Oil collapse to result in "painful" 2015/16 for energy services, says Goldman
Shares in the oil and gas service industry took a battering on Friday from comments by US investment bank Goldman Sachs which repeated its ‘cautious’ rating on the sector's European players in light of the collapse in crude prices.
Amec Foster Wheeler
546.50p
17:00 06/10/17
FTSE 100
8,078.86
17:14 25/04/24
FTSE 250
19,601.98
17:09 25/04/24
FTSE 350
4,434.34
17:09 25/04/24
FTSE All-Share
4,387.94
16:49 25/04/24
Oil Equipment, Services & Distribution
4,928.34
16:30 11/04/24
Petrofac Ltd.
23.54p
16:35 25/04/24
Wood Group (John)
148.00p
16:50 25/04/24
On UK-listed energy services stocks, Goldman kept a ‘buy’ rating on Petrofac and Amec Foster Wheeler but downgraded its stance on Wood Group from ‘buy’ to ‘neutral’.
Analysts said they expect “significant cuts” to exploration and production capital expenditure (capex) over 2015 and 2016 following the sharp drop in the oil price.
Brent futures are currently trading around the $60-per-barrel (bbl) mark, a level not seen since May 2009.
Goldman said: “Our analysis suggests the European majors would need to cut capex by 24%/32% at Brent oil prices of $80/70/bbl to achieve a 4.5% free cash flow yield by 2018.”
The bank said in these scenarios, capex reduction would likely happen over several years, as spending probably won’t be slashed by this magnitude in 2015 alone.
“We maintain our ‘cautious’ coverage view on this basis, although we are aware that much of the sector looks inexpensive on asset values,” Goldman said.
“Near-term, however, with US shale the dominant marginal producer in the industry, the European oil service companies are fighting for relevance, with shrinking revenue and too much capacity.”
The bank said that deflation “will be painful” for companies, but will become part of the solution as lower costs and higher efficiency allows projects to compete with US shale.
“The general conditions we would need to become more positive include balance-sheet restructuring, industry capacity reduction, lower consensus earnings estimates and a bottoming in oil prices.”
Petrofac was trading 2.6% lower on Friday morning, while Amec Foster Wheeler fell 1% and Wood Group dropped 4.3%.