Earnings upgrade cycle starts as Big Oils move into the Age of Free Cash Flow
We believe Big Oils are entering the Age of Free Cash Flow, as a new industry structure emerges and Seven Sisters again dominate complex global developments. This should allow Big Oils to re-employ capital at double-digit returns and foster
structural cost deflation. We expect European Big Oils to generate the strongest free cash flow in over a decade in 2018 and deliver a 3% volume CAGR to 2021, allowing for full cash coverage of capex and dividends from 4Q17 and excess free cash flow thereafter. Earnings are expected to lag free cash flow, as depreciation reflects inflated historical costs. However, we think the sector is entering a positive earnings-revision cycle, with 16% median upside to 2018E consensus EPS, supported by the end of share dilution through scrip dividends and the start of a new buyback cycle. Inside we update our earnings estimates, increasing our 12-month PTs by 5% on average. Top picks: Buy TOTAL (on CL), RDShell and ENI; Sell Statoil.
Our 2018E EPS are 16% above Bloomberg consensus on average, with the 2018E Brent oil price in line with the forward curve at c.US$62/bl
We have updated our estimates to reflect the latest news flow and our new Brent oil price forecasts (c.US$62/bl, c.US$60/bl and c.US$55/bl in 2018/19/20E), resulting in EPS changes of +6%, +15% and +11% in 2017/18/19E on average for European Big Oils. While our 2018E Brent oil price is in line with the forward curve, our 2018E EPS are on aggregate 16% above consensus, providing strong support for a positive earnings revision cycle after strong negative earnings revisions in the first half of 2017. On our estimate changes, we raise our 12-month price targets by 5% on average.
Top picks: Buy TOTAL (on CL), RDShell and ENI; Sell Statoil
We think TOTAL offers strong cash flow generation (8-9% 2018-21E FCF yield) and high growth (5% production CAGR to 2021E). RDShell offers the strongest cash return to shareholders on our estimates, with a 6% dividend yield fully paid in cash and an incremental 3% pa buyback. ENI is transforming into a higher-return business, driven by exploration success, disposals and a strong pipeline of project start-ups. We are Sell rated on Statoil, on a more expensive valuation and lack of major project start-ups in 2018.