MEDIUM RISK for entreprises
The most pressing threat ahead of Europe’s car industry isn’t Brexit or potential U.S. tariffs. It’s the EU’s own regulations for limiting carbon dioxide emissions.
Electric vehicles are the disruption of the century and how countries adapt to electrification will be key to the survival of their auto industries. But some have made more progress than others.
Supported by high oil prices and global demand strength, a deleveraged energy industry is returning to growth while keeping capital discipline.
After a year of great recovery, it is time for consolidation. We forecast oil demand growth in the order of 101mbpd, +1.3mbpd. Uncertainty over the extent of demand growth has increased though, because of the impact of trade tensions and a slowing rate of growth of the global economy. Our base case is for global trade to decelerate over the next two years, despite the possible normalization of trade relations between China and the US. At the same time, unabated US production growth competes with OPEC output cuts and supply loss from Venezuela and Iran. There is significant risk that demand growth could entirely be absorbed by growing US output. We expect US shale production alone to add 1.3mpbd this year. Based on rig count being down 32 ytd from a cyclical peak at year end, at the last read (22/02/19, source: Baker Hughes), we expect a slowdown of activity in North America in the early parts of 2019, with a recovery in the later quarters of the year. Late 2019 will see the removal of most of the Permian Basin infrastructure bottleneck as pipeline capacity in excess of 2mbpd is due to come on stream. All of this should feed through to 27% y/y earnings growth, albeit with limited margin expansion and that confined to the integrated and production universe. While financial discipline will prevail, we think growth capex will slowly return. On average, total debt stands at 1.5x Ebitda and dividends are 4.2x cash covered, thus there is room for investment in reserve and production growth. A divide may open between large cash-rich companies and smaller ones that struggle with bottlenecks, higher break even points and access to capital.
The power generation sector should now see substantial benefit from rising power prices alongside demand growth from industry. We expect sustained carbon prices to support higher power prices and spreads. This could counteract commodity weakness elsewhere, particularly coal. Markets will tighten, particularly in Germany with 1.4GW of nuclear closures in 2019 and anticipation of the remaining closures in 2022. Consequently, power generators are well placed to deliver 10% y/y earnings growth. For energy supply, though, we foresee continued margin squeeze as a result of intense competition.
We anticipate a further leg up for growth of renewables as costs continue to decline and policies may shift towards a more supportive stance again. The sector may see renewed growth in Germany and the UK but also in the US, with a number of new state-level initiatives. We expect a pick-up in momentum in e-mobility as utilities seek to gain a foothold in infrastructure development, while car manufacturers pursue infrastructure growth as an enabler for EV sales.
E&P: Profitability continues on the path of recovery in the silage of high oil prices.
Refining: Falling refining margins along with rising oil prices and large new capacity put pressure on margins.
Networks and infrastructure: Pipelines to benefit from volume growth. New opportunities for electricity and gas infrastructure, turning into the backbone of energy transitions. But intense regulatory scrutiny, as returns are reconsidered.
Clean energy growth will benefit from high oil and renewed policy support.