Wall Street starting to pick an oil bottom

Cashin: Oil seeks bottom
Cashin: Oil seeks bottom

Barclays became the first big Wall Street firm to upgrade a major oil stock in the wake of the crash in prices, a tentative sign that there may finally be some value in the energy patch following a slaughter in the sector's shares.

Barclays upgraded BP to "overweight" and called for the company to slash production and fire employees in order to get costs in line after oil's drop. The firm lowered its Brent crude oil estimate to $70 a barrel for 2015. That's about where it was trading Wednesday.

Separately, UBS raised its outlook on three pipeline companies: Boardwalk Pipeline, Crestwood Equity and Spectra Energy.

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"We upgrade BP to overweight with close to 30 percent potential upside to our new (share) price target," wrote Lydia Rainforth, Barclays' London-based oil analyst. "2015 will be a year where BP is likely to be able to demonstrate its capacity to control costs."

An oil platform is seen in the North Sea, around 100 miles east of Aberdeen, Scotland.
Andy Buchanan | Reuters

The analyst predicts BP will cut production and manufacturing expenses by at least 7 percent next year, saving the company $2 billion. Even so, the analyst slashed 2015 earnings estimates by 27 percent because of the drop in crude.

BP shares were up 2 percent to $41.40 in midmorning trading Wednesday. The stock is down 20 percent since July. The Energy Select SPDR is off by 18 percent since the summer.

Citi calls oil bottom
Citi calls oil bottom

BP now trades at a an attractive forward price-earnings ratio of just 12, according to Barclays.

If the analysts today are correct, the energy sector is about to embark on a major period of cost-cutting through reductions in production and employee count.

"Since 2009, (BP's) production ex-associates has fallen nearly 30 percent, compared to the 13 percent rise in average upstream employees," wrote Rainforth.

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Schlumberger, a major oil services player, is already reducing its head count as well as its number of oil field surveying vessels, according to Cowen and Co.

Cowen reiterated its price target for Schlumberger of $98 a share following a lunch with management. Shares of the company rose 2 percent by midmorning Wednesday.

UBS decided to upgrade the energy master limited partnerships it deems to be higher quality and resistant to a wave of credit defaults that could hit the industry's debt load soon because of the drop in oil prices. Boardwalk, Crestwood and Spectra also have relatively larger exposure to .

"We expect (oil) pricing to remain under $90 for the next four years with sustained volatility," wrote UBS analyst Shneur Gershuni.

WTI crude has fallen almost 40 percent from its high for the year in June.

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—CNBC's Michael Bloom contributed to this report.