Global Integrated Oil 2018Outlook:From Survival to Revival

Sector View — The case for Integrated Oils 2018 looks fairly balanced. Stretchedrelative valuations likely protect the downside, but the upside looks to rely on oilprices holding firm above the high-50s that we think is discounted in valuations.

    That in turn is challenging. OPEC is having success in squeezing the market, butthe Citi expectation is that oversupply will re-emerge as a key theme through thecourse of 2018 pushing oil prices back to the marginal costs of US shale (Citi view$45-55 range).

    Reserves Matter — Three years of self-help has now largely stabilised the financialposition of the group. We think the 2018 debate will move on to which companiescan be truly competitive in this environment. A key measure will be in the ability ofcompanies to sanction enough low-cost projects to restore full reserve-replacement;rates have been just 50-60% now for three years.

    Key Picks for 2018 — Currently ENI is the only company that looks (very)comfortable on reserve replacement; we think this and a turnaround in operatingperformance will drive equity performance in 2018 (on the Citi European FocusList). We see TOT as the best value of the five “benchmark” global Integrateds(TOT, CVX, BP, RDS, XOM). We have pair trades CVX over XOM (the third year ina row) and BP over RDS. Finally COP, to us, has a good balance of growth andprospective returns to shareholders.

    Macro Update — We raise sector EPS by 5% average 2018-20E, reflecting a viewof sustained strong refining against a backdrop of robust global demand. Ourunchanged oil forecast of $54 (Brent) in 2018 sits below both spot and forwardprices; we expect prices to start the year high, but modestly deflate through thecourse of the year as the oversupply picture unfolds. Estimate and TP changesbelow.