Goldman Bets Europe's Oil Stocks Will Shine as Crude Stays Murky

  • Total, Shell and Eni are Goldman’s top picks; avoids Statoil
  • European energy companies reported best cash flow since 2011

OPEC Risks Lower for Longer

European oil producers’ lower capital spending will help the region’s least-loved stocks to a standout performance this year, supported by the best quarterly cash generation in six years, according to Goldman Sachs Group Inc.

“All stars were aligned in the first quarter 2017,” Goldman analysts, including Michele Della Vigna, said in an emailed note. “We expect 2017 to show the industry at its best, as we view the year as a standout on a combination of peak growth and trough capex.”

Even as BP Plc, Royal Dutch Shell Plc, Eni SpA and Total SA reported a jump in first-quarter earnings, beating some of the most optimistic analyst expectations, investors are not yet convinced. Oil’s retreat this year on concern about increasing U.S. output has turned European oil and gas shares into the worst performers in the region in 2017, following a 23 percent rally last year after the OPEC supply cut deal.

“Capital discipline shows that the European majors are adapting to the New Oil Order and are now becoming more efficient and more profitable, despite operating in a lower oil price environment," the analysts said. “Looking into the second quarter, we note that some macro drivers have started to show signs of weakness.”

Falling Brent crude and European gas prices are among the main challenges for second-quarter earnings for the sector, while refining margins and Henry Hub gas prices remain “strong,” according to Goldman. Among major oil companies, Goldman recommends Total, Shell and Eni as top picks and says it’s best to sell Statoil, because it will be impacted the most by lower gas prices.

Investor skepticism has driven the valuation of the Stoxx 600 Oil & Gas to the biggest discount relative to European peers since 2015. The sector is down 1.9 percent this year. 

Oil is heading for its first weekly advance in a month as OPEC and its allies support prolonging output curbs for a further six months, Iraq’s Jabbar Al-Luaibi and Algeria’s Noureddine Boutarfa said Thursday in a joint news conference in Baghdad.

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