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Choose Oil Value Over Momentum? ConocoPhillips, Repsol Hit With Downgrades At Jefferies

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Brent oil prices averaged $33.9/bbl during 1Q16. The prices plunged to a low of $29/bbl in January, but peaked at around $42/bbl in late March. Jefferies’ Jason Gammel said that the reporting season in 1Q16 is likely to be worse than what it was in 4Q15.

Analyst Jason Gammel downgraded the ratings for ConocoPhillips COP and Repsol SA (ADR) REPYY from Hold to Underperform.

Stretched Equity Valuations

Equity valuations of most companies in the oil segment appear stretched, but are likely to go down if “the oil price grinds up with improving fundamentals,” Gammel commented. The option value linked to oil price momentum is expected to be an important driver of stock performances in the near term.


The price target for ConocoPhillips is at $37. The company’s shares are currently trading 27 percent above the price target and at a premium to the sector average.

ConocoPhillips’ growth depends on a significant oil price recovery. The analyst mentioned, however, that although there is capacity for dividend growth by 2018, the company is likely to prioritize balance sheet repair.

The EPS estimates for F2016 and F2017 have been reduced from -$1.82 to -$2.70 and from $0.67 to $0.43, respectively.


The price target is at €9.00. Repsol’s shares are currently trading 21 percent above the price target and at a 14 premium to its IOC peers.
Gammel believes that the premium is unjustified, given Repsol’s high debt levels. Although good progress has been made on recent divestitures, the risk-reward is skewed to the downside.

“There is no dividend policy after the recent 40% cut to the balance of the 2015 dividend,” Gammel mentioned. The EPS estimates for F2016 and F2017 have been raised from €0.46 to €0.53 and from €0.52 to €0.53, respectively.

Apr 2016JefferiesDowngradesHoldUnderperform
Mar 2016Deutsche BankMaintainsBuy
Feb 2016Wolfe ResearchDowngradesOutperformPeer Perform

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