Industry Trend Analysis - Oil Equities Face Blip Before Bounce Back - MAR 2018

BMI View: E xploration & P roduction and Oilfield Service equities have seen a recovery since November, but still lag oil price and S&P500 gains over the past year . Although this oil equity comeback has room to run over the medium term , we believe weaker oil prices in Q1 will limit the recovery prior to a stronger mid-year.

Low oil prices and souring sentiment towards oil equities has resulted in underperformance of oil companies versus the S&P 500 index over recent years. Oil prices, a major driver of oil company stock prices, have recovered more than 50%, since mid-June, when WTI hit its annual low of around USD42.5/bbl, supporting a recent surge in equity valuations.

Normalising data from January 17th 2017 (one year ago), the S&P 500 has risen by 22.8%. WTI has now recovered by a similar magnitude having increased 22.5% over the same period. However, US oil stocks remain behind the trend, perhaps surprising given companies have been assuring improved shareholder returns, consensus expects strong oil production growth from the US lower 48 in 2018, and oil prices are currently at a level that supports this ( see ' Brighter Market To Boost Shareholder Returns ' , December 7 2017).

More Upside For Oil Stocks, Especially OFS
S&P 500, E&P Index, OFS Index & WTI - Normalised from January 17 2017
Source: Bloomberg, BMI

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