Postcards from across Europe Encouraging progress. Brent was at the same average level in 2Q17 as in 3Q15 (~$50/bbl). However, in the intervening period the industry has made good progress on the things it can control, and hence 2Q17 compares favourably to 3Q15 (this is despite the fact that 3Q15 saw peak earnings from downstream). Both organic and inorganic FCF generation looked encouraging across the sector in 2Q17, thereby continuing to de-risk balance sheet strains. Bottom line: whilst the low-hanging fruit may have been picked, there is more the industry can do; RDS (a Focus List stock) has only passed the halfway mark of its 'cultural evolution'. In addition, there are other variables coming into play that could make the industry 'fitter'; e.g. benefits from automation, big data and data analytics, all of which are still in the early stages.
* Changes: While companies in the industry are making progress and oil markets are rebalancing, the latter is taking longer than expected (i.e., to work through excess inventory), which recently led us to lower our nearand medium-term oil price forecasts (see Oil Price: Lower and Longer, 24 July), the latter of which, however, is mostly driven by improved capital efficiency. Downstream helps, but as far as upstream is concerned, in a 'world of resource abundance', we continue to prefer those companies with resources that sit on the left side of the cost curve, which allow for more timely value creation and portfolio improvements. With this report, we also increase our EURUSD forecast to 1.20 (from 1.10) which puts a bigger cash burden on those dollar earners that set their dividends in euros (i.e., TOT, Eni, Repsol). Our preferred/Outperform-rated names remain RDS, Galp and BP. We downgrade Eni to Neutral (from Outperform) and Repsol to Underperform (from Neutral) on valuation grounds.