Big oil’s road back to riches could be a long one, but investors should hold on for the ride, analysts said on Tuesday.
Oil majors and their suppliers have taken a battering as crude prices have tumbled from more than US$100 a barrel late last year to less than US$50.
The likes of BP (LON:BP.) and Royal Dutch Shell (LON:RDSB) have slashed investment and unveiled thousands of job cuts to adjust costs to lower prices, and this ability to cut overheads may at least form part of the rationale behind maintaining decent exposure to the sector's biggies rather than run for the exit.
It looks like a brave call. US shale producers in particular have taken a hit as Middle Eastern oil sheikhs have refused to cut production, sparking a battle for global market dominance.
Industry watchers say the woe is unlikely to end soon as plentiful crude stocks, a firm US dollar and Iranian contributions fuel low prices.
Oil cartel OPEC reportedly may boost output to a record 33 million barrels per day after the West removes sanctions on Iran.
Augustin Eden at Accendo Markets reckons the falls are likely to continue until 2018.
Analyst Chris Beauchamp at spread-betting firm IG said: “Saudi Arabia’s oil production cut seems to be just a symbolic act as the long-running oversupply story comes into focus again.
“This will only intensify as Iranian production hits the market, suggesting energy firms will be at the forefront of any correction in equity prices.”
Cost cuts
Wood Group’s first-half results on Tuesday heralded the start of a string of updates from UK oil services companies likely to highlight the travails facing the industry.
Wood (LON:WG.) posted a 14.3% fall in first-half underlying pre-tax profits to US$156.3mln on a 19.3% fall in revenue to US$3.07bn.
Companies such as Wood, and rivals Lamprell, Amec, Petrofac are all suffering as demand for their services wanes.
Wood chief executive Bob Keiller is pinning hopes on cost cuts, saying there was little prospect of a short-term improvement in tough markets. Its shares fell 10p to 569.5p.
Another IG analyst, David Madden, said: “As long as big energy companies keep slashing their capital expenditure budgets, the price of John Wood’s shares will stay in its downward spiral.”
Analysts at Investec predict “messy” first-half results from Petrofac (LON:PFC) next Tuesday and a 75% fall in half-year operating profits at Hunting (LON:HTG) on Thursday.
They said in a note that markets were starting to bake a ‘lower-for-longer’ scenario into market price expectations.
“We reduce earnings per share forecasts further and lower price targets. We remain cautious on the sector,” Investec said.
Credible and aggressive
But analysts at another broker, Citigroup, were more upbeat about industry prospects. Citi has been cautious on the big oil majors, but said it was changing that view.
It said the so-called “big oil” group’s efforts to restore profits to long-run averages would be a long process, but the efforts had already begun.
Cost saving targets were already running at half of what the industry achieved in previous down-cycles.
Citi said investors should look to maintain “at least benchmark weight” in the Big Oil group, in particular US major Conoco Phillips (NYSE:COP), France’s Total (NYSE:TOT) and Norway’s Statoil (NYSE:STO).
It said all three were embracing self-help measures to restore returns on equity and had three of the most credible and aggressive recovery programmes in place.
The Citigroup analysts said: “Granted, the pathway will be multi-year and the industry faces head-winds over asset impairments, debt downgrades and and possible dividend cuts, but we think the downside looks value-protected.”