TheChek News Flow

Our inaugural European Select Conference held in London last week provided one key message for us: The Oil & Gas industry can cope with a period of lower prices, but it does require operators and contractors to work together to improve efficiency and bring down costs. The operators of the assets are starting to implement a different approach to working with the contractors on a “fit for purpose” approach that should simplify and standardize projects. This will take time – a significant amount of capex is already committed and changing working practices across all levels of the companies is not a one month process. Nonetheless, it is clear that the IOCs are committed to change and the industry is likely to emerge from this downturn more efficient than prior to it. Hence, we retain our Positive stances on the European Integrated Oil and European Oil Services. For European E&P, we maintain our Neutral stance.

European Oil Services – investor sentiment ahead of industrial recovery: 

With a broad spectrum of activity represented at our conference, not surprisingly there was a stark difference in the outlook of each company. However, they all had one thing in common – all were undergoing drastic corporate actions in the face of tough market conditions. That said, with the recent rally in oil prices, investor sentiment appears to have improved. Even so, relative valuations still support the sector, in our opinion, and thus, we remain Positive

but aware that we are not yet seeing signs of a recovery. The key, we feel, to generating the turnaround, was the widespread talk of co-operation within the oil industry as it works through its troubles. If this holds, then we see a path that could lower cash costs across the oil industry and ultimately re-ignite spending.

European Integrated Oil – standardization over bespoke: 

2015 was always set to be a challenging period for the Oil & Gas industry. In the majority of likely scenarios, the

European Integrated Oils face a material squeeze on earnings and cash flows, leaving the group struggling to fund the annual capex bill out of operating cash flows let alone maintain dividends. To adapt to this, the industry will need to bring down both capex and opex bills. The approach to sustainably reducing longer term capex and opex appears

focused on doing things differently and using standardized contractor solutions rather than bespoke company solutions. This “self-help” approach should leave the IOCs better placed longer term as oil prices recover.

European E&P – regaining confidence: 

Conversations have moved on from debt covenant levels and cash flow breakeven, which has allowed management teams to begin highlighting the capacity for their typically leaner businesses to deliver material growth in the coming years while retaining greater financial flexibility. The silver lining of lower oil prices is the opportunity for significant capex savings on uncommitted activity (both developments and future exploration). We still believe that rebuilding investor confidence requires consistent project deliveries and a commitment to capital discipline, but we note