Published: June 7 2007 03:00 | Last updated: June 7 2007 03:00
European oil stocks may be about to outperform as earnings momentum turns, says Nick Nelson at UBS.
“There have been fewer earnings upgrades for the oil sector than the wider market over the last year. But there are now signs this may be changing. We saw a similar event in June 2006 in the telecoms sector when relative earnings momentum turned positive, and it was one of the best performing sectors in the second half.
“We see four near-term supports for oils. First, we suspect we are past the peak of dollar weakness [now down just 4 per cent year on year versus the euro]. Second, valuations are attractive [the price/earnings relative to the market is 79 per cent, close to a 17 year low]. Third, balance sheets appear underleveraged. Fourth, the European oils have underperformed the US oils by 23 per cent over the last two years. The price relative of European oils is back down to where it was three years ago when oil was at $30 a barrel.”
Mr Nelson notes that in the recent first-quarter reporting season, more oil companies beat earnings estimates than missed them for the first time in a year. “Assuming the oil price stays at the current level [Brent oil is around $70 a barrel], that suggests we would start seeing absolute upgrades to oil sector earnings per share over the summer,” he says. Three particular stocks highlighted by UBS are Total, Royal Dutch Shell and BP.
Copyright The Financial Times Limited 2007
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