By Andrei Khalip
LISBON, May 29 (Reuters) - Lisbon-based oil company Galp's
stock is climbing, outperforming European peers and
the Portuguese market, as analysts hike price targets after it
pared its investment plan to avoid a share sale.
Analysts who recommend buying the stock have described Galp
as "one of the most compelling growth stories" in the sector
thanks to its stakes in big Brazilian oil finds.
However, others warn its refining arm is at risk from weak
European fuel demand and that doubts remain whether it can fund
its share of massive investments to extract the deep water
Brazilian oil discoveries, with costs still uncertain.
RALLY SEEN OVERDONE, POSSIBLE SELL SCENARIO
"The market has welcomed their funding measures and the
averted cash call, but in the long-term, we think the rally
since the start of the year is a bit too much for the
uncertainties that the company is facing," said Pablo Pena-Rich,
a Madrid-based analyst with BPI bank.
Galp's partners in Brazil, including the multi-billion
barrel Tupi field, are state-run giant Petrobras and
world majors like BG and Repsol .
Galp stock has risen over 55 percent since the start of the
year to 11.1 euros, compared with a 14 percent rise in the Dow
Jones Stoxx Europe oil companies index <.SXEP> and a 14 percent
gain in Portugal's PSI20 <.PSI20> index.
Galp rose around 4 percent in the last three sessions alone,
while the PSI20 remained flat.
On Wednesday, Galp decided to cut dividends and expenditure
on non-core projects instead of resorting to a capital increase
or selling of some oil assets to finance its Brazilian
exploration and production programme. [ID:nLR440341]
The management had acknowledged earlier it was mulling a
rights issue.
Galp cut its overall capex plan by 17 percent to 4.3 billion
euros ($6 billion), maintaining its oil E&P budget at 1.9
billion euros. A dividend cut and other measures would reduce
net cash outflow by a total of 1.2 billion euros, Galp said.
"It is a step in the right direction and certainly helps to
alleviate a lot of concern, but it doesn't detract from a very
high gearing level and a very stretched valuation ... despite
their fantastic exposure in Brazil," said Oswald Clint,
integrated oils research associate at Bernstein Research.
Clint has a 10-euro 12-month price target for Galp, which is
lower than the current 11.1 euros, and a "neutral" rating.
"Buying, not at this time. We need to see some data from the
Tupi flow-test first. We think Tupi is going to be the least
economical field in Brazil and we wonder if all valuation for
Brazil may be overdone," he said. Tupi started pumping crude in
test mode on May 1.
"And we still expect a very depressed refining market in
Europe with diesel exports from India and China creating
oversupply," Clint added.
Almost all of Galp's EBITDA comes from downstream operations
although its oil portfolio accounts for about half of the
company's valuation.
"The volume of reserves is still an unknown. It's all based
on estimates. Costs, the monetization of reserves are all
uncertainties still," Pena-Rich said.
BUY RATINGS AND TARGET PRICE HIKES
However, positive recommendations still flow in from major
houses like Bank of America Merrill Lynch, UBS and Credit
Suisse.
Credit Suisse, which raised its price target to 11 euros
from 10.5 euros on Friday, called the new funding strategy "an
important evolution of the story and "an innovative solution
that relieves the cash shortfall without diluting existing
sharholders or straining the balance sheet".
It also maintained an "outperform" rating, citing
expectations of positive Brazilian drilling results at the
Iracema area and the BM-ES-31 block.
UBS on Friday hiked its 12-month target by 8 percent to 13
euros, maintaining a "buy" recommendation.
A day earlier, Bank of America Merrill Lynch raised its
price target to 14 euros from 12 euros with a "Buy" rating,
saying the capex cuts resolved Galp's funding issues and removed
share overhang risks, leaving key growth projects intact.
"Galp, in our view, represents one of the most compelling
growth stories amongst the European integrated oils whilst
offering significant value creation potential through an
extensive exploration programme in Brazil," it said.
(Editing by Simon Jessop)
((
andrei.khalip@thomsonreuters.com; (351) 213-509-209; RM:
andrei.khalip.reuters.com@reuters.net))
Keywords: BUYSELL/GALP