European E&P stocks appear to be trading at significant discounts to NAVs, reflecting uncertain crude price trajectory and balance sheets, and the subsequent impact on the development timelines of pre-FID projects. This
report investigates what is priced into current prices in terms of key projects assuming a more conservative longer-term oil price of $75/bbl (vs Credit Suisse at $85/bbl l-t). We think the risk/reward is starting to look favourable for Africa Oil and Tullow Oil (both upgraded to Outperform from Neutral). We downgrade Ophir to Underperform from Neutral because we are sceptical about timelines for EG FLNG in a tough LNG environment. Lundin has the least uncertainty around its portfolio, but is fairly valued. Genel has potentially the biggest upside, but much will hinge on export payments. Our target price changes reflect mostly the rolling forward of NAVs, and reducing risking in some instances as we defer project spend to manage balance sheets.
■ Africa Oil (O/P from N): South Lokichar Basin has a competitive breakeven and, at SKr14/sh, the shares are pricing in a three-year delay to guidance for first oil in ~2020 at $75/bbl long term and no further resource upgrades.
■ Tullow Oil (O/P from N): Kenya and Uganda are key pre-FID projects. A share price of 285p/sh implies $70/bbl l-t, and a three-year delay to a Kenyan/Ugandan development, which we believe is too conservative.
■ Genel (O/P): MBB is a strategic project, but the timeline for FID is uncertain against a tough macro print. Assuming $75/bbl, the current share price assumes MBB will not happen. Export payments will be a key catalyst.
■ Lundin (N): Johan Sverdrup is the key value driver, and operator STL is using its A-team to develop this field. In the context of our more conservative forecast for most of its development projects, which are post-FID, we look at whether Lundin is attractive at $75/bbl Brent – and it appears fairly valued.
■ Det Norske (N): Execution of Ivar Aasen is important, but Johan Sverdrup accounts for 79% of our NAV. The market is currently pricing in $72/bbl for Det Norske, assuming Johan Sverdrup reaches first oil in 2020.
■ Ophir (U/P from N): Removing EG FLNG (a more speculative project) from its portfolio, the value of Ophir is 93p/sh at $75/bbl.
■ Cairn (U/P): Senegal is the key pre-FID project for Cairn, and at 174p, the market is pricing $81/bbl, assuming FID in 2018, and first oil in 2022.