Our top picks are BG/Royal Dutch Shell, Eni and GALP. Although not a top pick we are upgrading Total to Buy after the sell-off. Our absolute driven recommendations are now heavily weighted to Buy as we approach the bottom of the cycle. We are cutting OMV to Sell after its strong relative run places it on a stretched valuation.
Cutting oil price and gas price forecasts
We have cut our oil price forecast for the period 2016-19 and our LT normalised view to $75/bbl from $80/bbl. Near term forecasts reflect the sharp drop in prices in late 2015/early 2016 meaning recovery, which we expect to begin in 1H 2016, is formed from a lower base. The cut to the long-term price reflects more cost reduction than previously expected, pushing the cost curve down, but is mirrored in our company forecasts and hence has a negligible earnings effect. Our forecasts also include a lower Henry Hub view, reduced international gas pricing (primarily oil linked) but continued robust refining margins. The ferocity of this cycle will dissuade any company management from attempting to finesse their response and we anticipate another round of material cost cutting and capex reductions at 4Q which ultimately will address many of the performance and strategic issues which dogged the sector at >$100/bbl.
Summary of UBS Macro Forecasts