Analysts say the decade of rising oil prices is over
Oil companies dipped as Goldman Sachs came out with a downbeat note on the sector, saying the past decade of escalating oil prices was all but over.
The analysts wrote:
European integrated oils have undergone a period of falling returns and deteriorating free cash flow, despite rising oil prices. As we now expect the decade-long rise in oil prices to come to an end owing to a revival of non-OPEC supply led by shale oil, this deterioration is likely to accelerate, in our view.
They estimate the industry needs the average oil price to top $110 a barrel in order to fund dividends and capital expenditure out of cash flow from existing businesses. As a result, they cut their view on the entire sector to ‘cautious’, from ‘attractive’, concluding that: “Only material exploration success or shale oil with scale can lift big oils out of their difficulties in our view.”
Within the sector, the analysts downgraded Shell to ‘sell’, sending the shares down 1.2% to £22.05.
Shell has almost fully delivered on its big three projects, bringing to a close the investment cycle started in 2006, and starting a new one. This new cycle will be more capital intensive and will likely lead to lower returns.
They said BG Group remained the clear winner in the sector and reiterated their ‘conviction buy’ recommendation. The shares inched lower, down 0.2% at £13.42.
BG continues to screen as a key industrial winner, given 160% cash flow uplift over the next five years, a low decline production base and exposure to a tightening LNG market on our estimates.