Bernstein cuts ConocoPhillips and Diamondback ratings as Iran de-escalation looms

 Bernstein downgraded ConocoPhillips (NYSE: COP), Diamondback Energy (NASDAQ: FANG) and Devon Energy (NYSE: DVN) to Market-Perform, saying oil stocks may struggle as tensions between the U.S. and Iran ease after the midterm elections.

Analyst Bob Brackett said de-escalation now looks more likely than escalation. He expects oil prices to normalize, though at levels above where they were before the conflict.

Oil and gas stocks were the best-performing sectors in the S&P 500 before the midterms. Brackett noted that multi-year runs of outperformance are rare for the sector, and that corrections in oil stocks can happen quickly.

“We worry that profit taking into year-end or rotation into beaten-down sectors may occur,” he wrote.

Bernstein expects oil prices to average more than $90 a barrel this year, with Brent at $90 now.

“An $80/bbl world next year makes for great returns for oil companies but not great returns for oil equity investors,” the analyst said.

Instead, Bernstein recommends a defensive barbell. It favors Exxon Mobil (NYSE: XOM), the largest integrated oil company, which should benefit from refined fuel prices that tend to hold up better than crude. 

It also likes natural gas producers Expand Energy (NASDAQ: EXE) and EQT (NYSE: EQT), saying gas prices around $3 per thousand cubic feet are below mid-cycle levels and offer an attractive entry point.

Brackett added that valuations across his coverage are close to five-year averages, leaving little cushion if earnings fall along with oil prices.