Volatile oil prices, rising inflation, slowing emerging markets, and geopolitical tension have left investors hesitant to make moves in the oil market. But some analysts are confident that oil companies are in a strong position moving forward.
Nomura has a “buy” rating on Fugro, PGS, and Seadrill. Christyan Malek, a Nomura analyst, told CNBC that these companies stand out because they have the “best-in-class” assets. They also efficiently manage inflation pressures.
Malek stressed the need for oil companies to have the top technology and innovation in order to save money and maximize return. He favors oil companies that invest in strong project managers. “It doesn’t come cheap, but they are the ones who will put the key into the ignition and deliver the projects,” he said.
Shell is one of Malek’s top picks: “Shell is a company that has really managed to project engineer excellence, manage those costs, and deliver cash consistently,” he said.
On the services side, Malek cited Saipem and AMEC as companies that have “managed to understand the inflation, keep resource, and maintain efficiency,” he said.
Nomura’s least preferred oil stocks are CGGVeritas, TGS, and Weir Group.
Despite growth in the sector, oil price volatility has left many investors concerned. How will rising geopolitical tension in the Middle East impact oil prices?
To calculate the impact, the oil price must be broken into Middle East premium and marginal cost of production. Malek estimated that the proportional percentage of Middle East premium is somewhere between 5 percent and 10 percent.
Nomura’s view is that the market looks fundamentally oversupplied when that premium is taken out of the price. Malek cited this as one reason why investors should be cautious of oil prices. He explained that oil price volatility is why Nomura places such a strong focus on assets.
Over the past three years, economies in emerging market such as India and China have slowed, but Bhanu Baweja, global head of EM research at UBS, said that this slowdown will not last forever — good news for oil demand.
Baweja cited Brazil, Indonesia, and India as economies in need of much more infrastructure, energy, and engagement with foreign companies. He explained that emerging markets will continue to depend upon oil companies for these reasons.
However, China is the exception. “The economy has been structurally high and it needs to come down,” Baweja said. “The slowdown in emerging markets is not the end of the world. Investment to (gross domestic product), in the end, needs to pick-up.”
—By CNBC.com’s Madeline Laskoski
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No disclosure information was available for Christyan Malek or Bhanu Baweja.