UBS believes the European utilities sector has shown resilience amid soaring natural gas prices

Investing.com - According to a research report released by UBS on Wednesday, despite the sharp rise in natural gas prices triggered by conflicts in the Middle East, European utility stocks performed relatively well. Over the 10 days ending March 9, the STOXX Europe 600 index fell 8%, while the utility sector only declined 4%.

UBS analysts stated that the TTF natural gas price rose from €32/MWh on February 27 to €53/MWh on March 9. As of March 9, the futures curve shows a recent price increase of about €22/MWh, roughly 60%, with the 2027 contracts up about €10/MWh compared to February 27 levels.

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“From a fundamental perspective, the sector remains attractive, even with strong performance so far in 2026. The valuation at a P/E ratio of 16.5x is not yet unreasonable,” the broker said.

This Swiss broker named national power companies, RWE, and Grenergy as the most favored stocks, with buy ratings and target prices of €10.2, €55, and €130 respectively. It also listed Verbund, Drax, and Severn Trent as the least favored stocks.

UBS indicated that if the energy market remains elevated, companies with trading operations—Centrica, RWE, Engie Group, and Naturgy—will benefit the most, as trading activities are generally not subject to windfall taxes, including gas storage, liquefied natural gas, and electricity market trading.

Battery energy storage systems are another potential beneficiary. UBS pointed out that UK battery storage facilities operational during the 2021-23 energy crisis have a payback period of about 18-24 months. The broker noted that among the stocks it covers, Grenergy has the most exposure to battery energy storage systems.

Regarding interest rates, since the conflict began, the nominal yield on 10-year UK bonds has risen by 30 basis points, Italy and Spain by about 25 basis points, France by 20 basis points, and Germany by 15 basis points, with the greatest impact on companies focused on renewable energy. Solaria Energia y Medio Ambiente, EDPR, Grenergy, and EDP are considered most sensitive to interest rate changes.

UBS estimates that Verbund and Fortum’s earnings are most sensitive to electricity prices, with a €10/MWh change impacting 2027 EPS by approximately 18% and 13%, respectively.

On the demand side, in February 2026, electricity consumption across the EU27 was 224 TWh, down 0.6% year-over-year, 5% below the pre-COVID-19 average of 2015-19, and 3% lower than the record low in February.

UBS economists estimate that a 10% increase in oil prices would reduce European GDP growth by about 20 basis points. Year-to-date, monthly crude oil prices have risen from $60/barrel to $92/barrel, implying a drag of about 100 basis points on overall GDP growth.

UBS stated that governments may prioritize consumer relief over new investment spending, as seen in 2022-23, when the UK spent £50 billion on energy support, equivalent to 2% of GDP. The broker’s forecast for German electricity prices in 2029 is €64/MWh, about 14% below the current forward curve, while acknowledging upside risks in trading.

According to UBS data, European natural gas consumption has decreased from 540 billion cubic meters annually in 2021 to about 450 billion cubic meters currently, while dependence on liquefied natural gas has increased from 110 billion cubic meters to 186 billion cubic meters over the same period.

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