(Bloomberg) -- Yes, oil will very likely slump after this Friday’s OPEC meeting, according to JPMorgan. But stock investors can protect themselves by betting on the industry’s best cash-flow generators.
JPMorgan, which expects Brent to drop to the mid-$60s a barrel from $75 in the near to medium term as the cartel shifts toward production increases, says it prefers sector stocks that aren’t directly tied to the oil price, but rather reflect the industry’s lowest break-even cash flow levels. Royal Dutch Shell (LON:RDSa), BP (LON:BP) and Galp Energia (LS:GALP) are companies with the highest proportion of high-margin barrels, according to the bank.
“If oil trends lower following the OPEC meeting, the companies that investors should be buying are the ones that are structurally well-placed to manage a lower oil price, because they’re starting at lower cash break evens,” Christyan Malek, an analyst at JPMorgan (NYSE:JPM) in London, said by phone. “Our preference is not for companies that are geared to the oil price because we aren’t that bullish oil, but for companies who offer the lowest cash break evens, they’ve got the best cash flow per barrel.”
Brent has retreated as much as 8 percent from the 2014 high reached last month, dragging down the Stoxx 600 Oil & Gas Index, as Organization of Petroleum Exporting Countries now appear to be aiming for a modest production boost to bridge the gap between Russia’s push for a big ramp-up and Iran’s insistence that no change is needed. The sector is among the region’s best performers this year, and is seen increasing 2018 earnings by 36 percent. At the same time, analysts have reduced projections for profit growth in 2019 to 6.3 percent from 12 percent at the start of the year.
“Oil stocks have performed well this year, but on a multi-year basis, they’re still underperforming,” Malek said. “Investors remain skeptical that the oil price that they see is the real oil price as this week has proved.”