management signals potential buyback slowdown to prioritize rapid debt reduction

  Comparison

  More growth-forward than large peers

  Risks

  Higher production not rewarded by investors, stock closed down 3.5%

• XOM (ExxonMobil)

  Most integrated among coverage, benefiting from both oil prices and refining margins

  Strengths

  Best integrated exposure, record Guyana production, Golden Pass Train 1 achieved first LNG export

  Weaknesses

  ~20% upstream production exposed to Hormuz region, higher geopolitical risk

  Comparison

  Disadvantaged vs COP and CVX in permanent Strait of Hormuz closure scenario

  Risks

  Geopolitical risks, refining margin retreat

• COP (ConocoPhillips)

  Relative advantage over XOM in Strait of Hormuz closure scenario

  Strengths

  Maintains 45% operating cash flow return framework, returned $2B in Q1

  Weaknesses

  Production cut by 35mb/d due to Qatar uncertainty and Surmont royalty increase

  Comparison

  Lower geopolitical risk exposure vs XOM

  Risks

  Capital expenditures raised $250MM to maintain Permian operational efficiency

• CVX (Chevron)

  Relative advantage over XOM in Strait of Hormuz scenario, integration as earnings lever

  Strengths

  Integration synergies with HES, equity crude runs significantly increased (Q2 expected >2x YoY), ~80% of LNG portfolio under long-term oil-linked contracts

  Comparison

  Lower geopolitical risk exposure vs XOM

• EOG Resources (EOG)

  Capital reallocation from gas to liquids, significantly increased LNG exposure

  Strengths

  Committed to >$6B annual shareholder returns, pledged ≥70% 2026 FCF return, Cheniere LNG contracts increased from 140 to 280k MMBtu/day

  Weaknesses

  Slight timing delays on UAE and Bahrain international projects

  Risks

  International project execution risks

• APA (APA Corp)

  Strong Permian execution, raised 2026 US production guidance

  Strengths

  Significantly raised gas trading/marketing book guidance (2026 pre-tax cash flow outlook raised from $650MM to $1.1B), Waha basis significantly widened

  Weaknesses

  Cash returns limited to dividends (~$88MM), 2026 ≥60% FCF return commitment below 2025's 85%

  Risks

  Prioritizing debt reduction to $3B net debt target

Key data

• 2026 Brent Forecast$93/bblBased on YTD actuals and contract settlements
• 2027+ Brent Forecast$75/bblUnchanged
• Current Spot Brent Price$111/bblSignificantly above 2026 forecast
• Brent Forward Curve Starting Point~$120/bblNear record levels
• XOM Q1 EPS21% above consensusConsensus at $0.96/share
• CVX Q1 Adjusted EPS$1.457% above consensus
• FANG Q1 Adjusted EPS$4.2~13% above consensus
• XOM Upstream Production Exposed to Hormuz~20%Higher geopolitical risk exposure
• YTD Oil Price Increase~50%Crack spreads up ~100%

Impact & implications

Investor implications: Higher oil prices directly improve 2026 cash flows and boost 2027 EBITDA, supporting higher target prices. However, declining investor interest in sector beta may pressure multiples, partially offsetting fundamental improvements. For integrated players, refining margin resilience may exceed crude price movements, providing downside protection if oil retreats. For shale producers, inventory depth will be key competitive differentiator in coming decade, with best Permian assets maintaining strategic advantage.

Risks

• Geopolitical risks including potential prolonged Strait of Hormuz closure
• Oil price volatility risks, with current spot well above forecasts
• Valuation multiple compression from declining investor interest
• Slower refining margin recovery if oil prices retreat

What to watch

• Strait of Hormuz transit conditions and geopolitical developments
• Brent price convergence path from current $111/bbl to $93/bbl forecast
• Execution of 2026 production and capex guidance
• Trends in refining crack spreads
• Shale producers' (e.g. FANG) inventory depletion and replenishment