Jefferies Downgrades Occidental, Upgrades Total And Eni As Integrated Oil Picture Gets Tougher

• Shares of Total SA (ADR) TOT, Eni SpA (ADR) E and Occidental Petroleum Corporation OXY have been under significant pressure over the last 5 trading days.
• Jefferies’ Jason Gammel upgraded the ratings for Total and Eni, while downgrading Occidental.
• Balance sheet strength and ability to combat oil price declines are the overriding concerns for choosing stocks in the integrated oil sector, Gammel stated.

“The integrated oil sector is likely to face another difficult year,” Jason Gammel wrote. He added that the OPEC’s production is flat in a market that is oversupplied by more than 1 mbd. The deceleration in demand growth could be pushed down further by slowing economic activity, while OECD inventories are likely to expand through at least mid-2016.

“It is difficult to envisage a fundamentally bullish scenario for oil in 2016,” Gammel commented. The Brent oil price assumptions have been reduced to $43/bbl from $61/bbl in 2016, to $57.75/bbl from $73/bbl in 2017, and to $71.75/bbl from $81/bbl in 2018.

The analyst expects capex to decline 17 percent in 2016, and the sector to be “relying heavily” on its balance sheet to fund dividends.

In the report Jefferies noted, “The aggregate market capitalization of our IOC universe has declined 7% in 2016 alone and it is down 11% since the OPEC meeting at the start of December 2015 and price to book ratios are at trough levels.”

Gammel added, however, that the sector was still not “an outright Buy,” and investors would consider balance sheet strength and the ability to cope with oil price declines when seeking exposure to stocks in the integrated oil sector.

Total

The rating for Total has been upgraded from Hold to Buy, while the price target remains at €43. Management seems to be “navigating the challenging macro well,” Gammel said. While earnings are showing resilience, operating cost reductions have been effective and disposals continue.

“We believe Total has the flexibility to further dial back capital spending in 2016 to sub-$20b (guidance is $20-21b) while non-oil price linked assets in the Downstream could be divested as gearing remains sub-25% to 2018,” the Jefferies report noted.

Following the recent pressure on Total’s shares, the company “represents one of the lowest risk plays on a future recovery in commodity prices,” the analyst mentioned, while adding that the stock is not expensive, trading at a 7 percent discount to Super Major peers.

The EPS estimates for 2016 and 2017 have been reduced from $4.03 to $2.05 and from $4.98 to $2.99, respectively.

Eni

The rating for Eni has been upgraded from Underperform to Hold, with a price target of €11.50. Since October 2015, Eni’s shares have underperformed peers by about 3 percent, and there is limited downside.

“While we believe this stock is still relatively expensive and expectations remain high (our 2016 estimates are 90% below the consensus), we believe another dividend cut is unlikely. Moreover, given a greater preference for robust balance sheets, we would expect Eni to perform more in line with peers in the coming months,” Gammel stated.

The EPS estimates for 2016 and 2017 have been reduced from €0.39 to €0.02 and from €0.68
to €0.35, respectively.

Occidental

The rating for Occidental has been downgraded from Buy to Hold, with a price target of $69. The company has high leverage to oil price and its valuation appears less attractive following the revised estimates.

“We expect that Oxy will aggressively manage its capital expenditures but nonetheless forecast a cash deficit of $2b in 2016…Reduced capital spending will also inevitably result in lower production growth; we now anticipate that Oxy will generate a rather average production CAGR of 2% from 2015-2020,” Gammel added.

The EPS estimates for 2016 and 2017 have been reduced from $(0.68) to $(1.97) and from $0.32 to $(0.86), respectively.