We retain our 2010e Brent assumption of
USD75 but see short-term weakness
􀀗 Sector looks undervalued long term but
weak oil prices, cheap US gas and soft
refining margins pose short-term risks
􀀗 We favour defensive plays such as ENI
(OW, TP EUR22). We downgrade BP to N
(from OW) with a 570p TP and Royal
Dutch to UW (from N), TP 1650p/EUR19.
We remain UW(V) Repsol (TP EUR 15).
Our target prices are unchanged
Oil price – short-term risks: As we move out of the US
gasoline season, we see downward pressure on crude prices
over the next two to three months. Middle distillate demand
remains soft and inventories high, leading to weak margins.
Gasoline seems to have supported crude during the summer
but we believe will weaken for the balance of the year. We
see a risk that Brent could fall as low as USD50.
Retain 2010e Brent assumption of USD75: In 2010, we see
rising demand and accelerating non-OPEC decline curves
enabling OPEC to better defend its USD70-USD80 range.
Sector undervalued but faces headwinds: The sector
looks attractive on PE relatives for 2010e, but a recovery in
refining margins and US gas prices is needed to meet HSBC
and consensus forecasts, in our view.
ENI (OW: TP EUR22): Defensive play: We reiterate our
Overweight rating on ENI because of its limited exposure to
US gas and refining. We see its utility division as defensive
and undervalued, something highlighted by shareholder firm
Knight Vinke.
BP: Downgraded to Neutral (TP: 570p). BP is trading at the
top end of its two-year trading range relative to the sector. In
the short term, BP’s above-sector-average exposure to US
gas may cause it to pause for breath.
Repsol: Underweight (V): (TP: EUR15). Optimism over a
potential sale of YPF seems to have obscured the risk Repsol
faces from weak middle distillate margins, in our view.