Broker tips: Energy services sector, IAG, Serco, Aveva

Shares in the oil and gas services sector were hammered on Friday by comments from US bank Goldman Sachs which repeated its ‘cautious’ rating on the European sector in light of the recent collapse in crude prices.

Goldman said: “Our analysis suggests that the European majors would need to cut capex 24%/32% at Brent oil prices of $80/70/bbl to achieve a 4.5% free cash flow yield by 2018.” The bank kept a ‘buy’ rating on Petrofac and Amec Foster Wheeler but has downgraded its stance on Wood Group from ‘buy’ to ‘neutral’.

Broker Liberum Capital has reiterated its ‘buy’ stance for IAG shares, saying it expects the airline group to add Aer Lingus to its portfolio.

Liberum said Aer Lingus would further strengthen IAG's transatlantic market position and improve its ability to service transatlantic traffic to and from the UK regions, as slot constraints at Heathrow and the limited domestic network of British Airways limited the opportunities to target those markets.

Peel Hunt has slashed its target price for Serco from 265p to just 135p to take into account a proposed rights issue by the outsourcing group and kept a ‘sell’ rating on the stock. The broker said that the valuation - trading at 22 times estimated earnings for 2016 - is too expensive.

However, the broker said that the company’s amendment of its financial covenants and a successful conclusion to the prisoner escort and custody services investigation are “welcome pieces of news”.

Shares in Aveva came under heavy selling pressure on Thursday after both Morgan Stanley and JPMorgan Cazenove cut the stock to ‘underweight’, though Westhouse Securities chose to stay positive with an ‘add’ recommendation for investors.

“We retain our ‘add’ stance, aware of current risks to estimates, but bear in mind the group's long term strategic value,” said Westhouse analyst Gareth Evans, raising hopes that potential deal activity could support the shares.