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FTSE falls as BP slides but Hikma lifted by cost saving hopes

Discussion in 'Market News' started by Lily, Feb 2, 2016.

  1. Lily

    Lily Forum Member

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    Crude continues to fall on worries about global economy and oversupply

    With crude continuing to fall and a $6.5bn loss and job cuts at BP, resource companies are leading the market lower again.

    Fears about a global slowdown have re-emerged, with disappointing manufacturing data on Monday from China, Europe and the US. That has helped push oil prices lower again, as has the lack of any progress from Opec and others on cutting production to stem the supply glut.

    We maintain a reduce rating for the following reasons: 1) we see the valuation risk-reward on a mid-cycle oil price range of $60-$70 a barrel as not particularly compelling (downside of 40% versus upside of 15%) in the context of weaker near-term prices and our bearish industry outlook...; 2) the high reinvestment risk and large contribution of East Africa to our net asset value (94p on $60 a barrel); and 3) the perception that reducing the debt balance (around $4.9bn for 2016 on $30 a barrel) will squeeze equity value as investments are reduced or deferred.

    Short-term, the focus remains on managing the balance sheet. Our estimates suggest that debt covenants will come under pressure through 2016 with net debt at 5-6 times EBITDAX [earnings before interest, taxes, depreciation, amortization and exploration] assuming $30-40 a barrel, even with the benefits of around $600m hedging gain. Although we expect lending banks to be flexible through 2016/17, we see cost reduction, the delivery of first oil at TEN [offshore Ghana] and asset sales as necessary to deleverage meaningfully in the near term.

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