Jefferies downgrades Tullow, EnQuest and upgrades Premier on new oil forecasts

Jefferies took a lathe to its target prices for most oil companies on Tuesday, including downgrading EnQuest and Tullow Oil, but kept a host of 'buy' ratings for growth stories such as Cairn Energy, Faroe Petroleum and newly upgraded Premier Oil.

The bank's average Brent crude oil price calculations were cut to $52 per barrel for 2017, from $55; to $57 for 2018 from $64; to $60 for 2019 from $67; to $65 from $70 for 2020; and to $65 from $70 for the "long term".

While analysts estimate that a "very modest under-supply" will persist through into 2018, inventories are unlikely to return to the five-year average levels "any time soon" -- and an expiration of OPEC’s production cuts looms in a "slow" market.

"While the market appears to be more than adequately supplied in the near term, we do expect that depleting proved developed reserves, and (eventually) shrinking spare capacity, support our rising longer-term price assumption."

Reviewing the international exploration and production stocks under their coverage, analysts said NAVs were reduced by 15% on average based on the long term price, with Lundin Petroleum and Aker BP maintained as 'anchor' recommendations on the Norway story, but Premier Oil upgraded to 'buy' from 'hold' as its improvement in fortunes is seen as accelerating, with a 32% increase in the target price to 90p per share.

"We are more confident in Premier's ability to move its growth projects forward and de-lever the balance sheet. The crucial contrast here to other levered UK peers is that PMO's debt refinancing, while protracted and dilutive during the process, is now complete. Secondly, Catcher field ramp-up is ahead as a catalyst and the Mexico Zama discovery appears simply world class at ~600mmb of oil after just one well."

EnQuest, with a target price cut to 30p from 64p, has "one of the most material deleveraging potentials" among the highly indebted UK explorer-producer cabal, with Kraken's performance disappointing to drive a material 2017 production downgrade.

"Taking into account natural declines and summer maintance at EnQuest’s other fields, at the low point the new guidance range could potentially imply immaterial contribution from Kraken in 2H17 (albeit somewhat offset by a reduced FPSO lease rate)."

Tullow Oil's downgrade, with a target price slashed to 155p from 250p, follows one $750m rights issue and two oi price deck changes, which have "offset most of the positives" analysts were looking for earlier this year.

While Tullow's operations are seen as being on a stable footing, "we cannot escape the question of just how 'clean' the resolution of the TEN field border dispute will be and/or if any further dilution will be associated with the full
debt refinancing."

A common thread analysts see through the Faroe, Cairn and Kosmos Energy "is they all maintained balance sheet discipline and/or monetized assets in the past 'high' oil price/capex cycle", with 'buy' ratings retained on all three as they embarking on new growth phases.

Cairn's price target was cut to 225p due to the phasing size of its SNE field off Senegal and Kraken field ramp-up.

As for the majors, after the revision of the Brent price deck, Jefferies continues to prioritise those stocks offering the highest 2018 expected free cash flow yields (OMV and Royal Dutch Shell) as well as the stocks offering the greatest swing in FCF generation over the coming 12-18 months (Eni, Chevron and Conoco), while the least preferred remain Statoil and Repsol where analysts expect FCF yields to compress the most in 2018 relative to 2017.