Morgan Stanley expects more capex cuts in Oil&Gas, downgrades Rotork

Cuts to capital expenditure budgets in the Oil&Gas space had only just begun and were beginning to filter through from the ‘Upstream’ segment into Mid and Downstream activities, Morgan Stanley said.

There had been about $90bn of recent deferrals announced, the broker pointed out.

Indeed, Morgan Stanley’s proprietary capex tracker was pointing to about a 20% year-on-year fall in mid/downstream spend in 2016 – for the first time ever.

For those reasons, the team of analysts led by Robert J.Davies downgraded its recommendation on shares of Rotork to ‘underweight’ and cut its target to 155p while cautioning clients that shares in capital goods manufacturers were now more exposed to downside risk.

Stocks in the oil services patch were trading at about a 20% discount to their historical troughs on a price-to-book value basis, whereas Morgan Stanley’s engineering universe was still trading on approximately a 55.0% premium.

“CapGoods’ PE valuation have reverted to levels consistent with approximately $100 oil,” Davies and his team said in a research note sent to clients.

Morgan Stanley also reiterated its underweight stance on shares of Alfa Laval, Smiths, and Metso, but remained at equal-weight on IMI, although it reduced its target price to 960p.

The broker also stuck to its equal-weight view on upstream-exposed Weir, highlighting its preference for the shares as compared to IMI, Rotork and Smiths as its earnings revisions had already been much higher – at about 60.0% - and the analyst consensus was already just for 'break-even' for the company’s Oil&Gas margins as opposed to about 20% at the likes of Rotork or Smiths.

“Even if oil rallies we see limited benefits for CapGoods stocks relative to Oil Services.”