* Initiating coverage of European Oilfield Services: The worst downturn for a generation has seen over USD200bn (>40%) of E&P capex removed from the market, spurred widespread restructuring and tested many balance sheets. But it has also been a force for good – the industry needed to change after decades of poor operational performance. Unlike 2009, this downturn has been sufficiently long to spur behavioural change – a leaner, fitter and more returns-focused industry should emerge. This will take time to be reflected in financial performance but valuations suggest the market is prepared to look well beyond the current eye-of-the-storm.
* Top picks – Petrofac and Wood Group: Today we think the traditional investor playbook for EU OFS will not work; stock selection is far more important. Our preferred plays are Petrofac (retreating to a high-quality core with optionality) and Wood Group (best-in-class early-cycle recovery play, attractively valued). Our least preferred stocks are Subsea 7 (P&L challenges, overly capital intensive), and AMEC Foster Wheeler (recent outperformance excessive, headwinds underestimated). Our forecasts are conservative – 5-10% below consensus – but we believe we are approaching the end of the OFS downgrade cycle. We expect investors to be looking through the trough to 2018.