--> 2013 performance was poor but provided a good entry point
--> We downgrade DNO to UW(V) from N(V); upgrade both Genel Energy and Tullow Oil to OW(V) from N(V)
--> Our key pick for 2014 remains Ophir Energy
2014 outlook
2013 proved to be another poor year for the sector as more of the froth was removed from share prices after a relatively disappointing year with the drill bit. We believe this now provides a great entry point for investors with the shares discounting little in the way of exploration upside. 2014 is
set to be an exciting year with many high-impact wells being drilled. A modicum of success could revive interest in this out-of-favour sector.
We amend our target prices predominantly on the back of our new pricing deck where we increase our 2014e Brent price to USD100/bbl (from USD91/bbl), whilst 2015e is now USD95/bbl (from USD92/bbl) and this is increased by 1% per annum thereafter. We also review the exploration programmes for the next 12 months. Additionally, we believe that progress is being made in the Kurdistan Region
of Iraq (KRI), and so we reduce the discount we apply to assets in this region to our tradition 30% from 50%.
We review our ratings on the sector. We downgrade DNO International to Underweight (V) from Neutral (V) after a strong performance with the shares rising by 160%. Conversely, we increase our rating on Genel Energy to Overweight (V) from Neutral (V) with the reduction in discount of KRI assets. We also raise Tullow Oil to Overweight (V) from Neutral (V) on the back of the share price decline.
Our key pick for the year is Ophir Energy, which has the most exciting drilling campaign in our coverage universe. Our other key picks for the year are Cairn Energy, Genel Energy, Kosmos Energy, Petroceltic International, Salamander Energy and WesternZagros Resources.