You Gotta Roll With It

oil futures

BARCLAYS | The oil price has recovered to ~$50/bbl and project execution has been better than we have come to expect from the European E&P sector. Those two points appear to have been enough to see many investors revisit the sector with more forward looking optimism in recent months and increasingly ascribe value to delivery of 2016 operational goals. In response, we have rolled forward our NAVs by one year to the end of 2016 to see of how sector valuations should evolve over the course of H2. The impact on our price targets (still primarily driven by Tangible NAV) and relative rating system is significant. Our new Top Pick is Ophir Energy (replacing DNO) with DNO, Premier Oil (u/g from Equal Weight) and Tullow Oil rounding out our Overweight group. Our revised group of Underweight ratings is Det Norske (d/g from Equal Weight), Genel Energy (d/g from Overweight), Ithaca Energy (d/g from Equal Weight) and Soco International.

Roll forward highlights value creation through the downturn

Moving the discount date for our NAV calculations forward a year to end-2016 from end-2015 is the main driver for an average 11% increase in Core NAVs and 16% increase in Tangible NAVs. The spread of outcomes in broad, reflecting the differing degrees to which companies are able to create equity value through the execution of 2016 activity in a low (but improving) oil price environment. Debt-levered developers Ithaca Energy and Premier Oil see the biggest uplifts in Tangible NAV as key developments progress and minimal capital is invested in pre-development assets. More muted increases (or decreases) can be explained by a mix of continued investment in pre-development assets (Africa Oil, Cairn Energy and Tullow Oil), investment in projects with sub-optimal returns in the current oil price environments (EnQuest) and reduced activity levels (Bowleven, Faroe Petroleum and Soco International).

Valuations re-based

We estimate the sector is pricing in a recovery to $63/bbl. Ophir Energy and DNO continue to trade at the deepest discounts to Tangible NAV (47% and 35%, respectively), a reflection of stock-specific factors that we believe both companies can continue to address over the coming months. Increasing our long-term oil price outlook to $80/bbl would increase our Tangible NAVs by 27% on average. Conversely, assuming $60/would lower our Tangible NAVs by an average of 30%.

Oil price adjustments

We have increased our 2016 Brent forecast 11% to $44/bbl, marking to market for a stronger-than-expected Q2 to date and bringing our H2 assumptions into line with the estimates of the Barclays Research commodity team. We continue to factor in a gradual recovery in oil to $70/bbl from 2018 onwards (unchanged) with our 2017 estimate increased to $57/bbl from $55. We do not expect the improving near-term oil price outlook to materially change E&P companies’ 2016- 17E spending plans given the emphasis on balance sheet strength and capital discipline.

About the Author

The Corner
The Corner has a team of on-the-ground reporters in capital cities ranging from New York to Beijing. Their stories are edited by the teams at the Spanish magazine Consejeros (for members of companies’ boards of directors) and at the stock market news site Consenso Del Mercado (market consensus). They have worked in economics and communication for over 25 years.