Barclays Wealth: Oil majors beginning to look ‘more attractive’

Ray Boulger

Barclays Wealth head of equity strategy for Europe William Hobbs says valuations of large integrated oil companies are starting to look attractive, thanks to new areas of growth from the shale gas boom and a possible “pick-up” in operational momentum.

The wealth manager continues to favour exploration and production companies as well as the oil services subsectors of energy, according to Hobbs. However he also points to recent opportunities for investors within large integrated companies such as Shell and Chevron.

He says: “The energy sector has lagged most other areas of the global equities market over the past year, but we still see some attractions for investors.

“We continue to prefer the exploration and production and oil services subsectors, but the large integrated companies have begun to look more attractive on valuation grounds.”

Hobbs acknowledges that the dominant integrated names within the energy sector have “struggled” despite “reasonably stable oil prices”. He adds: ”As companies push into more remote and technically challenging areas, capital-expenditure capex budgets are having to be increased.

“So far, this has not resulted in meaningful production or earnings growth. It is also putting a squeeze on cashflows, with some businesses now struggling to fully cover capex and dividends.”

However Hobbs adds that this issue is “not a new development” for oil companies and should already be priced in, while elsewhere there other promising signs of a  “pick up” in operational momentum and new growth from the shale gas boom.

“Operational momentum may start to pick up as the years of rising capex starts to, perhaps, pay off,” he says. “The shale boom has also opened up new areas of growth and the possible easing of restrictions for foreign companies in emerging markets, such as Mexico, could also support the industry longer term.”

Hobbs also highlights particular risks for exploration and production companies and oil services, as a result of concentrated geographic exposure and discovering new oil fields, and suggests that investors hold some large integrated oil companies as a way of giving stability.

He says: “We would, therefore, recommend investors retain some exposure to the large integrated names. These stocks tend to be more stable, and offer investors an attractive dividend yield.

“For the most part though, energy companies, particularly those more exposed to the oil price, represent one way for investors to insulate portfolios against further uncertainty in the Middle East.”