* Sector is highly levered to the oil price…
Oil prices have sold off sharply following the OPEC decision on
November 27 to maintain its production target at 30 mn bbl/d. With Brent
spot prices now below US$75/bl, we expect greater focus on capital
discipline, and more pressure on capex budgets. Share prices in the
European Oil Services sector have a strong correlation with the Brent oil
price (54% R-squared since 2007).
* … and is still trading 15% above trough EV/GCI levels
The sector is currently trading at around 0.77x 12-month forward EV/GCI,
which remains at a 15% premium to the average EV/GCI in the sector in
2003, which we view as the last prolonged downturn in the sector. We
remain Cautious on the sector outlook, although we are aware that some
companies are already trading well below asset support levels.
* Avoid operationally and financially levered companies
In an environment characterized by overcapacity and a falling oil price, we
would continue to avoid the financially and operationally levered oil
services companies. The fundamentals for the capital-intensive offshore
segments (seismic, drilling, subsea construction) remain very challenged in
our view, and in a scenario where the demand environment remains weak
for a sustained period of time, it is among these companies that we see the
highest risk of balance-sheet distress. We adjust some earnings estimates;
our EPS for 2015 and 2016 estimates are 12%/19% below Reuters
consensus in aggregate across the sector.
* Remain Sell rated on TGS Nopec, Technip; Vallourec down to Sell
We remain CL-Sell on TGS Nopec as we see a significant slowdown in
demand driving weaker earnings. For Technip (Sell), we see weak order
intake and pressure on pricing leading to a fall in earnings from 2016. We
downgrade Vallourec to Sell as we see slowing demand and pricing
pressure in the OCTG market and our 2015 EPS estimate moves to 31%
below Reuters consensus.