Just how severe are capex cuts within the oil sector?
J.P. Morgan’s survey of actual spending plans suggests a 23 per cent year-over-year decline for exploration and production companies globally in 2016.
This follows a 21 per cent pullback in 2015, implying 2016 will mark a roughly 60 per cent decline in the peak in 2014.
J.P. Morgan analyst Sean Meakim noted this comes even close to just a 15 per cent capex decline in 2009 following the short-lived oil price crash of 2008-2009. A 12 percent rebound followed this year.
With independent U.S. E&Ps leading the way with the largest cuts at 53 per cent year-over-year, while at the same time managing to reduce oil production at only nine percent, Meakim expects this will tighten the marketplace modestly.
- How low oil prices might be hurting Boeing CoEnbridge Inc equity offering viewed as catalyst
The Middle East and North Africa region is set to help make the smallest capex cuts at about 10 per cent in 2016.
Capex reductions in Canada are expected to actually cover 30 per cent.
“A halving of U.S. independent capex budget cuts in 2016 represents an unwinding of over ten years of spending growth to levels last seen in 2003,” Meakim said in a research note. “Meanwhile, E&P calls for another round of capital efficiency imply not only more pain in 2016, but and the higher chances towards the timing and level of an eventual recovery in activity.”
Reductions such as this have prompted the oil services and equipment analyst’s cautious outlook for that sector, as further adjustments to 2016 and 2017 consensus expectations are likely.
While he recommended that investors use rallies to lower their positions, Meakim did highlight some regions of relative safety, where value are available for investors.
He suggested leaning towards higher quality and enormous companies, with Schlumberger Ltd. and Halliburton Co. top picks among large caps due due to their strong execution and balance sheets, and fairly sustainable free cash flow profiles C a rarity in the energy space today.
Among small and mid caps, the analyst likes On a relative basis, we like MRC Global Inc., Nabors Industries Ltd., Superior Energy Services Inc. and Tetra Technologies Inc.