Icap have put out a rather bearish note on European integrated oil companies, many of which are reporting full-year results this week and next. Average EPS forecasts for the sector are 8 per cent and 16 per cent below consensus for 2010 and 2011, respectively. But while they think the environment is picking up for many factors, including refining, relative to 2009, they see problems with gas prices, gearing levels, a lack of big M&A opportunities, and – interestingly – Iran.
Moreover, they say, many integrateds are not managing to benefit from rising oil prices:
Here’s Icap’s top five factors:
That the macro background for oil and gas prices and refining margins should be better than in 2009 but that gas prices and refining margins are likely to be well below historic norms. We see price risk to all our macro forecasts to the downside with the important caveat that Iran could become a major driver to oil prices over the nuclear issue but probably not before H2 2010 at the earliest.
Balance sheets took the strain of the weak macro environment during 2009, consequently gearing (net debt/total capital) increased by approximately 8% across the group to 25% making balance sheet considerations much more important from an investor point of view as this level of gearing is already impacting dividend paying capacity and may threaten investment plans, particularly if the macro environment proves weaker than we forecast.
The industrial background, meaning access to high value resources, cost outlook, etc, remains difficult and growth generally remains weak, although better than for 2009.
M&A activity will pick up but we do not expect mega mergers between the integrateds which means they are more likely to be acquirers of companies/assets and will face significant competition from the internationalising National Oils Companies (INOCs) which amounts to a potential negative for sector investment performance.
Multiple valuations are relatively low and dividend yields reasonable relative to markets; dividend support is likely to be key to sector performance.
On the likelihood of an oil market disruption relating to Iran, they discuss a possible risk of US sanctions – but conclude a watch-and-wait approach is suitable for now. They also allude to the lesser threat of an Israeli strike on Iran, something they discount as the US appears to be unsupportive.
A Q4 refining headache for the oil majors (FT Alphaville)