JPM - European Integrated Oils

* In this note, we raise our estimates to reflect our new 2009-10 oil price assumptions of $49.4/bbl for 2009 and $57.5/bbl for 2010 vs. $43.3/bbl and $55/bbl previously. This reflects our view that the oil market could tighten again by the end of this year. With all the integrateds’ strategy presentations now behind us, we thought it useful to recap the main takeaways from the strategy updates. The oil sector has outperformed the broader market by 9% YTD, as investors rotated out of the UK supermajors into another safe haven and played the rebound in crude through E&P-levered names. Going forward, we remain cautious on the sector as we do not view near-term valuations as compelling, even at our new crude price forecasts. In addition, upcoming 1Q09 results should be weak and could hit sentiment.

* Estimates increased: We raise our EPS estimates for the European oils by 11% and 4% for ‘09-10 on avg. The largest positive effects are for E&P levered names. Consensus has fallen in the past two months - our new estimates put us 9% and 5% below Bloomberg consensus for ’09-10.

* Strategy updates round-up: With all the European integrateds’ 2009 strategy updates behind us, we see the main takeaways as follows:

1) Dividends: While the supermajors will likely protect dividends in 2009, there remains uncertainty for some— which are constrained by payout policies, gearing levels or access to funding.

2) Capex should decline 7% in 2009 vs. 2008. Along with dividend cuts,we believe that sector gearing (net debt/capital employed) should remain under control and peak at 22% in 2010, up from 19% in 2008.

3) Volume targets cut: Most companies have cut their growth targets for 2012 given uncertainty over project sanctioning. We think that not all the bad news is out of the bag yet.

4) Cost reductions: The majors have unveiled ambitious upstream cost reduction targets. We see lifting costs declining 21% in 2009 vs. 2008 after a 23% annual increase over 2003-08 but do not believe costs will return to 2005 levels.