Oppenheimer energy analysts Fadel Gheit and Luis Amadeo say yes, it is too early to buy shares of energy firms, as most are still priced too high relative to current oil prices.
Gheit and Amadeo explain their perspective in the summary of the report. “The collapse in oil prices triggered a widespread sell-off in energy stocks with an average decline from 12-month highs of more than 36% for the 15 large E&Ps, 27% for the largest six majors and 19% for the largest five independent US refiners. But despite this big correction, we believe energy stocks are currently discounting $85/b oil price and are over-valued at oil prices under $75/b.”
Expect at least 20% capex cuts in energy stocks
The Oppenheimer analysts note that they expect CAPEX cuts of more than 20% across the board from 2014 levels. They project a 10-15% capex reduction for the majors and 20-40% haircut for the E&Ps in an inverse correlation to market cap. Of note, bigger companies typically have less CAPEX flexibility as they invest in multi-year projects that can’t easily be stopped once construction is underway. That said, many large projects still in the early stages are going to be delayed, scaled back or canceled.
Most dividends are safe, barring oil below $40
Fadel and Gheit also argue that dividends are unlikely to be cut, as energy firms will reduce spending and increase borrowing in order to preserve the dividend. Oil company execs understand that cutting the dividend undermines investor confidence in a company, and is is especially damaging to energy stocks. They also highlight that the European majors currently offer the highest dividend yield. ConocoPhillips has the highest yield among U.S. oil majors, then Occidental Petroleum. The analysts also note they anticipate both Exxon Mobil and Chevron will increase their dividend this year.
Industry consolidation likely
As a final note, the Oppenheimer report points out that the oil industry has enjoyed windfall profits over the last four years due to $100+ a barrel oil prices and strong production growth driven by the shale revolution. The analysts believe that while lower oil prices will definitely slow down drilling activity, industry consolidation is also likely, and this will “create stronger companies with lower cost structure more resilient to low prices.”