Northern Oil, Occidental, Ovintiv cut at Morgan Stanley, shifting more defensive after strong summer

Rating Downgrade: Northern Oil and Gas has been downgraded by Morgan Stanley from Equal Weight to Underweight, with a new price target of $27, reflecting concerns about the oil and gas sector's pricing and production forecasts.

Production Guidance Revision: The downgrade follows Northern Oil and Gas's announcement of reduced production guidance for oil and total output in the latter half of 2025, largely attributed to production shut-ins and fewer completions in the Bakken region.

Sector Trends: Morgan Stanley's downgrades extend beyond Northern Oil and Gas to other companies such as Occidental and Ovintiv, indicating a broader downturn in expectations for the oil and gas market amid declining production prospects and high leverage concerns.

Viper Energy Coverage Initiation: McDermott also initiated coverage on Viper Energy with an Overweight rating, highlighting its potential for above-average growth without the costs associated with drilling and completion, despite it trading comparably to other oil companies on a cash flow basis.

Recommendation Rating: Caution on Northern Oil and Gas

Northern Oil and Gas (NYSE: NOG) has experienced a 2.5% decline as Morgan Stanley adjusts their rating from Equal Weight to Underweight, setting a new price target of $27, reduced from the previous $29. This adjustment is part of a broader trend of three downgrades in the oil and gas sector, reflecting that much of the potential benefits from increased cash flow, driven by efficiency improvements and reduced spending for equivalent or enhanced production, have already been priced in. As seasonal advantages dissipate, Morgan Stanley anticipates potential declines in crude prices in the latter half of the year.

Analysts, led by Devin McDermott, made this downgrade following Northern Oil and Gas’s reduction in production guidance for both oil and total output for the remainder of 2025, as indicated during their Q2 earnings conference call. This revision suggests a slower production rate in the second half of 2025 compared to earlier forecasts of growth, mainly due to production shut-ins and a decrease in completions, particularly in the Bakken region.

The anticipated lower production in the second half of 2025 has also led to reduced expectations for full-year 2026 volumes, with further risk of diminished non-operated activities if oil prices continue to decline, according to McDermott’s analysis.

In addition to Northern Oil and Gas, Morgan Stanley also revised ratings for Occidental (NYSE: OXY) and Ovintiv (NYSE: OVV), downgrading them from Overweight to Equal Weight, with new price targets of $52 and $48, respectively. The downgrade for Occidental comes despite significant progress on debt reduction following the acquisition of CrownRock; however, its leverage remains higher than its industry peers. Meanwhile, Ovintiv’s Q2 performance showcased strong operational results, but the stock has surpassed its peers by 11% year-to-date while maintaining a higher-than-average net debt to EBITDAX ratio.

Furthermore, McDermott initiated coverage on Viper Energy (NYSE: VNOM) with an Overweight rating and a price target of $46. He highlighted that Viper Energy’s stock trades similarly on a 2026 free cash flow basis and shareholder return yield compared to oil exploration and production companies, yet it presents above-average growth opportunities without incurring drilling and completion capital expenditures.