Interesting convergence of events this week. Perhaps the most significant was the CAPEX cut by Anadarko, one of the best capitalised US E&Ps, essentially showing that the lower oil price is starting to bite.
Importantly for the sector, which is usually rewarded for growth, Anadarko rallied yesterday, which may nudge others to show some discipline and follow suit. The implication is that US production isn’t a one way bet.
This comes at a time where we should be getting support from a weaker dollar, are seeing material draws (admittedly helped by seasonality), and Baker Hughes talking to the rig count levelling off and probably dropping should oil stay below 50 USD.
The SXEP is the worst performing sector YTD, having accelerated over the last few weeks as a few notable bulls have thrown in the towel and long term oil forecasts drop into the mid 50’s. Given the news flow this looks a decent time to be picking up some oils.
We note that TLW is being rewarded for solid figures http://monacoalpha.com/ideas/monaco-alpha-buy-tullow-oil/ we are +9.84% on the trade and stick with it as we see think the data later will be solid and there will be some upgraded numbers tomorrow.
We reiterate and are happy to initiate a BUY on oil leveraged ENI into numbers friday, we are -5.4% on the trade.
CHEAP AND GEARED TO THE UPSIDE IN THE OIL PRICE
Tuesday • 28 February 2017 • 16:10
We are initiating a buy into numbers tomorrow. We expect numbers to be good as production has gone up and the oil price has rallied. We could also have the addition kicker as they may cut capex guidance, which would be an unexpected positive.
From a more medium term view we still like oil here and think the mkt and CB’s are running behind inflation so like oils as an inflation hedge.
ENI is coming out of one of its worst periods ever in a position now where capex has been rationalised better and they are starting to bear the fruits of some of their investments. FCF picks up materially in Q4/next year, so div covered between 50 and 55 USD.
Most other majors are having to buy barrels now however ENI have a good pipeline and so have material exposure vs the sector to upside in the oil price. Recently they have not joined in the rally due to the Italian macro hangover.
It is cheap vs the sector and we use this under performance to open a position. BUY.