European Oil & Gas: E&P - Road to redemption
*UPGRADE sector to POSITIVE
*AMERISUR – Initiate OW, 34p PT
*DNO – Initiate OW, NOK14.00 PT
*ITHACA – Initiate OW, 70p PT
*DET NORSKE – Initiate EW, NOK70.00 PT
*FAROE – Initiate EW, 75p PT
*AFRICA OIL – Downgrade to EW from OW. Lower PT to SEK16.00 from SEK20.00
*PREMIER OIL – Downgrade to EW from OW. Lower PT to 90p from 190p
*CAIRN – Downgrade to UW from EW. Lower PT to 170p from 180p
*SOCO (UW) Raise PT to 170p from 150p
PT Changes in the note
The sustained low oil price during the last year has been a painful experience for the European E&P sector. But it has also been the catalyst for a much-needed change in mindset, prompting management teams to address the operational inefficiencies, bloated budgets and poor capital allocation that eroded returns and investor confidence before oil prices fell. We believe the results of these changes should begin to emerge in 2016 in the shape of a more focused group of businesses presenting strategies centered upon value over volume and capital-constrained growth. Our optimism does not depend on a sudden rally in oil price, rather a gradual recovery as supply/demand dynamics rebalance in the medium term and recognition from investors of the strategic and behavioral changes made. We expect 2016 outlook statements to emphasise the ability to create and realise value while operating within the constraints of ~$50/bbl, potentially marking the first steps towards redemption. It is on this basis that we revise our industry view to Positive from Neutral. This report adds five new stocks to our coverage group - Amerisur Resources (OW), Det Norske (EW), DNO (OW), Faroe Petroleum (EW) and Ithaca Energy (OW) - and includes updated investment cases for the whole group. Ophir Energy remains our Top Pick, while DNO, Ithaca Energy and Tullow Oil, in our opinion, provide the most attractive investment cases to benefit from an improving oil price outlook and recovery in investor sentiment towards the sector.