Topic: AAUC (AA UNION CAPITAL) Investment strategy - Oil due for a bounce

[MelissaLiberson]

Oil has suffered from a major sell-off and volatility has spiked amid mulitple bearish developments. We increasingly think that the drop is excessive and see scope for a tactical rebound.

Views and forecasts

Appendix – AAUC Research Recommendations

Energy top picks



We highlight four of our Energy top picks below.

After BP (BUY) was forced to sell down its asset base in order to pay USD 65 bn in fees and penalties in relation to the Macondo accident, it became a simpler and more focused organization. This ‘shrink to grow’ strategy came to an end when BP bought BHP’s shale assets in the Permian and Eagle Ford, which will give it critical scale in the US shale oil segment and signal its return to a more active portfolio management with acquisitions. Among Big Oils, BP offers an attractive dividend yield (about 6%) and long-term volume growth (targets 5% estimated production CAGR through 2021).

Chevron (CVX, BUY) is now reaping rewards from completing a large investment program and the focus has now shifted to production growth and free cash flow generation, while offering a sustainable dividend yield of almost 4%. In addition to long-lived assets, the company has strong exposure to US shale assets (Permian and Duvernay shale basins), which is expected to drive its growth going forward. CVX targets overall growth of 3.5% through 2022 and expects its shale assets to be about 20% of the total production by 2020. Further, it has initiated a buyback program with a target to buy shares worth USD 3 bn per year going forward (bought shares worth USD 750 m in Q3).

On the back of its strong exposure to the low-cost Marcellus assets, Range Resources (RRC, BUY) targets to achieve strong double-digit production growth (CAGR 13%) on a debt-adjusted per share basis until 2022. Additionally, RRC also benefits from a relatively high share of natural gas liquids (NGL) production (one-third of the total production). We consider RRC uniquely positioned to benefit from the current gas price recovery given its relatively lower hedging levels. Other near-term catalysts could be faster-than-expected deleveraging (supported by the ongoing strength in NGL prices) and management’s focus on raising shareholder returns.

Over the past three years, Repsol (BUY) has done a commendable job in transforming its business and developing a geographically balanced portfolio between Organisation for Economic Co-operation and Development (OECD) countries and non-OECD (no single country in non-OCED now makes up more than 5% of the capital employed). In light of the upcoming IMO 2020 regulation, which is expected to push refining margins for distillates higher, Repsol has one of the best feedstock advantages with a fairly high share of distillate production and the ability to process the heaviest crude oils. Further, it should benefit the most as its downstream refining & marketing business makes up 50% of group profits, which is the largest relative refining exposure among its peers.

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