Oil and Gas Update: Buckle down for a bumpy ride

Please read below for a summary of the latest Oil & Gas sector research from Exane BNP Paribas

2015 surprised us all… 2016 could as well

2015 was full of surprises. Did many of us really forecast $35/bbl oil by year end or the boom in refining? Many of the consensual views held at the start of the year turned out to be wrong. We believe a combination of negative earnings revisions, a capped oil price and valuations at 20-yr highs relative to the market will make this another tough year for the oil sector. But after the year we have seen it’s healthy to test those views by considering what could surprise us again.

 

Surprise 1: Crude doubles in 2016

We forecast $45/bbl for Brent in 2016 but remain cautious with a bear case of $35/bbl. However, looking back at the most severe corrections in history, in almost all cases after two years of 30% falls, crude rallies big in year 3. We consider the factors that would be needed for a repeat in 2016.

 

Surprise 2: M&A – Time to go big… or go home

Oil majors face a structural dilemma. Diversification has fragmented upstream portfolios while increasingly companies are accepting lower project returns. Could the M&A boom of 1998 repeat itself with companies facing many of the same challenges? If it did, we think majors would need to focus on US shale.

 

Surprise 3: Where did all that LNG go?

It is easy to be bearish LNG. Volumes set to increase by 150mtpa in a market that is forecasted to grow 3-5% per year; you can understand why there are so many bears around. Our detailed work on demand suggests price elastic demand could force the market to tighten much quicker than many anticipate.

 

Surprise 4: Could Wages be cut?

Labour has been a winner with pay growth at 5-10% p.a. hugely outpacing industries with high intellectual capital. Wage cuts are rare and politically difficult, but a reduced level of compensation could add billions to FCF for majors and lower breakevens on offshore projects even further.

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