Downstream revival continues
The European large cap oils are gradually adjusting to a world of lower oil prices. It remains a challenging environment with the group facing a material squeeze in earnings and cashflow but critically we see increasing evidence that the management teams are able to drive through cost savings and efficiency improvements. We assume capex for the group will fall an average of 10% in 2015 and there is also a greater emphasis on opex discipline than in the recent past. The impact of these changes is not always immediate and a bigger impact is likely to be seen on earnings in 2016, but that progress is able to be made at all at this stage is encouraging. We expect 2Q earnings to fall an average of 39% y/y in US$ terms with cost savings and a remarkably strong downstream environment not quite enough to offset the lower oil and natural gas prices. The revival in downstream lasted longer than we expected at the start of the year and looks set to remain a differentiating feature amongst companies for the rest of the year. The combination of rising consensus EPS estimates, the evidence that self-help measures are working along with the commitment to dividends should, in our view, be supportive of sector valuations relative to the wider market in the coming 12 months. Our Overweight ratings remain Royal Dutch Shell, Repsol, BP, GALP and Total.