Market Overview

Barclays: Oil Bulls 'Need To Be Cautious'

Barclays: Oil Bulls 'Need To Be Cautious'

In a recent report, Barclays analysts gave their updated outlook for the oil industry.

Although analysts see some signs that oil production growth may be slowing faster than previously anticipated, they caution investors in oil, such as owners of the United States Oil Fund LP (ETF) (NYSE: USO).

Falling Capex

Analysts point to falling 2015 capex and production guidance by many oil producers as a major driving force behind slowing production growth.

Barclays is forecasting a drop in oil production growth for the companies in its coverage universe, from 14 percent growth in 2014 to only 8 percent growth in 2015. Capex spending is expected to fall by a third for these companies in 2015, as spending discipline will be the key for many companies in successfully navigating the weak price environment.

According to the report, analysts are predicting that exploration and production (E&P) companies will spend 117 percent of cash flow in 2015 if crude oil averages $50 per barrel, compared to spending of 130 percent of cash flow in 2014.

Falling Service Prices

Analysts believe that plummeting rig counts could soon lead to declining service prices as well. Servicers may have to resort to re-negotiating contracts and lowering rates to incentivize E&P names to continue drilling.

Related Link: Morgan Stanley: Crude Oil Troubles Will Grow


Barclays analysts are less bearish on oil prices now that the 2015 capex picture has become clearer. Analysts are now forecasting a production peak occurring in mid-2015 instead of early 2016 as previously expected.

While this news is certainly a positive for oil investors, analysts believe many E&P names remain overpriced at current levels.

“We believe the stocks discount a price recovery to $80-85/bbl oil, a level that is 30-35 percent higher than the current 2016 strip,” they explain in the report.

Equal Weight Ratings:

  • Denbury Resources Inc. (NYSE: DNR)
  • Linn Energy LLC (NASDAQ: LINE)
  • Rice Energy Inc (NYSE: RICE)
  • Superior Energy Services, Inc. (NYSE: SPN)

Underweight Rating

  • Transocean Partners LLC (NYSE: RIGP)

Overweight Rating


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