Oils under the cosh as crude price retreats
After yesterday's oil price jump, a retreat among oil producers was to be expected today but several sector plays remain on analysts' buy lists
Crude enjoyed a big surge yesterday gaining US$3.85 or 8% in one session—fuelled by greenback weakness, a Dow Jones recovery and hopes of stimulus news from China—to broach the US$46.0 per barrel mark not seen since late January.
“The short term trend is bullish,” a crude report from ODL Securities said today, before adding that “the medium term trend is sideways and the long term trend is bearish.”
Analysts at Goldman Sachs said yesterday that they remain structurally bullish on the oil price and expect non-OPEC production to enter structural decline in 2010. According to the broker’s analysis, production growth will be a rare commodity in the coming years as “companies suffer from the low level of final investment decisions in the 2007-2009 period.”
Production growth at Royal Dutch Shell, however, shares in which jumped over 6% yesterday, will be the exception, Goldman Sachs predicts.
Shell benefits from a portfolio of new projects that is profitable, come at relatively low risk, and gives sector-leading cash flow in all time horizons, the broker said as it repeated its Buy advice and 2,500p price target.
In today’s downward market, Shell shares were 0.9% weaker, while its fellow heavyweight BP slipped 1.9% and Cairn Energy and BG Group lost 2.4% and 2.8%, respectively.
BP was yesterday praised by a number of analysts for its high yield, which would remain above 9% even if it were to freeze its dividend policy, as recently suggested. Today UBS reiterated the oil & gas stock as a member of its ‘Most Preferred list.’ The broker has a 600p target on the stock, implying 48% upside, and said the group is the best placed to weather the current sector conditions.
Among oil services, UBS prefers John Wood Group, which trades at a large discount to peers. The broker believes that there is little risk to the group’s financial stability, given relatively low debt, a substantial cash balance, a good track record, and relatively long maturities of existing facilities, hence its Buy recommendation and 260p target price.
Analysts at FinnCap disagree: their favoured play within the oil services sector is Hunting, although the group's shares were also dragged down with the rest of the sector Thursday afternoon, easing 0.6% in closing deals.
On a less positive note, Petrofac has been singled out as one of UBS’s least preferred issues. The stock, which the broker rates Neutral with a target price implying 12% downside at 390p, is valued at a level that generously accounts for its earnings outlook that is better than peers’ and low balance sheet risk. UBS also believes cash flows from the Don field due to start up in the first half of 2009 could disappoint.
Wood Group and Petrofac were each down 3.2% and 2.3% on London’s mid-cap index, while WTI oil fell back US$1.5 to $43.9 in early US deals.
