We see opportunity in large, integrated oil firms today. After years of generating little or no free cash flow, these firms are now set to reverse course as high levels of investment give way to growth and capital restraint. We expect increased free cash flow from both upstream and downstream segments. In upstream, improved cost structures and the addition of higher margin production will increase cash margins, offsetting much of the impact of lower oil prices. Meanwhile, service cost deflation, standardization, and simplification combine to reduce the capital intensity of key project areas such as deep water, shelf, and onshore, creating the opportunity to do more with less. In downstream segments, continued strong market conditions combined with earnings growth lead to strong free cash flow generation. This results in financially stronger and healthier companies that can increase dividends and repurchase shares. Importantly, this improvement can occur at our midcycle oil price of $60 per barrel, well below current levels, and in many cases, the market is underpricing the improvement. We have revisited our moat ratings in light of upstream cost improvements and are upgrading Shell and BP to narrow moats. We are also increasing our fair value estimates to reflect our positive outlook, leaving the group trading at an average 15% discount, despite our bearish outlook for oil prices. Our best ideas are Shell and Total, trading at the biggest discount to our fair value estimates.
