Barclays downgrades Premier Oil, Cairn Energy

Barclays has downgraded Cairn Energy and Premier Oil and initiated on Faroe Petroleum with a neutral stance as it believes the trio are eclipsed by other stocks in the sector that currently offer a more attractive valuations.

Cairn Energy is lowered to 'underweight' from 'equalweight', with a target price of 170p; Premier is moved to 'equalweight' from 'overweight', with a target of 90p; while Faroe Petroleum is given an 'equalweight' recommendation and a 75p TP.

Cairn’s investment case should not be closely linked to immediate oil prices as its production is more than a year off, but is finely balanced after exploration success in Senegal has been offset by an escalation in its tax dispute in India.

“The quality of its Senegal acreage position and relatively strong financial position gives reason for optimism, but we believe this is counterbalanced by execution risks in the North Sea developments and to a lesser extent the ongoing Indian tax dispute.”

Enthusiasm about the long term potential of the portfolio is overridden by a feeling that other stocks currently offer a more attractive valuation and greater scope to benefit from a gradual recovery in oil prices.

Likewise, on Faroe Petroleum, Barclays says management offer a strong “consistent and conservative” strategy, offering investors steady profitable production, meaningful exposure to exploration and negligible funding concerns, which offers continued appeal though the current period of uncertainty.

However, again, analysts believe greater exposure to an improving oil price outlook lies elsewhere in the sector.

Premier is one of these but it has been left with considerably more debt than planned which creates operational risks and puts a high sensitivity of its investment case to oil price volatility and the initial performance of the Solan field.

The debt itself “is not the overriding problem”, Barclays said, as maturities are favourable, the company has a stable level of production and consistent hedging strategy that means it “can navigate a prolonged sector downturn”.

While Barclays is comfortable in Premier’s capacity to pay off debt and develop its projects, with the stock primed to benefit from the gradual anticipated oil price recovery through 2016, the bank sees more compelling investment opportunities elsewhere.