Oil prices have bottomed out, but JPMorgan still cautious

The significant downside risk facing oil companies has now passed, according to JPMorgan Cazenove, though exploration and production (E&P) businesses still face a "bumpy path".

In its review of the European E&P sector, the broker has downgraded Soco International from 'neutral' to 'underweight', causing shares in the UK outfit to drop on Tuesday.

"We believe we have seen the bottom in the oil price and hence some of the more extreme downside risk has passed. However, we remain conscious of relatively stretched balance sheets and lower than expected cash generation and returns in a $60-70 oil price world," said analyst James Thompson.

He said that this price range is a "grey area" for E&Ps - while prices are high enough to make profitable returns on current producing assets, they may not be not high enough to warrant the risks associated with signing off on new developments.

Thompson said he has a 'neutral' stance on the sector as a whole with a "slight positive skew" due to discounted stock valuations and a rising oil price outlook, albeit a gradual one.

As for Soco, the shares have rallied strongly in recent months and are now trading above JPMorgan's new core net asset value estimate, which has been cut due to reserve downgrades in Vietnam. "Hence, risk appears skewed to the downside," Thompson said.

The broker has slashed its target price for the shares from 285p to just 168p after rolling forward its valuation to next year's forecasts.

Soco's stock was down 2.6% at 185.17p by 09:31. Elsewhere, JPMorgan also dropped its price objective on shares of Tullow Oil from 425p to 424p with a “neutral” rating on the stock. The bank's price objective would indicate a potential upside of 2.19% from the company’s current price.