Set against a backdrop of sharply falling oil prices it is hard not to feel that this reporting season is more likely reflective of a world that, for now, is past than one that is impending. Nevertheless, rear view mirror or not the quarter should provide important indications of the extent to which project starts and cost restraint are beginning to influence cash flow. Overall, with hydrocarbon prices falling by c6% YoY and volume essentially flat we look to a 3% weighted decline in YoY earnings. Disparity amongst the names is, however, meaningful with exposure to R&M for once proving an atypical source of earnings upside. Most likely upside? BG and Total. Most likely downside? ENI and Statoil.
--> Valuation & Risk
--> Valuation & Risk
As to the individual names we see stronger than anticipated production in Brazil as likely driving upside surprise at BG Group (Buy 1400p). Combined with the potential for the removal of significant execution risk as key Brazilian and Australian projects move to cash delivery we remain constructive on the shares. At Total (Buy €55) we believe that both project start-ups and material exposure to European refining also imply upward quarterly earnings risk, with yield (5.6%) offering share price support. By contrast we see scope for disappointment at Statoil (Buy NOK 195) given a potential high exploration write-off and the guided deferral of NCS gas volumes to later quarters. ENI’s exposure to challenging Italian gas markets (Buy €22) in a faltering economy advises similar caution. Our target prices, which assume $103/bbl 2015 Brent, target an 11x 2015E PE multiple, the key risk being sustained lower oil pricing.