Europe: Energy: Oil Services
Clear signs of deterioration emerging; remain Cautious
* Recent profit warnings highlight deteriorating outlook
We have seen four European oil service companies profit warn in the last
week, with Wood Group, Technip, PGS and CGG all lowering expectations
for 2013 or 2014. The common factors behind these announcements in our
view are offshore project delays (for Wood Group and the seismic
companies) and a reining in of spending by the major international oil
companies. In 2013, 11 of the 18 oil service companies under coverage
have profit warned, with six of these occurring in the last few months.
* This theme likely has legs, and capacity continues to build
We believe that the major oil companies will re-focus on capital discipline
as we move into 2014, and are not likely to expand E&P capex budgets. We
believe we will continue to see delays to more marginal offshore projects
where costs have risen, particularly following the Macondo oil spill in the
Gulf of Mexico. Into this more cautious demand environment, supply
continues to build across the offshore supply chain, with the potential to
put pressure on pricing and returns in a stagnant growth environment.
* What’s next? We downgrade TGS Nopec and Prosafe to Sell
We downgrade TGS Nopec to Sell from Neutral with a Nkr124 price target,
as we believe that higher competition and lower multi-client spend in 2014
will drive revenue lower. We are 10%/13% below consensus for 2014/15E
EPS. We downgrade Prosafe to Sell from Neutral as we see 53% new
capacity over the next three years putting pressure on pricing and
utilisation. We are 19%/31% below consensus for 2014/15E EPS.
* Remain Sell on TECF, upgrade CGG to Neutral, remove SUBC from Conviction List
We lower our price target and remain Sell rated on Technip, where the
stock does not look inexpensive on 2014 estimates even after the recent
underperformance, and returns no longer justify a premium multiple. We
remain skeptical on the 2015 Subsea margin rebound. We upgrade CGG to
Neutral from Sell following significant underperformance, although we
remain negative on the seismic space. We remove Subsea 7 from the
Conviction Buy List, although the stock remains Buy rated, as we believe it
could take some time for the market to give credit for the earnings given
the ongoing risk around Guara-Lula.