UBS | 2015 has seen a sharp decline in oil prices, and we exit the year at around a 7-year low. However, we see reasons to be upbeat – we are certainly more optimistic than we have been for the past 2 years, and more constructive than merely extrapolating from current market conditions. Although oil prices currently look unsustainably low for some operators, we can see a correction under way. Before the end of 2016, we think the oil market may well be balanced and prices could be adjusting significantly higher as a result.
2016 market conditions should continue to see evolution
Natural gas markets are amply supplied currently and require prices to remain competitive to encourage consumption. Evidence suggests that demand does exist however. Refining, while seemingly unlikely to repeat a stellar 2015, looks set to have a robust 2016 unless squeezed by crude. Industry spending looks set to fall again, maintaining pressure on the oilfield services industry but likely extending the period of cyclically low supply capacity growth and resetting industry returns.
Value in Integs; opportunity in E&P; limited value in Refiners; tricky 1H for OFS
Although quite resilient over the last few months of 2015, we see value in Integrateds. For similar reasons we see opportunity in the E&Ps, although we acknowledge a balancing act between value and funding. While we are constructive on 2016E margins we see Refiners as having performed well and largely up with events. We expect OFS to struggle to outperform in 1H amid a continued low oil price and spending pressure, but the group may benefit from investors looking through spending trends to something better in 2H.
