Integrated Oils
SECTOR REVIEW
The reality of lower oil prices
Lowering oil prices: We are lowering our oil price forecasts. 2009E WTI
moves to $50/bbl (from $60/bbl); 2010E moves to $60/bbl (from $80/bbl); 2011
moves to $70/bbl (from $100/bbl). $70/bbl is also now our mid-cycle oil price
estimate. We have published a report entitled “Oil Market REBOOT – The Three
Step Program” and this provides more details on these assumption changes.
Earnings changes: We lower integrated oil US$ EPS by 27% in 2009E, 30% in
2010E, and 32% in 2011E. On average, group earnings fall 61% YoY in 2009E.
Within the integrated oil group, HES and COP have the greatest YoY EPS falls,
down over 70%. BG is the most resilient, down 40% YoY.
Sector cash cycle under pressure: Our earnings changes assume a c.20%
reduction in upstream costs in 2009, and a further 10% reduction in 2010.
Despite this, the sector is deeply underwater on its cash cycle. We estimate that
the sector will generate negative free cash of $56bn in 2009, and a further
negative $25bn in 2010. Sector gearing (net debt to equity) rises to 27% in 2009,
and 30% in 2010. OMV, REP and COP see their gearing rise over 45% in 2009,
while RDS sees gearing rise from 6% to 30% in 2010 after c.$30bn of debt
raising. RDS, CVX, STL and REP remain materially cash flow negative through
2012 on our forecasts.
Questioning the strategic ascent of cost curve: The absence of a v-shaped
recovery in our new oil price estimates is a material shift, and raises questions
over the recent decision by some Integrated Oils to climb up the supply cost
curve in search of new upstream opportunities. Oil sands, very tight gas, and
GTL are all much less central to our new view of the world’s medium term
hydrocarbon supply needs. We argue that Statoil, RDS and TOT in Europe, and
COP in the US have most obviously embraced a v-shape recovery in
commodity prices, and are more exposed strategically.
Stock recommendations: We remain cautious on the Integrated oil group, and
have lowered group target prices by an average of 11% on the back of these
changes to earnings estimates. Although the dividend and buyback support has
been a positive relative attribute in a tough equity market, the sector’s payout is
unsustainable in a sub-$70 oil world. Big Oil has provided a much-needed safe
haven in the storm, but is now exhibiting negative earnings momentum (we are
now 24% below consensus on 2009 EPS), high risks to volume growth, and
strategies which appear inflexible to low oil prices. This haven looks highly
vulnerable to any stabilization in the equity market. Our key Underweight stocks
are STL (Underperform NKr90 TP), RDS (Underperform 1420p TP) and TOT
(Underperform