Growth: OFS/E&Ps – Don’t lose conviction in Q4.
Investors are worried that the rally in equity and
commodity markets has gone too fast too far. In Energy,
the key beneficiaries were E&P and Service names and
there has already been profit-taking since late August.
However, we think it is inevitable that Energy markets
tighten and argue that the crossover point when oil
demand is constrained by supply will be sooner than
currently anticipated. We expect E&Ps to be driven by
exploration newsflow and supported by M&A. Oilfield
services (OFS) should rally further over the next 12-18
months, although most of that performance will be
concentrated in 2010, in our view. Top picks: OFS –
Wood Group, SBM; E&Ps - Tullow, Dana and Afren.
Value: Majors’ underperformance too difficult to
ignore. Big cap oils were cheap before the 18% relative
underperformance since March. Now we believe they
are also underowned. While the Q3 numbers won’t
surprise positively, the negative outlook on refining and
gas markets is priced in alongside lower volume
expectations, in our view. The cut by Eni reopened
concerns on the dividends – however, with the
Supermajors focused on lower cost structures, we do
not anticipate any change in policy. There is not yet a
compelling argument for growth (the exceptions being
BG and Galp). However, valuation is increasingly
attractive (trading at 8x 2010 P/E is a 27% discount to
the five-year historical average) and we expect a modest
catch-up relative to the market. BG is our top pick, Total
our preferred Supermajor.
Value: Refining – ‘The hour before dawn’.
Consensus remains overly bearish and disconnected to
an economic recovery. Albeit the conditions in Q3 are
weak, we see limited downside. Saras is our top pick.
Value & Growth: Russia: Rising earnings through
higher crude prices and selective tax advantages should
be supportive. Our top pick is Alliance and for oil price
bulls Rosneft.