Global Oil Vision - Survivors’ Party
* Oil price recovery necessary, but not a return to triple-digit – Our deep analysis
of 325 assets that forms the industry supply-curve concludes that oil markets should
see a recovery to 60s-70s Brent pricing 2016/17 as current spot oil prices are too
low to incentive future supply needs. However, we also see little rationale for prices
to return to the triple-digit environment of 2010-14. For the first time in a decade the
supply-curve is beginning to flatten. Marginal incentive prices now look to be in the
$65-75/bbl Brent range, down 6-8% YoY, a shift prompted by supply-chain deflation
and a continued elongation of the middle of the curve from US shale.
* Downward supply-curve shift will leave stranded capital – In the pursuit of
growth in recent years we think many companies have not left enough headroom to
deal with a lower oil price environment. Among our 37 Oil Vision companies we
think as much as 40% of the current investment cycle could prove economically
challenged at oil prices below $75/bbl. Most challenged in this new paradigm are
focused LNG and heavy oil players, as well as most of the Big Oil names.
* Align with defensive growth – We think this downward shift requires a
fundamental retool of portfolios and investment strategies. Investors are best served
to align with companies that can grow from 1st -2nd quartile on the supply-curve; US
shale, Brazil, Kurdistan and Russia brownfield standout. These companies should
be able to drive better capital returns, or alternatively have the value arbitraged by
higher-cost companies looking to reposition down the curve (e.g. RDS-BG).
* Shale is the core of the 'Survivors’ Party'; COP and DVN preferred – US shale
continues drive a wedge in the middle of the supply-curve, with Eagle Ford,
Permian and Mid Continent shales all expected to establish as large 2nd-quartile
assets. Although a lot is already appreciated – many of the high-quality shale plays
are well-valued by the market – we think investors can still get good value exposure
in Buy-rated DVN and also COP (not a pure shale player, but most of its growth is).
* Value in International; ROS, upgrade TLW – BG (1st/2nd quartile Brazil) is a
reminder that low-cost supply is not simply about US shale. In the international
arena we think Russia brownfield re-development will prove more robust to low oil
prices than the market believes – we highlight Buy-rated ROS. We have also
upgraded TLW to Buy/High Risk (433p price target) on a view that low-cost growth
in Ghana and E. Africa is overly discounted on balance-sheet concerns.
* Accepting the New Paradigm – For companies that are challenged with stranded
assets we look for companies to protect ROE through self-help. We think Buyrated
TOT and STO hold the most potential. We have previously highlighted BP
on a self-help theme, but with much of this potential now being realized in the
market valuation we have downgraded BP to Neutral.