Energy stocks are holding up relative to the broader market picture, says Jens Zimmermann, equity analyst at ABN Amro. Steady production coupled with wider geopolitical issues means energy companies are beginning to look undervalued. New research from ABN Amro shows recommendations to buy underweight companies in both the exploration and production and oilfield services fields.
“Oil prices continued to gain despite OPEC’s decision not to cut production quotas further at their meeting on Sunday. The last thing the cartel wants is to be blamed for exacerbating the global recession and OPEC’s compliance of 80% with its previous 4.2 million bbs/day output cut still leaves more room for supply tightening,” explains Zimmermann.
“Meanwhile additional support for the oil price comes from a stabilising US gasoline demand, a weakening US dollar and further attacks on pipelines in Nigeria – which shut 11,500 bbs per day of Chevron’s production.”
Oil is indeed pushing towards the upper end of its long-term trading range, and is putting pressure on the short-term resistance at US$51.18. If this resistance is broken, Zimmermann asserts that the picture improves even further and the oil price could continue its upward trend.
Big oil focus
“Integrated oil companies should be able to achieve their twin goal of maintaining dividend payments and capital expenditure plans even in a low price environment this year,” says Zimmermann.
For most IOCs the sum of dividend and capex payments is projected to be less than their operating cash flow, meaning they can fund dividends and capex by their own financial means.
“Furthermore, intergrated oils look undervalued at the moment because their share price seems to reflect a worst-case scenario of no oil price recovery above $60 a barrel until 2010,” attests Zimmermann.
The research note puts oilfield service companies Halliburton and Saipem on the buy list, along with CNOOC and Royal Dutch Shell and Petrochina from the integrated oils category.
