Have Oil Prices Driven E&C Stocks Too Low?

sterne agee Oil Prices ec ratings 1214

With oil prices down nearly 40% for the year, engineering and construction (E&C) firms have also taken a beating because a drop in oil & gas capital spending would directly impact their bottom line. While it’s true that oil & gas majors will need to reassess their asset allocation decisions to account for falling prices, Sterne Agee analysts Michael S. Dudas and Patrick Uotila argue that capex will still grow over the next five years and that E&C stock prices have fallen too low.

“Recent global crude oil pressure is forcing the market to digest updated policies, reassess energy supply/demand balances, and analyze impacts to energy infrastructure investments and regional project economics,” they write. “Energy-sensitive E&C names have succumbed to the energy rout – too much, in our view.”

Oil prices: Sterne Agee analysts still expect oil & gas capex growth

Dudas and Uotila understand that if oil prices don’t rebound then oil & gas firms will have to cut back their spending, but right now they are still forecasting capex growth because the combination of urbanization and a growing global middle class should increase demand. They’ve also already accounted for sub-$80 oil in their most recent price targets, so they only need a modest rebound for those Buy ratings to still make sense. They also argue that North American shale oil will continue to have a reasonable rate of return at low oil prices, despite both being fairly high up the oil production cost curve.

They say that Canadian oil sands will be more affected by the price drop (production of Canadian crude has already been discontinued), and there won’t be as much incentive to build export capacity. Upstream oil development and offshore oil are also at risk, but liquefied natural gas (LNG), petrochemicals and gas processing could even benefit from lower crude prices.

Sterne Agee stands by current E&C stock ratings

Pointing to their existing order backlogs and a steady stream of new orders, alongside the industry trends already mentioned above, Dudas and Uotila reaffirm their Buy ratings for Chicago Bridge & Iron Co (NYSE:CBI), Fluor Corporation (NYSE:FLR), and Jacobs Engineering Group (NYSE:JEC) as well as their Neutral ratings for KBR, INC (NYSE:KBR) and North American Energy Partners Inc (NYSE:NOA). The only question is whether oil prices will stabilize in the $70 – $80 range that they expect.

About the Author

Michael Ide
Michael has a Bachelor's Degree in mathematics and physics from Boston University and Master's Degree in physics from University of California, San Diego. He has worked as an editor and writer for several magazines. Prior to his career in journalism, Michael Worked in the Peace Corps teaching math and science in South Africa.