Run-up in energy stocks not over, Citi says in raising BP, Conoco, Repsol to Buy (NYSE:BP)

The market rotation into energy stocks has more room to run, as history says the sector usually performs well in an earnings recession, a Citi team of analysts led by Alastair Syme said in a note this week, offering three stocks to buy.

Despite its belief that the worst commodity price inflation is now largely behind us, Citi said oil markets will start to see inventory builds from next spring, and that the global energy system is largely adapting to accommodate Europe’s crisis.

Upgrading BP (NYSE:BP) to Buy, Citi sees valuations that put it over European peers; a lack of chemicals exposure, which could prove a key headwind for global peers in 2023; and the potential to differentiate around underlying growth, driven by upstream and marketing.

Citi’s two other top energy picks are Buy-rated ConocoPhillips (NYSE:COP), whose price target was hiked 21% to $160, and Spain’s Repsol (OTCQX:REPYF) (OTCQX:REPYY); the firm also raised price targets for Exxon Mobil (XOM), Chevron (CVX) and Shell (SHEL).

Citi’s economists do see the global economy continuing to weaken in 2023, with the U.S. tipping into recession by Q3, and believe the relative strength of energy stocks, while still positive, will start to diminish given that stocks have seen such a big run higher in 2022.

BP’s (BP) current “risk-reward is extremely compelling right now,” The Global Investor writes in an analysis published recently on Seeking Alpha.