With OPEC choosing not to cut quotas, the onus now rests on non-OPEC producers to balance the
market unless there is a strong demand response to soak up the oversupply of c.1.7mb/d through
H1 15. The oil price collapse has triggered a number of capex cuts across the industry, with US
onshore leading the way. We model a 25% fall in the US oil rig count through end-2016, by which
point we see oil production being c.1.4mb/d lower vs initial expectations, which should be enough
to rebalance the market by 2017. We cut our 2015/16/17 Brent forecasts from USD100/90/92/bbl to
USD67.5/75/80/bbl. On average we cut NAVs by c.40% – the stocks are pricing USD65/bbl LT.
* All companies with debt could breach covenants at c.USD50/bbl Brent
We test a variety of scenarios from LT Brent of USD90/bbl down to USD50/bbl; we find that at low
oil prices, every company with covenants (AFR, LUPE, MAU, PMO, TLW) is likely to breach them.
However, these companies have some options that could help them weather the storm – Afren
(down to U/P) is most exposed at USD50/bbl over 2015-17. We believe TLW could meet its
covenants at a flat USD50/bbl oil price scenario until 2017 without cutting its dividend. The stocks
most levered to oil prices are PMO & AFR; the least are Seplat, SOCO and Cairn.
* Bream, Sea Lion don’t make sense at c.USD60/bbl
We believe that Premier should not sanction Bream (USD83/bbl breakeven), and Sea Lion should
again be revisited in 2016 given that the carry arrangement pushes the breakeven to c.USD63/bbl
long term. On this basis we downgrade PMO (=), RKH (-). We believe that operator BG is likely to
slow Ophir’s Tanzania LNG project at current prices. On the flipside, we believe that Sverdrup
(LUPE), Kenya (AOI, TLW) and Uganda (TLW, government permitting) should all be sanctioned.
* Positioned with CF/safety – O/P TLW, CNE, MAU
In a falling oil price environment, the sector should remain under pressure. We position ourselves
in companies with near term cash flow growth, stronger balance sheets: Tullow, Maurel, Cairn.