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If the OPEC meeting in Vienna fails to shock oil prices upwards, Deutsche Bank analysts would “feel inclined to downgrade” the investment attractiveness of oil sector stocks to Neutral, according to a new note by Mark Roberts, the German bank’s chief of research and strategy for alternatives.
“OPEC might agree to expand the cut, which would be taken positively by investors,” Roberts said. “Energy equities have not been able to decouple from volatile oil-price movements. The market does not give credit to the fundamental improvements of the companies’ cash flows.”
Despite traditionally high dividends for oil sector investors, current markets require shareholders to review corporate financial records to determine if a company has the resources for payouts, according to Marco Scherer of Deutsche Asset Management.
“Many integrated oil companies are making progress on this front, but only a fraction has achieved satisfactory dividend coverage just yet,” he said. “We are even more selective when it comes to U.S. E&P companies, as they are more prone to oil-price changes and changing financing conditions.”
Superbly productive oilfields are a major pre-requisite for investments in the upstream U.S. oil sector, Scheder added. The consolidation of oilfield services providers has led to the emergence of several well-diversified multinational OFS companies that will be more resilient to oil price changes in the future, he noted.
Related: Kuwait: Deeper Cuts Are On The Table
As drilling activity dried up following the oil price crash of 2014, OFS companies had no choice but to slash their prices, charging much less for rigs, equipment, and services.
Now, drilling in the U.S. is coming back quickly, shifting leverage back in favor of OFS companies, who are starting to hike their prices. According to S&P Global Platts, services costs are expected to rise by about 20 percent on average this year. That could offset some of the efficiency gains that shale drillers are accruing as they improve their drilling techniques.
By Zainab Calcuttawala for Oilprice.com
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Zainab Calcuttawala is an American journalist based in Morocco. She completed her undergraduate coursework at the University of Texas at Austin (Hook’em) and reports on…