UBS Flags Five Energy Stocks to Buy as Refining Margins Jump 83% in a Quarter
UBS has highlighted five European energy stocks as “buy” opportunities in its latest third-quarter earnings preview, arguing that stronger oil, gas and refining margins are creating a better earnings backdrop for the sector.
The five names are BP, TotalEnergies, Eni, Galp and OMV. UBS rates five of the eight European energy companies it covers as Buy and says its third-quarter net-income estimates are, on average, 12% above consensus expectations. The bank has also raised its Brent crude forecast to $100 a barrel for the fourth quarter.
The backdrop has become particularly favorable for refiners. A sharp improvement in refined-product spreads, combined with elevated oil and gas prices, is expected to support cash generation across several integrated energy companies.
For investors, however, the opportunity is not simply about higher oil prices. The more important question is whether exceptionally strong refining economics can persist long enough to materially lift earnings and shareholder returns.
Why refining margins matter for energy stocks
A refining margin, often referred to as a crack spread, broadly represents the difference between the value of refined petroleum products and the cost of crude oil used to produce them.
When margins rise, refiners can potentially earn more from each barrel processed, assuming other costs and operational factors remain broadly stable.
That is particularly important for integrated oil companies because they have businesses across the energy chain. A company can produce crude, transport it, refine it into fuels and then market those products.
The current environment has produced an unusually strong combination of supply disruptions and elevated fuel prices. Reuters reported on October 8 that attacks on shipping in and around the Strait of Hormuz were intensifying concerns about Middle East supply, while Brent crude rose above $104 a barrel.
The disruption is also affecting refined-product availability, which can push refining margins higher even as crude prices rise.
Shell, for example, said it expects a $42-per-barrel refining margin in the third quarter, up from $24 in the second quarter, as disruptions have tightened global fuel markets.
That helps explain why UBS is particularly positive on companies with significant refining exposure.
The five energy stocks UBS favors
1. BP
UBS raised its price target for BP to 700 pence from 675 pence, compared with a share price of 558 pence cited in the report.
The bank expects BP to generate third-quarter adjusted net income of $5.70 billion, about 6% above consensus. It also estimates cash flow excluding working-capital movements at $10.87 billion, 10% above consensus.
UBS identifies BP as a key beneficiary of stronger refining conditions and estimates an 18.6% 2026 organic free-cash-flow yield.
BP's relatively high financial leverage also means its earnings and cash flow can be more sensitive to changes in commodity prices than some peers.
The company is scheduled to report third-quarter results on October 30.
2. TotalEnergies
UBS raised its target for TotalEnergies to €89 from €88, compared with a share price of €74.50 in the report.
The bank expects third-quarter adjusted net income of $8.63 billion, 16% above consensus, with downstream operations and gas trading expected to provide support.
Its estimated cash flow excluding working capital of $12.36 billion is 25% above consensus, the largest positive gap among the companies in UBS' group.
TotalEnergies' diversified business model is important here. The company combines upstream oil and gas, LNG, refining and chemicals, marketing and services, and electricity-related operations.
That diversification means it is not simply a bet on refining margins.
3. Eni
UBS raised its price target for Eni to €30 from €28, compared with a €24.20 share price cited in its preview.
The bank's third-quarter net-income estimate of €2.42 billion is broadly in line with consensus, but its 2026 earnings-per-share estimate is 26% above consensus.
UBS also assumes Eni could increase buybacks to €3.8 billion and pay a special dividend of approximately €1 billion, while reducing net debt by around €2 billion. These are UBS forecasts rather than confirmed company commitments.
Eni's investment case therefore combines commodity exposure with potential shareholder distributions.
The company is due to report on October 23.
4. Galp
UBS kept its €25 price target for Galp unchanged, compared with a €21.70 share price.
The bank expects third-quarter net income of €654 million, 22% above consensus, and cash flow of €956 million, 14% above consensus.
Production is expected to be slightly higher, helped by the ramp-up of the Bacalhau project. UBS also identifies Galp as a beneficiary of stronger refining margins.
The company faces a different set of considerations from the larger European majors because its portfolio and production base are smaller. Investors are also watching developments around its planned Moeve merger before assigning potential distributions to their valuation.
5. OMV
UBS raised its price target for OMV to €77 from €68, a 13% increase, against a share price of €70.50 in the report.
The bank expects third-quarter net income of €1.07 billion, around 3% above consensus, with higher oil prices and refining margins partly offset by weaker chemicals margins.
Cash flow is estimated to be 5% above consensus. UBS also points to low river-water levels as a factor supporting inland refining-margin premiums.
OMV is scheduled to report third-quarter results on October 29.
Why the Middle East is changing the earnings outlook
The biggest driver behind the current refining opportunity is the disruption of normal energy flows.
The Strait of Hormuz is one of the world's most important oil-transit routes. Reuters estimates that around 20% of global oil and fuel supplies pass through the waterway.
Recent attacks on vessels and escalating conflict have increased the risk of further disruptions. At the same time, U.S. Gulf production has been affected by hurricane-related shutdowns, adding another source of supply pressure.
For refiners, the crucial point is that product shortages can sometimes develop faster than crude shortages.
If diesel, jet fuel or gasoline becomes scarce while refiners are still able to access crude, the price of refined products can rise faster than crude. That widens the refining margin.
But this relationship can reverse quickly if supply chains normalize or fuel demand weakens.
UBS is expecting earnings to outperform
UBS' broader message is significant because it is not simply raising individual stock targets.
The bank says oil, gas and refining margins have all been running above consensus expectations and that its third-quarter net-income estimates for the covered group are 12% above consensus on average. It has also raised its Brent forecast to $100 per barrel for the fourth quarter.
That creates the possibility of another round of earnings upgrades if the current commodity environment persists.
However, investors should distinguish between higher commodity prices and higher shareholder returns.
Oil companies can generate more revenue when crude rises, but they may also face higher taxes, working-capital requirements, transportation costs and political intervention. Refiners can benefit from stronger cracks, but margins are cyclical and can fall rapidly when refinery utilization rises or fuel inventories rebuild.
What could go wrong?
The biggest risk to the UBS thesis is that today's exceptional refining environment may not last.
Refining margins are highly cyclical. A normalization of Middle East supply, a decline in geopolitical risk or a recovery in refinery availability could increase refined-product supply and narrow margins.
Higher crude prices can also become a problem for parts of the downstream business if fuel prices fail to rise sufficiently to compensate.
There is also a broader macroeconomic risk. Sustained oil prices above $100 could add to inflation and put pressure on central banks, potentially slowing economic activity and fuel demand.
That means the current environment is positive for some energy producers and refiners, but it can create second-order risks for the wider economy.
What investors should watch next
The upcoming earnings season will provide the clearest test of the UBS view.
For BP, TotalEnergies, Eni, Galp and OMV, investors should focus on realized refining margins rather than headline oil prices alone.
Cash flow is another important indicator. Strong commodity prices are most valuable to shareholders when they translate into debt reduction, dividends, buybacks or productive investment.
Investors should also watch management commentary on fourth-quarter margins. If companies describe current refining economics as temporary, the market may assign a lower valuation to earnings generated during the spike.
Conversely, evidence that fuel inventories remain tight and supply disruptions are lasting longer could support earnings expectations.
The bottom line
UBS has identified BP, TotalEnergies, Eni, Galp and OMV as its five European energy “buy” picks in a third-quarter earnings preview, with the bank expecting stronger oil, gas and refining economics to push earnings above current consensus estimates.
The key catalyst is the sharp improvement in refining margins, supported by disruptions to global fuel supply and ongoing Middle East tensions. But investors should remember that refining is cyclical, and today's unusually strong margins can reverse if supply conditions normalize.
The next major test will be the companies' third-quarter results and management guidance. If elevated margins translate into stronger-than-expected cash flow and shareholder distributions, the UBS thesis could gain further support. If margins retreat quickly, the current earnings optimism could prove harder to sustain.
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This article is for informational and educational purposes only and should not be considered investment advice.