LONDON (ShareCast) - A continued drop in oil prices was weighing heavily on the exploration and production (E&P) sector again on Monday, with stocks dampened further after a number of ratings downgrades by US broker JPMorgan Cazenove.
The bank has cut its recommendations for UK-listed Afren (from 'overweight' to 'underweight'), Enquest (from 'overweight' to 'neutral'), Ophir Energy (from 'neutral' to 'underweight') and Tullow Oil (from 'overweight' to 'neutral').

Oil prices have fallen sharply over the last few sessions after the Organization of Petroleum Exporting Countries resisted calls to scale back output amid a supply glut.

JPMorgan said that the recent slide in crude - both Brent and West Texas Intermediate are currently trading at five-year lows below $70 a barrel (bbl) - means that E&Ps are now facing a period of "tough decisions", while the risk of industry consolidation rises.

"The European E&P space has fallen 35% year-to-date tracking the recent sharp slide in the oil price. While this has been an uncomfortable ride, downside risks remain, in our view," the US bank said.

It said that companies are faced with the reality of oil prices being sub-$90/bbl for at least the next six to 12 months, or even "perhaps longer".

"For the E&P space this price action comes at a difficult time, balance sheets are more stretched than at any point in recent memory given investments in projects sanctioned with $100/bbl+ in mind," JPMorgan said.

"Companies are likely to react defensively, cutting capex, and so reducing events that are key drivers for the sector. Intra-sector M&A may rise, although this often does more harm than good."

Tullow's shares were down 5.8% on Monday afternoon, while Afren dropped 8.2%, Enquest fell 4.5% and Ophir Energy declined 4.3%.

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