UBS's Big Oil Call: Downgrades Chesapeake, Murphy; Upgrades Marathon

In a report published Thursday, UBS analyst William A. Featherston changed the ratings on three oil majors, having raised the 2015-16 oil price forecast, while reducing the normalized gas price estimates.

The Brent and WTI oil price forecasts for 2015 and 2016 have been raised from $56.25/$51 per bbl to $61.50/$56 per bbl and from $67.50/$62.50 per bbl to $70/$65 per bbl, respectively. Analyst William A. Featherston said that the upward revision reflected stronger-than-expected 2Q prices as well as “the market stabilizing at somewhat higher levels than we had previously envisioned.”

“Despite an oversupplied market, oil prices have rebounded on the back of a drastic drop in the US rig count which points to the start of production declines in 2H15 & better than expected demand providing further visibility of a slowly self-correcting market heading into 2H15 & 2016,” Featherston added.

Meanwhile, the long-term normalized US natural gas price forecast has been reduced from $4.50 per MMBtu to $4.00 MMBtu.

• Featherston downgraded the ratings on Chesapeake Energy Corporation CHK from Neutral to Sell, while reducing the price target from $16 to $11.

Apart from the reduction in normalized US natural gas price, Featherston believes that Chesapeake “carries far too much financial leverage, prompting a material reduction in activity that is contributing to a declining production profile in 2015-16E.”

• UBS upgraded the ratings on Marathon Oil Corporation MRO from Neutral to Buy, with a price target of $32.

“MRO's high oil exposure, above average debt-adjusted growth, leverage to low-cost resource in the Eagle Ford and SCOOP/STACK, strong balance sheet and inexpensive valuation vs. peers make it, in our view, an attractive vehicle to play our expectations for a recovery in longer-term oil prices,” Featherston wrote.

Marathon’s stock is currently trading at a “wider than normal discount” to its peers, despite the company’s “above average cash flow per debt-adjusted share growth outlook,” the report stated.

• Featherston downgraded the ratings on Murphy Oil Corporation MUR from Neutral to Sell, while reducing the price target from $45 to $41.

“We believe MUR's sharp capex cut this year will lead to a declining production profile in 2015 and 2016. The absence of a large exploration discovery over the last few years, maturing Malaysian position and Eagle Ford growth which is expected to plateau in 2017 underscore concerns about MUR's ability to deliver competitive long-term growth,” UBS noted in the report.

These growth concerns may prompt the company to make an acquisition at a time when E&P valuations and sellers expectations are “inflated,” Featherston said.