Why Barclays Downgraded The Oil & Gas E&P Sector

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Thomas Driscoll of Barclays on Wednesday downgraded the U.S. oil and gas E&P large-cap sector to Negative from Neutral while the SMID-cap oil and gas E&P sector is being downgraded to Negative from Positive.

The analyst now sees an average downside to equity price targets of approximately 4 percent for large caps and 15 percent from SMID-caps.

“Investors are discounting crude prices that are approximately 30 percent higher than the current strip,” Driscoll argued in his note. “Despite the continued weakness in crude prices in recent weeks, the market has been slow to re-calibrate commodity price expectations lower.”

Driscoll adds that equity investors are pricing in WTI crude assumptions of close to $75 per barrel in 2016, compared to current strip prices of $57 per barrel. The analyst also notes that an abundance of “relatively cheap” oil supply from U.S. producers could further delay a price recovery.

Bottom line, downside risk outweigh potential gains even if oil prices recover, according to Driscoll.

The analyst downgraded shares of Continental Resources, Inc. CLR, Devon Energy Corp DVN, Kosmos Energy Ltd KOS, Marathon Oil Corporation MRO, RSP Permian Inc RSPP and Whiting Petroleum Corp WLL to Equal-Weight, from Overweight.

Also, the analyst downgraded shares of Cheaspeake Energy Corporation CHK, Halcon Resources Corp HK, Resolute Energy Corp REN and Sandridge Energy Inc. SD to Underweight, from Equal-Weight.

On the other hand, shares of Range Res Corp. RRC were upgraded from Equal-Weight to Overweight.

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Posted In: Analyst ColorDowngradesAnalyst RatingsBarclaysE &PgasOilThomas DriscollWTI Crude
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