Oil companies need to rebuild investor confidence, says Barclays

Oil exploration and production (E&P) companies need to rebuild confidence amongst investors, according to analysts at Barclays, who said depressed oil prices are not wholly to blame for the recent weakness in the oil sector.

The bank pointed out that the European E&P sector has under-performed the wider market by some 30% so far in the second half of 2014. This, it believes, is only partly attributable to a $27-a-barrel decline in the oil price.

Analysts highlighted that the sector has actually under-performed the market over the past two years even though the oil price environment has been relatively stable.

"We believe the sector's downturn mainly reflects investors' frustrations with excessive spending and poor expectation management, eroding their enthusiasm for the growth potential that remains," Barclays said.

It said the issue was "exacerbated" by the recent shift from exploration-led to development-led growth, as E&Ps expanded spending budgets and forecasted growth on a longer time horizon.

"In our view, the sector cannot rely on exploration to draw investors back in. They need to work on addressing the concerns of a more discerning investor base: becoming self sufficient, trimming excess costs, and achieving operational targets. In short, they need to rebuild investor confidence," the bank said.

Barclays has named UK-listed E&P peers Ophir Energy, Premier Oil and Tullow Oil as its favourite stocks in the sector - all rated 'overweight' - as they are "among the most advanced in the re-modelling process".