We remove the Not Rated designation from Vallourec’s shares and reinstate with a Neutral rating, as we see better risk-reward elsewhere. We believe the risk-reward potential for the European oil services sector looks skewed to the upside in the near term should an agreement be announced and implemented at the November 30 OPEC meeting. However, the
medium-term picture for the industry continues to look deflationary, capping any price increases in the OCTG market in which Vallourec operates.
Valuation
Our 12-month price target of €4.5 is based on a target EV/EBITDA multiple of 10.5x (a 27% premium to the historical 2006-14 average of 8.3x) applied to our 2018 estimates.
Key risks
(1) Higher/lower oil prices than expected (Vallourec’s share price has historically been tightly correlated to oil price movements)
(2) a better/worse-than-expected OCTG price recovery, (3) higher/lower-thanexpected plant utilisation levels and (4) balance sheet constraints.