Re-rating for Europe oil majors
Europe oil majors are big laggards among global peers. We believe concerns over their dividend and green policies, which are the main reasons for their underperformance, should start to ease. With rising oil prices and Energy being a major sector weight in Europe, global investors may start to look at this Value sector positively, as they turn increasingly positive in Europe, leading to its re-rating.
Strong 1Q results. 1Q21 results for major companies in the sector were very strong and showed signs of sustainable improvement in their operations. Notably, Gas and Marketing divisions showed strong recovery and as global economies start to reopen fully, we expect the recovery to continue. For instance, motor gasoline demand in the US is about 90% back to pre-crisis levels. Meanwhile, these companies have also demonstrated confidence to resume their dividends and share buyback programmes as cashflow generation was strong. Ongoing upstream projects delivery, cost restructuring such as deleveraging, and improving efficiency to a lower breakeven cost of around USD40.00-45.00 should see the companies on a sustainable recovery. Share buybacks, combined with dividends, could lead to total cash returns for shareholders of around 8-10% yield in the coming years.
Green vision. These European big oil companies have also reiterated their strategic visions to achieve net zero greenhouse gas emissions target by 2050 – a global target by all regions including China, the US, and Europe. However, it is a legally binding target in most European countries such as Sweden, the UK, Denmark, and France, and hence the urgency for the European oil majors to stay consistent on this path. The main focus is on reducing the carbon intensity of their products and to build an integrated portfolio of low carbon technologies of renewables, electrification, and biofuels mix. We believe environmental, social, and governance investors will still be attracted to the sector.
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