EU Integrated Oil 2017 Outlook: Stay bullish
OW BP (AFL), Shell, Statoil; UW ENI, Repsol, OMV
EU Oil’s risk/reward remains positively skewed and we expect
outperformance in 2017 will be led by a secular inflection in cashflows. We
raise our TPs by 7% implying 10% upside for our Buys plus a 5.7% dividend
yield. We highlight three themes in 2017: (1) de-leveraging (we model an
average 120bp ND/CE reduction 2017/16E, taking the sector average to 26%),
(2) improved capital efficiency – we forecast an 8% reduction in sector capex
2017/16E, (3) execution on production growth (JPMe: av. 4.1% growth
2017/16E). Against that backdrop our preferences are as follows:
* Overweight: BP (TP £5.60), Shell (TP £26.00), Statoil (NOK 175) should
outperform by offering the greatest rate of change in cost reduction/gearing,
upstream portfolios with attractive risk/rewards at $60/bbl long term and
adequate affordability to invest in future growth within the confines of
structurally lower gearing.
* Underweight: ENI (TP €13.5), Repsol (TP €13.5), OMV (€30.5) - we
view their asset bases as driving inferior risk/reward profiles, which
together with limited differentiation in cost reduction translates into a more
challenged path to de-gear and mid-ranked CF/share growth.
Look for positive de-coupling from oil in 2017: right for the right reasons
EU Oil’s 10% outperformance vs. the market in Q4 is broadly correlated with
oil moving higher following the OPEC cut late November. Our Post-Launch
Feedback suggests that Long Only Institutions appear generally underweight,
particularly in the US. We believe there is further scope for rotation into Big
Oil from generalist money if company managements can demonstrate capex
discipline, more efficient capital allocation and improved project returns.
History has shown that self-help can drive a positive de-coupling in oil equities
from range bound oil prices (e.g. 2000-03). To us, the burden of proof lies in
the positive trending of CFFO, FCF dividend coverage and gearing.
4Q ideas: Buy BP, STL on macro tailwinds, CFFO, production/execution
4Q earnings season begins with Shell on 2nd February. Improved macro
conditions (oil up 9% q/q, EU gas/refining and Fx) drive JPMe sector earnings
c.40% higher q/q (US terms) and cashflows c.30%. Amongst the majors we
see Statoil and BP as best placed. Macro tailwinds and seasonally strong
production in Norway make us positive on Statoil, while BP should offer
positive upstream momentum through its exposure to stronger Henry Hub
prices (as well as oil) and a reversal of 3Q US GoM downtime. Shell
performed well in 4Q and we remain fundamentally positive for 2017, but
highlight the risk of a pause in momentum with FY’s through both Upstream
and Oil Products. In the midcaps we anticipate a robust quarter for Galp,
taking it comfortably above FY16 EBITDA guidance, set against the risk of
weakening momentum at OMV. Evidence of continued capital discipline
through strategy updates will be a key input.