European energy sector earnings are expected to decline sharply in the fourth quarter as weaker commodity prices, softer trading performance and year-end cost pressures weigh on results, according to Morgan Stanley in a recent note.
Stay informed beyond the headlines with premium market insight, AI stock picks, and deep research tools from InvestingPro - 55% off today The brokerage said it expects aggregate net income for European energy companies to fall 15-20% quarter-on-quarter in the fourth quarter of 2025, reversing gains seen earlier in the year.
The projected decline reflects lower average oil and gas prices, underwhelming trading contributions and the impact of several one-off items that typically affect fourth-quarter earnings.
Morgan Stanley said dated Brent crude, Dutch TTF gas and global LNG prices all declined by about 8-9% quarter-on-quarter during the period. The drop in prices is expected to weigh directly on upstream earnings across the sector.
While U.S. Henry Hub natural gas prices rose 32% quarter-on-quarter, the bank noted that exposure to Henry Hub among European companies is limited and concentrated mainly in BP and Repsol.
Refining margins showed strength in the middle of the quarter, but Morgan Stanley said trading updates indicate companies only partially captured that improvement.
The brokerage also said trading activity typically slows toward the end of the year and that both Shell and BP have guided for neutral-to-weak trading and optimization earnings in the fourth quarter.
In addition, Morgan Stanley said the fourth quarter is usually marked by higher costs linked to infrequent items, making it a structurally weaker and more volatile period for earnings. These factors together are expected to drive the 15-20% decline in aggregate net income.
Morgan Stanley estimates aggregate free cash flow of about $8 billion for the quarter, including hybrid coupons and lease payments.
That compares with roughly $15 billion in combined buybacks and dividends. Net debt is expected to remain broadly stable, supported by disposal proceeds at several companies, including Eni and Equinor.
The brokerage said it expects modest dividend growth to continue across the sector, reflecting cost and capital efficiency measures and portfolio actions.
However, Morgan Stanley said it expects both Equinor and BP to suspend share buyback programs as companies prioritize balance sheet strength.
The outlook reflects what Morgan Stanley described as a “cautious” stance toward the European energy sector, with weaker commodity averages and softer trading performance putting pressure on near-term earnings expectations.
