whatifscenario-2015-oil

CROSS-EXPERTISE RESEARCH
10 March 2015
What if oil s tays low long-term?
 The oil shock has not only surprised in terms of scale but also raises the
issue of its duration. The world economy and financial markets will be all the more
impacted if oil does not promptly return to its average and trends in a fluctuation
range close to current levels. Outside our core scenario (Brent at $60/b in 2015 and
$70/b in 2016), it is this prospect of lastingly low oil, at $52/b in 2015 and $56/b in
2016, that our report explores.
 After presenting the factors underlying this scenario – oil demand trend,
responsiveness of current production, environmental policies and strategic stakes –
we analyse the macro implications. These are the fruit of vast revenue
redistribution between exporting and importing countries, clear increase in
deflationary pressure, and a positive supply shock for many sectors. This leads to
modification in terms of trade, a strengthening of purchasing power and an
opportunity for companies to pick up their margins and underpin the investment
cycle. All these items maintain the nascent imbalance between developed and
emerging economies.
 The macro vision is accompanied by sector impacts, direct and indirect, that
vary broadly between sectors. For the directly concerned sectors, impacts are
very negative on the earnings and financing of oil groups and hence on
development prospects. Sharp reductions in investment have already been
announced and a cut in operating costs is likely to follow. Despite these cuts,
balance sheets will remain under pressure, encouraging the sector reshuffle
underway. The OCTG tubes sector is particularly hard hit after the massive
investments in new capacities in the previous cycle, while pressure in oil services is
likely to lead to a phase of restructuring and consolidation. For credit, the
consequences are direct on American HY owing to the overrepresentation of energy
in credit indices, increasing the likelihood of default on this segment.
 Indirectly, lastingly low oil leads to identification of losers and winners
(mainly), notably depending on operating costs (for example for airlines), and
supplementary consumption impact (Retail, Food-FMG, Media, Construction
Concessions, Hotels & Leisure) for various sectors. As for socially responsible
investment, the key point lies in the capacity of states to meet their carbon
commitments. Lastly, econometric analysis of the relations between sector sub-
indices making up the Eurostoxx and the oil price helps determine a basket of
sectors benefitting from oil that stays low long term.
Chief Economist
Patrick Artus +33 1 58 55 15 00
Multi Asset Strategy
Evariste Lefeuvre +1 212 891 6197
Abhishek Deshpande +44 20 32 16 92 93
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Economic Research
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Bei Xu +33 1 58 55 14 83
Credit Research
Thibault Cuillière +33 1 58 55 80 56
Yvan Pavlovic +33 1 58 55 82 86
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Equity Strategy
Sylvain Goyon +33 1 58 55 04 62
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Global Markets research.natixis.com
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Distribution of this report in the United States. See
important disclosures at the end of this report.

Global Markets Research I 3
Contents
1. Introduction 4
2. Temporary or long-term fall in oil prices ? 6
Short-term trends: a strategic decline 6
Medium-term scenario: determinants for low oil 7
Brent between $50 and $60/b over 2015 and 2016 12
3. Macro cons equences of las tingly low oil 13
How do energy prices spread to economies? 14
The resulting impacts on public action 19
Summary of the macro impacts: euro zone and Asia, the big winners 21
4. SRI: Ambivalent s ignals for the environment 23
5. Financial equilibria in oil s ectors thrown off keel 25
Oil companies: cash-flows evaporating 25
Oil services: pressure at all levels 40
OCTG equipment: prepare for the worst 44
6. Sector impact mos tly pos itive 49
Aerospace: low oil prices are good news 49
Food retail: positive direct and indirect effects 50
Media: Support for consumer spending and thus for advertising stocks 55
Construction & Concessions : good news for Motorways and Airports 56
Food-HPC: strong sensitivity to oil, especially for Unilever 57
Capital goods: impact will vary from one group to another 62
Utilities: very low impact 65
Hotels, Leisure & Catering: positive to varying degrees 66
Automotive: a positive effect that must be qualified 67
7. Our s trategic analys is 70
Brent vs. Eurostoxx 600: an econometric analysis 70
Equity strategy: how to play lastingly low oil? 75
What consequences for the credit market? 78

1. Introduction
After the event, it is possible to explain why the slide for oil has been so abrupt. It is now necessary
to respond to the following dual question: will the shock last and is it a response to a real change of
paradigm, a ‘new normal’, characterised in particular by lastingly low oil?
Explanation of the 2014/15 crash forms an integral part of the more general issue of ongoing low
prices. The precursors for the decline were masked for four years by the relative stability of oil prices
at around $110/bbl. There was not necessarily complacency but rather the idea, valid up till then,
that the influencing force was not necessarily supply/demand imbalance but purely budget
considerations. Breakeven prices, required to balance the public accounts of many oil producers,
provided a reasonable estimate of the equilibrium price. Temporary shocks (Libya for example)
could lead to price fluctuations but the strength of these ‘breakevens’ systematically justified a return
to the average. This analytical framework is no longer valid, having suffered the double shock of the
change in ‘marginal producer’ policy (Saudi Arabia) and new production conditions, in the US in
particular.
The arguments justifying lastingly high oil are generally based on some macro and technical
assumptions: oil demand is driven long term by emerging countries. Supply (American notably) is
founded on rather low quality hydrocarbons; world reserves are in very onerous extraction zones
and increasingly unstable politically. A part of these arguments are now open to criticism.
The idea according to which the catch-up for emerging countries is a lasting phenomenon is
increasingly questioned. The structural limits to their growth are many: chronic current deficits,
excess debt in the private sector. More generally, many countries are close to the ‘middle income
trap’, a transition phase from growth based on the sole accumulation of production factors to a
momentum based on sounder usage of these. The idea of a gradual slowdown for emerging
countries is all the more justified in that the dollar is on a clear upward trend, synonymous with
deterioration in terms of trade and hence lesser ‘easy’ growth for emerging countries.
American oil production is rich in liquids (NGLs) but if offers a dual advantage: its marginal cost is
falling steadily thanks to technological progress. The chart below shows that the production
investment ratio has fallen substantially since 2007. The implementation of a new well is much faster
than for the extraction of traditional oil (some months). This increases the elasticity of supply versus
demand and is in clear contrast with traditional extraction-investment-exploitation cycles.

Chart 1: Investment ratio per unit of production ($ capex for 1,000 b/d produced)
Sources: Datastream, Natixis
Rather than seek a justification for the lasting rise (or maintenance at a high level) for oil in the
strength of emerging countries – where catch-up seems to have entered a more complex and
difficult phase – it seems that extraction technologies (less capital intensive) and the location of
marginal production locations (soils or sand, more politically stable countries) argue for a new
reading of the oil market and, as a corollary, a lasting low oil price. This view is all the more justified
in that the marginal producer has altered strategy, a radical option which is unlikely to be questioned
for several years.
Our report develops this assumption ($52/b in 2015 and $56/b in 2016) by exploring many other
avenues. Aside from factors which could justify a lastingly low oil price, we analyse the sector
consequences of such a scenario and its impact on different asset classes.
evariste.lefeuvre@us.natixis.com
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2. Temporary or long-term fall in oil
prices?
The suddenness and scale of the oil price decline since the end of summer 2014 has led to a vast
transfer of global revenues and a sharp increase in deflationary pressure in a number of countries. It
also raises several questions about the real reason for this decline, especially as oil prices seem to
have levelled off at around $50/60: is this just a temporary crisis and will prices rapidly revert to their
long-term average? Or are we about to enter a period of sustainably low oil prices? This note
discusses these issues and illustrates how the impact of an oil crisis varies widely depending on
whether it is temporary or permanent.
Short-term trends: a strategic decline
It is impossible to quantify accurately the relative contribution of supply and demand factors to the
fall in oil prices. It would appear however that it has not been the most decisive factor as there has
been a marked de-correlation with world trade (note the striking contrast with 2008/09 in the chart
below). Moreover, although the fall in Brent prices was concomitant with the rise in the dollar, the
strength of the greenback cannot alone explain the plunge over the last few quarters (the chart
shows a rupture in Brent price trends compared with other commodities).
Chart 2:
World trade and oil prices US dollar and oil price changes vs. others
Commodities (3-month change)
Sources: Bloomberg, Natixis
We will discuss demand factors in more detail in the next section. Even if the slowdown in growth in
China, in numerous emerging economics and the Euro zone have undeniably played a role, above
all, it was the combination of surplus supply and a change in the OPEC’s strategy that explains this
major downturn.
This is because global oil output capacities have continued to shoot up, mainly owing to increased
US and Libyan output. Above all, the OPEC countries' refusal, in particular Saudi Arabia's, to
continue losing global market share explains why the cartel no longer wants to curb its output and
has thus caused a situation of over-supply.
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Chart 3:
US + Canadian output
% of Saudi Arabia's output
Oil output
(mbpd)
Medium-term scenario: determinants for low oil
Is the fall in oil prices temporary (lasting a few months) or long-term (lasting a few years)? This
question is particularly crucial insofar as it influences inflation, monetary policy, bond yields and
corporate earnings.
Investment/supply adjustment
It is often said that falling oil prices discourages investment in the most expensive oil types (shale oil,
tar sands, Arctic, ultra-deep water offshore oil) and supports oil demand. If history were a reliable
predictor of future trends, it would indicate that investment cuts after a drop in oil prices is a lengthy
process. Nevertheless, the shale revolution has introduced new prospects in this field, as it is a drill-
intensive type of production, and enjoys more spending headroom. Thus the flexibility of oil
companies' investment budgets that is historically estimated at 10/20%, is largely enhanced in the
current cycle: independent US companies have announced they are slashing capex by 50/60% and
even groups like ConocoPhillips that are exposed to unconventional US oil, have announced a 30%
investment budget cut. The greater level of flexibility afforded by shale oil should work both ways
and we might think that an increase in prices to above breakeven should trigger a new phase of
investment that would put a “cap” on prices.
There are several reasons why investment might not lead to a fall in production in the short and
medium term. Indeed, capex cuts could above all affect exploration and not drilling activities.
Moreover, a downturn in production could happen, as is always the case, more than a year later, or
even more, if spending cuts are concentrated in exploration. As a consequence, the argument for a
rapid change in supply does not factor in the massive wave of investment over the last few years –
and which should increase production in 2015 and in 2016.
Naturally the number of rigs in operation has plummeted over the past few months, and the chart
below shows that the trend has affected, and will continue to affect investment. Even so, if horizontal
drilling continues in the USA, US oil output trends will not necessarily depend on the number of rigs
in operation alone. Moreover, even if a certain number of producers might default on their bond
repayments (junk bonds) and thus exit the market, technological progress and the fall in a number of
related costs (services) might also suggest that the breakeven price (that offers an acceptable IRR)
could fall between $50/bbl and $55/bbl. History has shown that cost functions change over time.
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(1) OPEC production (2) Non-OPEC Production
Ratio (1) / (2) (in %)

Chart 4:
World:
Investment in exploration
and oil output
United States:
Investment in mining operations
and no. of rigs (yoy %)
Sources: Datastream, IMF, Bloomberg, Natixis
Strategies of oil producing countries
The mismatch between oil supply and demand is nothing new and has widened significantly over the
past several years, owing to the output of non-OPEC member countries. What is new, however, is
the attitude of the marginal producer Saudi Arabia and its wish to allow the market to set prices in
order to stem the arrival of new entrants in less profitable techniques (unconventional US oil
Ghana's and Venezuela's output, etc.). This strategy was preferred to the risk of losing market share
by reducing a supply glut. The equation below is usually just a formulation. It becomes a rule when
the OPEC can no longer or, most importantly, no longer wishes to curb its output.
World demand – non-OPEC output = implied "call" on OPEC output
The OPEC's strategy is clear and seems sustainable: increase the OPEC’s market share in global
output, thus keeping oil prices low long enough for there to be an irreversible cut in investment in
producing expensive forms of oil. For Saudi Arabia, a rapid up-tick in prices would mean a loss of
revenue without any long-term favourable impact.
The question is whether or not non-OPEC countries will be forced to cut their production rapidly. US
and Canadian producers seem to want to do so: the IEA in its February monthly review began to
revise down its growth forecasts for North-American supply by 300,000bpd in Q3 15 and
500,000bpd in Q4 2015. However, this reduction should be contained. As a result of the previous
investment cycle, numerous projects are entering into the production phase or are ramping up in
2015/2016. Last, the extent and timing of the impact of lower investment budgets on existing
production and in particular on mature production, particularly in maintenance (acceleration in the
rate of decline) is difficult to quantify.
Last, the fall in prices should not prompt non-OPEC countries to trim production against a backdrop
of public finances already heavily strained by falling oil prices and, in the absence of cooperation,
they will be confronted with a real prisoner's dilemma.
Amid this, global supply could remain high and OPEC's production could surpass “the call on OPEC”
for quite some time.
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Investment in mining structures Rig count

Demand
Beyond cyclical factors, oil demand can be affected by structural parameters: the structure and
make-up of world trade, Chinese structural reforms, environmental policies, demographics.
− Investment
Investment, which is the component of world demand that consumes most energy, has not returned
to its historic levels. It has remained stagnant since 2012 at 22% of GDP vs. 23.5% on average
between 2003 and 2008. Even if economic trends seem to be improving, to the extent that certain
emerging countries are easing interest rates amid falling inflation, that the Euro zone credit squeeze
has run its course and that the outlines of the Juncker investment plan are taking shape, the current
global investment cycle should remain pretty downbeat. In terms of world trade, we see growth of 4
to 5% p.a. between 2015 and 2017, a pace below the 2002/2008 average (6.6%).
− China
On the one hand, the change in China's growth strategy should argue in favour of weaker oil
demand. Nevertheless, growth expected for the country’s transportation sector and its delay in
accumulating strategic reserves means that the relationship between the Chinese slowdown and the
country's oil imports is particularly hazy.
The slowdown in Chinese growth is inevitable with the economic switch from an old growth model
focused on exports and investment, to a new model based on sustainable growth, more sensitive to
the quality of the environment and more service-focused. This could significantly slow down
production in a certain number of heavy industry sectors and globally weigh on commodities prices.
Nevertheless, oil demand should move in different directions given the levels of oil consumed by the
transportation sector which now surpasses industry as the biggest consumer of oil products. This is
in addition to a growing number of private cars on the road, up 9% (yoy) in H2 14.
Chart 5:
China: Oil imports and GDP growth (yoy %) China: Automotive sales (%yoy)
China's strategic oil reserves stood at 12.43m tonnes at end-2014, i.e. around 90 million barrels and
16 days of imports. According to ‘The long term planning of the National Petroleum Reserve
(2008/2020)’, China will attain reserves of 500 million barrels in 2020. The country is therefore
behind on its plans and also well behind other countries (reserves of the EU and Japan represent 90
days of consumption). Storage capacities total 103 million barrels and should quickly reach 168
million barrels. In theory, China will need to import 410 million barrels by 2020 to reach the Plan's
target, i.e. an average of 68.3 million barrels p.a., or 3% of imported oil in 2014.
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− International trade
Since the Great Recession, world trade has struggled to grow at a faster pace than world GDP for
one main reason: the slowdown in the pace of internationalisation of value/production chains. Their
geographic dispersal has led to faster expansion in the transportation of goods, particularly semi-
processed goods than in final demand. The elasticity of international trade to world GDP had even
jumped to 2.5x in the mid-1990s. It has now fallen back to 0.8x, as low as it was in the 1980s.
1
This
should argue in favour of weaker oil consumption per unit of world GDP. One example among
others: industrial developments in Eastern Europe (Poland, Czech Republic, Turkey, etc.), the
transportation of semi-processed goods on the European production chain are been significantly
shortened. The global economy is now more focused on a re-regionalisation model, rather than a
globalisation one.
− Demographics
Is this a generation-Y effect? On the contrary has it been tied to the ageing of the population in
developed countries and new modes of working? The distance in kilometres travelled per annum
and per capita is no longer increasing, particularly in the USA. Even as the number of vehicles
increases, as is the case in Europe (530 vehicles for every 1,000 inhabitants today vs. 504 in 2008),
the share of passenger transportation in GDP has stagnated since 2008.
− Environmental policies
European and US public policy encourages energy solutions that are less polluting than fossil fuels.
In an effort to reduce Co2 emissions, the EU28 is aiming for 27% of its energy consumption to
derive from renewable sources by 2030. This figure stood at 14% in 2012, up 4 points vs. 2004.
Despite the expansion of shale oil and gas, the USA has not been inactive either. As part of its clean
power plan, the US Environmental Protection Agency wants to cut the energy sector's GHG
emissions by 30%, i.e. to below the 2005 figure before 2030. Standards for US trucks and light
vehicles are expected to evolve by 2016, as is the case in Europe. The Department of Energy has
set a target to reduce carbon pollution by 3 billion tonnes before 2030.
These policies and the associated technical progress have all improved the energy efficiency of the
major global players. This is not merely due to the development of the tertiary sector in economies.
Industry needs less energy to produce in most developed countries and in certain emerging
countries, with the notable exception of Brazil and India. The result of this shift is that the share of oil
on global energy consumption has fallen since 2001.
1 http://ec.europa.eu/economy_finance/eu/forecasts/2015_winter/box1_en.pdf

Chart 6:
Industry: VAB ratio on oil consumption
(boe)
Share of oil in global consumption
of primary energy (%)
Sources: BP, Natixis
Carry strategies
Last, investor demand resulting from strategies triggered from the carry/contango markets will only
support oil prices in the short term. In the medium term, barring massive inventory cuts, it will take
longer than expected to reduce these stores of surplus onshore and offshore oil. The higher the
stock levels, the longer it will take to deplete them and the longer it will take for stock reductions to
support prices.
Chart 7:
OPEC: expected daily call in 2015 (mbpd) Projected crude stocks at Cushing
Sources: Bloomberg, OPEC, IEA, Genscape, Natixis
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Operational maximum:
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Brent between $50 and $60/b over 2015 and 2016
Econometrics has taught us that the share of oil in global energy has a weak but direct impact on oil
prices.
2
Thus, without drastically restricting oil supply, the reasons we have mentioned above
suggest that oil prices will remain low in the long run.
As we see it, the likeliest scenario is for (Brent) crude prices of between $50 and $60/bbl for several
years (at least two). This will discourage investment in the most expensive forms of oil (see table 1),
while preserving positive levels of profitability in conventional oil.
Table 1: Marginal cost of oil production
$/bbl
Conventional oil 23
Deepwater offshore 52
Shale/Tight oil 70
Very heavy crude 86
Tar sands/shale 115
Arctic 120
Source: IEA
We have drawn up a scenario based on low assumptions for oil (Brent at $52/bbl in 2015, then
$55.7/bbl in 2016). It assumes that the OPEC will maintain its policy over the next two years and a
limited impact on output growth from the reduction in oil investment. It does not factor in the return of
Iranian or Libyan oil to the market. In this last scenario, oil prices could fall and remain at new lows
as long as equilibrium remains marked by a supply glut. This scenario is improbable however. The
situation in Libya is very unstable, with conflict leading to production and export breakages and the
government and rival militias fighting over oil terminals. In this context, production is intermittent.
According to PIRA estimates, Libya will produce between 100,000 bpd and 200,000 bpd, but the
current situation could lead to lower output. Moreover, EU sanctions (embargo) cannot be ruled out.
As for Iran, talks with the P5+1 group started again on 2 March. Though the two parties have agreed
to reach an agreement by end-March, the outcome is very uncertain, with in addition the return of
the Republicans to the American Senate.
patrick.artus@natixis.com
abhishek.deshpande@uk.natixis.com
2 Our estimates for the 1995-2012 period suggest that a 1 percentage point drop in the share of oil in energy consumption would see Brent prices fall by
0.12%. For further details see Flash 2013-359 “The determinants of the oil price”.

3. Macro consequences of lastingly low oil
The fall in oil prices and ongoing low oil for several years will have many repercussions on the world
economy. Above all, this entails a transfer of revenues from oil exporting countries, mainly emerging
economies, towards oil importing countries, mostly developed economies, but not only (China, India,
Taiwan, Thailand, Indonesia and even Brazil are net importers). This transfer of revenues is not a nil
sum game and the IMF estimates that a 10-20% fall in oil lifts world GDP by 0.05%.
3
The main
reason is that oil exporting countries commonly display savings rates above the world average, with
part of the income from export revenues invested in sovereign funds. The fall for oil is thus beneficial
worldwide, but some regions will benefit more than others, according to their oil dependence.
Chart 8: Oil balances
Countries net importers of oil (% of GDP) Countries net importers of oil (millions of barrels/day)
Countries net exporters of oil (% of GDP) Countries net exporters of oil (millions of barrels/day)
Sources: IEA, Natixis
3 “Commodity and Market Review” in the World economic outlook October 2013, table 2, page 7.
0 2 4 6 8 10 12 14 16
Singapore
Thailand
Taiwan
South Korea
India
Netherlands
Japan
Spain
Turkey
Indonesia
China
France
Germany
Italy
USA
0 1 2 3 4 5 6 7 8
Singapore
Thailand
Taiwan
South Korea
India
Netherlands
Japan
Spain
Turkey
Indonesia
China
France
Germany
Italy
USA
0 5 10 15 20 25 30 35 40 45 50
Angola
Koweit
Saudi Arabia
Iraq
Qatar
UAE
Algeria
Kazakhstan
Venezuela
Nigeria
Russia
Iran
Norway
Canada
Mexico
0 1 2 3 4 5 6 7 8 9 10
Angola
Koweit
Saudi Arabia
Iraq
Qatar
UAE
Algeria
Kazakhstan
Venezuela
Nigeria
Russia
Iran
Norway
Canada
Mexico

How do energy prices spread to economies?
On paper, energy prices are diffused to economies in three ways:
− Terms of trade: revenues derived from foreign trade by oil importing economy increase when
the oil price slides relative to the price of its exports. We then say that the terms of trade have
improved. More revenues are available to finance consumption and supplementary investments.
Conversely, for oil exporting economy, the fall in oil prices undercuts its terms of trade and,
unless it saves less or borrows more, less few revenue is available to finance growth. As a
knock-on impact, variation in the terms of trade can impact currency prices, as it influences the
current account balance. A fall for oil can thus lead to a rise for currencies of importing
economies and to a dwindling for currencies in exporting economies (or to multiple interventions
by the central banks when the forex regime is fixed, as in the Middle East for example).
− Demand: the impacts on demand are linked to the impact of energy prices on inflation (energy
represents 8-10% of the total consumer price index in a developed economy). When prices fall,
real revenue increases. There is little likelihood that this supplementary revenue will boost
savings: first of all because it stems from recurrent spending (car fuel, heating fuel); secondly,
because it is distributed to all revenue classes. Consumption must thus increase. The positive
impact on demand can also be prolonged by monetary policy; the sharp disinflation stemming
from the fall in oil can trigger interest rate cuts by central banks targeting inflation.
− Supply: supply impacts stem from the role of energy in the production of goods and services. A
fall in the price of energy used can: 1/ either be saved by the producer, in which case it makes a
supplementary profit that can be invested at a later stage, which peps growth; 2/ or be passed on
to the consumer in the form of a fall in the prices of goods produced, which favours consumption
but increases the risk of deflation (the decline in energy prices spreads to other goods and
services).
These impacts are either immediate, notably on demand, or temporary, notably on profits. But the
decline in the price of energy can also have longer term impacts. Any supplementary investment
generated can increase the growth potential for an economy. The relative variation in the price of an
energy source compared with others can alter the energy mix consumed by a country and make
public policy choices redundant. Of course, this is the case for countries that have developed non-
conventional oil or renewable energies. The non-retention of cost falls for producers make result in a
deflationary spiral in the economy, undercutting investment and growth potential.

Chart 9: Energy prices and economic activity
Source: BCE
In practice, we see that the first two types of impacts are already spreading to economies. Terms of
trade are improving substantially in the euro zone but not in the rest of the G4: only barely in Japan,
where the sharp fall in the currency works annuls almost all the benefits from of the fall for oil, not in
the US when the strong dollar works against the impact, and still less in the UK which exports oil.
Terms of trade are improving in oil importing emerging countries (China above all, but also in India),
while they are deteriorating in Russia, a net exporter of oil and in Brazil due to the forex trend.
Household consumption is picking up fast in the G4 by disinflation; not in emerging countries, either
because their currency is collapsing (Russia), or as energy consumption is subsidised, the fall in
world prices does not favourably impact demand. Several central banks have already eased their
monetary policy in reaction to low inflation: the ECB with its QE, but also other central banks close to
the euro zone (Switzerland, Denmark, Sweden) and some emerging countries (China in November
2014 and February 2015, India in January 2015, Indonesia in February 2015).
Energy prices
Import prices
Consumer prices
Profits and/or output
price adjustments
Investment
Jobs
Wages
Real wages
Quantity adjustment Input prices
Savings for private
consumption
Substitution of
expensive energy and
energy savings
Terms of trade SupplyDemand
Short term
Long term

Chart 10:
G4: Terms of trade BRIC: Terms of trade
G4: Inflation (y/y in %) BRIC: Inflation (y/y in %)
If oil remains at current levels for the next three years, instead of heading towards $75 at end-2016
in our core working assumption, we think that household consumption will be one percentage point
higher in the US and in euro zone cumulatively over three years (cf. table 2). In the euro zone, at the
pump prices have adjusted faster in Germany and Spain than in France and Italy. It is therefore
likely that consumption will benefit more from low oil in the first two countries that in the latter two
(+1.5 point in Germany and Spain vs. +0.7 point in France and Italy).
Table 2: Macro projections
y/y in % US Euro zone
2015e 2016e 2017e 2015e 2016e 2017e
Core scenario (oil rises towards $75 )
Household consumption 3.3 2.4 2.3 1.9 1.4 1.6
CPI 0.7 2.4 2.0 0.2 1.5 1.5
Alternative Scenario (oil stable over the period)
Household consumption 3.6 2.8 2.4 2.2 1.8 1.7
CPI 0.4 1.9 1.9 -0.1 1.1 1.4
Source: Natixis
50
60
70
80
90
100
110
120
50
60
70
80
90
100
110
120
91 93 95 97 99 01 03 05 07 09 11 13
USA Eurozone UK Japan
40
60
80
100
120
140
160
180
40
60
80
100
120
140
160
180
91 93 95 97 99 01 03 05 07 09 11 13 15
Brazil China India
-4
-2
0
2
4
6
-4
-2
0
2
4
6
96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
USA Eurozone Japan UK
-5
0
5
10
15
20
25
30
35
-5
0
5
10
15
20
25
30
35
00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15
China India Russia Brazil

Study of the correlation for the euro zone between variations in oil prices in local currency and
consumption expenditure by type of good (table 3) suggests that food, household consumer goods,
rents, water and domestic energy profit more than other goods from a fall for oil. Above all, this
concerns consumer staples. We infer that the fall for oil favours the most modest revenue classes,
who consume more when their revenue is less rationed. However, we also see that compressible
goods and services such as leisure also benefit from a fall in oil prices. This suggests that the least
well off do not save but spend the increase in revenue stemming from lower energy prices.
Table 3: Correlation between the price of oil and final household consumption spending by sector of consumption in the euro
zone
y/y in % Simultaneous Postponed
Food products and soft drinks 0.2 -0.2
Alcoholic drinks, tobacco 0.1 0.1
Clothing and shoes 0.4 -0.1
Housing, water, gas, electricity and other fuels 0 -0.3
Furniture, household equipment, home maintenance 0.6 -0.2
Healthcare 0.1 0.1
Transport -0.4 0.2
Communication 0.2 0
Leisure and culture 0.3 -0.1
Education 0.4 -0.1
Hotels, cafés, catering 0.6 -0.1
Other goods and services 0.3 -0.1
Total 0.2 -0.1
Source: Natixis
Longer term, demand for private vehicles could be impacted by low oil. Note that the fall in fuel
prices is unlikely to impact car demand, as this is driven by other factors (age, habit amongst the
young, credit, etc.) and as a large part of the consumption rebound in the auto sector has already
been absorbed by the scrappage premium programmes put in place in the last few years. However,
the decline in the price of fuel could have a bearing on the type of vehicle demanded, probably with
a slight jump in demand for the less economic vehicles. And yet, we do not think that the lasting fall
for oil will result in a clear jump in demand for energy intensive goods/services owing to stricter
regulatory standards.
As for supply, comparison of the two subcomponents of the manufacturing sector PMI surveys gives
an idea in real time of the impacts of the fall for oil. Indeed, we see that the price of inputs has
declined more than sales price, in reaction to the fall for oil, in the G4, large euro zone countries and
leading emerging countries. The slide for oil has thus allowed the world manufacturing sector to lift
its margins. The detail for the G4 suggests that the recovery for company margins is of a similar
scale in the US, UK and euro zone. Margins are only declining in Japan. In this country, input prices
indeed increased in H2 14, the abrupt fall in the currency having erased the impacts of the fall for oil.
In the BRICs, the situation varies. Margins are up sharply in India and China since last July. While
their rise stems solely from the fall input prices in India, selling prices remaining stable, Chinese
industry has abandoned part of the rise in its margins by slashing its selling prices. This may be
explained by the production overcapacity for heavy industries which are declining at present owing
to the structural transition for the economy. In Russia and to a certain extent in Brazil, margins are
down however. This stems from the depreciation of the currency which, as in Japan’s case, has
erased the impacts of the fall in input prices. Russia has even been forced to raise selling prices to
cope with this but insufficiently compared with the increase in input prices.

Chart 11: Manufacturing PMI: Selling prices– input prices
G4 BRIC
This rise in profits is temporary. Traditional phenomenon in a positive supply shock, it indicates
however that risk of deflation via oil is not great. Indeed, if profits increase, it is because producers
do not pass on the full decline in production prices to consumers. The decline in prices is thus
limited to energy and does not spread to other goods.
Given that they retain a part of the generated margins, the sectors most favoured by the fall for oil
are unsurprisingly those which consume the most energy, i.e. air transport, chemicals, and energy
producers aside from oil companies (table 4). Econometrics suggest that Spanish manufacturers
are more favoured than others, notably in the energy sector.
Table 4: Impact of a 10% rise in the energy price on producer prices: breakdown by main business
% Germany Spain France Italy Euro zone
Agriculture and fisheries 0.36 0.29 0.34 0.29 0.35
Manufacturing sector 0.27 0.34 0.21 0.27 0.29
o/w:
Chemical materials 0.70 0.92 0.50 0.38 0.70
Basic metals 0.64 0.54 0.29 0.52 0.59
Energy 4.82 5.15 4.12 4.90 4.88
Construction 0.18 0.18 0.16 0.23 0.20
Services 0.12 0.20 0.13 0.18 0.16
Commerce 0.14 0.21 0.20 0.24 0.19
Transport 0.63 0.79 0.46 0.44 0.60
Road transport services 0.47 0.90 0.62 0.50 0.64
Waterway transport services 0.50 1.42 0.57 0.29 0.63
Air transport services 2.46 1.85 0.67 1.01 1.53
Telecommunications 0.09 0.19 0.12 0.14 0.12
Other services 0.07 0.12 0.08 0.12 0.10
Source: ECB
-30
-20
-10
0
10
20
-30
-20
-10
0
10
20
03 04 05 06 07 08 09 10 11 12 13 14
USA UEM Japan UK
-30
-20
-10
0
10
20
-30
-20
-10
0
10
20
03 04 05 06 07 08 09 10 11 12 13 14
Brazil Russia India China

The resulting impacts on public action
Beyond impacts on the terms of trade, demand and supply, a lasting decline in oil prices will also
impact economies. We are thinking above all of public finances and energy policy choices. The
public finances of developed economies will be little impacted directly by the slide for oil, the taxes
directly received on fuels not being a function of prices. In the US and in Europe they represent a
fixed amount per gallon/litre sold. The impact on VAT revenue on oil products is downward,
however, but should be offset by the increase in VAT inflows stemming from accelerated
consumption. In the US, only producer states (Texas, Louisiana, Oklahoma and Alaska mainly) are
likely to suffer from the fall in prices, via the decline in taxes on oil businesses and via the impact of
automatic stabilisers with a decline in business expected in these states. Canada is an exception in
this sense: in this country, tax revenues from several provinces depend on oil exports. However, if
we look more broadly at countries where implicit taxes on energy are the highest, we can conclude
that public finances in the UK, countries in northern Europe and Italy will be more impacted than
elsewhere (table 5).
Table 5: Implicit tax rate on energy in 20121
€
Denmark 303.61
UK 276.26
Italy 233.43
Sweden 216.86
Malta 200.37
Greece 186.13
Germany 185.29
Luxembourg 181.29
Netherlands 180.2
EU (28 countries) 172.78
Slovenia 172.24
Ireland 172.12
France 161.6
Austria 145
Cyprus 141.29
Portugal 134.07
Finland 127.63
Spain 114.16
Belgium 102.36
Poland 96.38
Estonia 91.12
Croatia 87.43
Czech Republic 79.08
Hungary 75.41
Latvia 70.43
Lithuania 69.65
Romania 68.13
Bulgaria 65.51
Slovakia 47.52
1 € gathered per tonne of oil equivalent consumed
Source: EC

As for emerging countries, countries which subsidise energy prices could see their public finances
improve with the fall for oil (Indonesia, Malaysia, Myanmar, and India) on the condition of a weaker
fall in tax revenue linked to oil. Remember also that several oil exporting emerging countries
subsidise oil products for their domestic consumption (Middle East, Algeria, Tunisia, Venezuela,
etc.). For these countries, the negative impact on the public finances will be reduced by a fall in
domestic subsidies.
Amongst the leading emerging countries, it is in Russia that the public finances are hardest hit, as
half of budgetary inflows stem from the energy sector. Up till now, the balance has not been
especially hard hit as public spending is denominated in national currency and the slide for the
rouble has offset the decline in oil revenues in dollars. However, oil maintained at $50/bbl in a
context of stabilisation of exchange rates is likely to reduce revenues from Russian government
inflows in RUB by over 20% in 2015. This will probably lead to fiscal adjustments with cuts to public
expenditure.
Other emerging countries with heavy subsidies on energy prices may profit from the low oil price to
reform the budget and cut public spending. This is the case for Malaysia which announced the
elimination of oil and diesel subsidies in December 2014. Indonesia is also committed in this sense,
putting a ceiling on subsidies of diesel and ending aid for petrol as of 1 January 2015. However, tax
inflows on oil and gas represent 1/5
th
of the budget of the Indonesian government, and the net
impact of the decline in subvention combining the low oil price on improvement in the budgetary
balance is not determined.
Finally, the budgetary solvency of indebted states (we are thinking of Italy and Japan of course)
could suffer from low oil. Lastingly low inflation reduces nominal growth and works against the
decline in deficit and debt/GDP ratios.
Past energy choices may no longer be as profitable in case of low oil. The US is seeing its
comparative advantage with shale oil and gas (2 points of GDP vs. Europe, 3 points of GDP vs.
Japan) narrow. A lasting decline is also likely to dent US growth. Part of the recovery for the
American economy is based on the energy revolution over the last few years. And this is largely
based on year extraction of shale gas and oil. Natural gas is the energy most used by American
industries (notably in the production of chemical products and metals which use natural gas
derivatives), which offers an advantage on the international level with very low prices de-correlated
from the price of oil. These industries could suffer lastingly from the relative fall in productions costs
for international competitors thanks to lower oil and natural gas. A loss of competiveness probably
increased by the supplementary rise of the dollar is probable in such a scenario. And, in case of a
lasting decline for oil, investment spending in shale oil and gas extraction sectors may return to a
level similar to that before the crisis, which would imply a permanent decline of $60bn for investment
in structure, i.e. 0.3-0.4 point of GDP. In Europe, we are thinking of course of the reduced
profitability of investments in renewable energy. Germany and countries in northern Europe will be
hit.

Summary of the macro impacts: euro zone and Asia, the
big winners
Table 6 summarises all the impacts of a slide for oil on economies: impacts in terms of trade
(improvement in trade balances and forex); impacts on demand, notably consumption, either directly
by disinflation, or indirectly by the easing of monetary policy in the wake of the disinflation; impacts
on supply by a temporary rise in profits and by a return to investments or, conversely, an obstacle to
investment in the oil sector; impacts on the public finances (type and amount of the taxes on energy,
energy subsidies, revenues on oil exports and budgetary solvency in case of low inflation); impacts
on past choices in energy policy.
Summing up the positives and negatives for the main economies (G7, BRICs and intermediary
emerging countries), we see that the euro zone and Asia, emerging and developed, are the main
winning regions. These regions are both net importers of oil. Demand will be more stimulated in the
euro zone, however, than in Asia. This is due to differences in forex trends (depreciations in Asia
which diminish terms of trade and disinflation impact), but also because energy consumption being
subsidised in many Asian countries, an oil counter shock will have less direct impact than in the euro
zone.
Note that in the euro zone, France will derive greater advantage from low oil than its two large
neighbours. Germany now feels the reduced profitability of its choice in favour of renewable
energies (abandonment of nuclear). The Italian public finances will suffer more than the others from
the situation, owing to the high level of energy taxation and solvency erosion (debt higher than
elsewhere).
In Asia, demand in Indonesia will be less stimulated than in India, China and elsewhere owing to the
major subventions that smooth the oil cycle. However, the public finances of Indonesia will improve
markedly. In Japan, the choice of a low currency substantially reduces the positive impacts of low
oil.
Outside these two regions, Russia is clearly the big loser, like Canada, also a net oil exporter.
Paying the price of renewed energy independence, the US does not gain much. On the contrary, the
investments in the oil sector and the energy policy focused on shale oil and gas mean that it loses a
competitive edge over other G7 countries. We have not mentioned the Middle East but it is clear that
this region is also a loser with a forex regime (US dollar peg) which will even be unfavourable in
terms of sound budgetary balance.

Table 6: Summary of the impacts of lasting low oil on the main economies in the current context
Terms of trade Demand Supply Resulting impacts Total impact on
Economy
(trade balance
/ forex)
(consumption /
disinflation /
monetary policy)
(profits /
investment /
specialisation)
Public
finances
Energy
policy
(sum of the
signets)
(tax revenues, energy
subsidies, solvency)
(past choice)
G7
US 0 + - 0 -- --
Canada - + - - 0 --
Japan + + + - 0 ++
UK - ++ + - 0 +
Germany ++ ++ + 0 -- +++
France ++ ++ + 0 + ++++++
Italy ++ ++ + - 0 ++++
BRIC
Brazil - 0 + - 0 -
Russia -- 0 - - 0 ----
India + + + + 0 ++++
China ++ + + 0 0 ++++
MIKT
Mexico - + + 0 0 +
Indonesia ++ 0 0 + 0 +++
South Korea ++ + + 0 0 ++++
Turkey + + + 0 0 +++
Source: Natixis
sylvain.broyer@de.natixis.com
thomas.julien@us.natixis.com
bei.xu@natixis.com

4. SRI: Ambivalent signals for the
environment
Obviously the first stage in the debate consists in considering that sustainably low oil prices is a
major threat to the pursuit of targets for decarbonising the economy and in particular the
search for energy efficiency gains in energy-intensive sectors (the economic incentive is
automatically lower) and the further expansion of the renewable energy sector (their relative
economic equation suffers).
More generally, the strain that this environment is putting on growth could be such that it might
encourage States to review their carbon timetables. As a reminder, in preparation for the eagerly-
awaited Paris Conference of the Parties to the United National Convention on Climate change (COP
21), in December 2015, the 192 nations must submit their carbon targets for 2020 to the UN in
March. Oil-producing countries, most of which are not in the OECD, will be the hardest-hit and might
have to revise down their ambitions. And yet, looking to find ways to share the effort between
developed and developing countries is one of the prerequisites to hope for a post-Kyoto global
agreement on climate change in Paris...
Even so, amid high oil prices, although reducing energy consumption is a very powerful economic
driver, bear in mind that for several decades, the political and regulatory dimension for
decarbonising economies has, in itself, bee, a key driver for investment in low-carbon
technologies. Moreover, by their very nature, these policies are medium/long term in scope,
extending out to 10-20 horizons. The sustainability of the current oil pricing environment is therefore
a decisive issue for States’ capacity to meet their carbon commitments.
We think for example that this pricing climate will not push the EU to review its climate or
renewables commitments. Remember that last October, the EU signed up to Climate/Energy targets
out to 2030, including, in particular, a 40% reduction in CO2 emissions (vs. 1990 and -20% by 2020)
and a binding target of having a 27% share of renewables in the European energy mix (vs. 14%
today).
Similarly, the European Commission is on track to adopt a structural reform of the carbon market,
that is hoped will better adapt the EU Emission Trading Scheme (ETS) mechanism to economic
reality and support (via the creation of a reserve market) the price of a tonne of carbon, which so far,
has failed to send the much-hoped-for signal to industrialists... Up till now, within the EU ETS, the
price of a tonne of carbon is virtually exclusively driven by Brussels policy challenges regarding
cyclical and structural reforms to the cap and trade mechanism. For this reason, the collapse in oil
price has not had any notable impact on carbon prices. More generally, the shared observation is
that carbon market mechanisms, having come under assault from persistent lobbying by
industrialists, have not proven to be very effective as price signals.
At the same time, and it becomes very clear upon analysing the capex cuts announced by integrated
oil companies, sustainably low oil prices tend to seriously undermine the profitability of
certain oil projects that are among the most carbon-intensive or the riskiest environmental-
wise, similar to the conclusions of lawyers on the notion of stranded assets, by taking another route
than carbon restrictions. This is illustrated in the successive announcements of the shelving or
postponement of offshore Arctic or tar sands exploration projects. Carbon Tracker goes even further,
estimating that 92% of tar sand projects (at the discovery stage) in the coming decade will require oil
prices upwards of $95/boe.

Moreover, this low pricing environment in our view creates, the “ideal” platform for increasingly
vocal proponents of a national, regional and, why not, global (one can always hope!) carbon
tax. Similarly, as State subsidies of fossil fuels are increasingly a matter for debate, this low pricing
environment also provides favourable conditions for a radical overhaul of government
mechanisms supporting fossil fuel consumption.
Lastly, we would emphasize that although reports are likely on certain renewable projects, some
renewables (on-shore wind, solar in certain geographies in particular) have reached, against a
backdrop of a massive reduction in technological and equipment costs, their network parity and
should, – in our view – weather the low oil price storm.
orith.azoulay@natixis.com

5. Financial equilibria in oil sectors
thrown off keel
Oil companies: cash-flows evaporating
The sharp fall in oil prices since June 2014 and the prospect of them remaining at a low level, with
$52/b in 2015 and $56/b in 2016, will have very negative impacts on oil groups’ earnings and
financing situation. They have started to announce significant reductions (10-35%) in capex budgets
and are working to pare operating costs. Despite these cuts, balance sheets remain stretched and
dividends could be at risk. We are maintaining our Underperformance rating on the sector, steering
clear of the most vulnerable players in terms of shareholder returns: ENI (Reduce; target price
€14.5) and OMV (Reduce; target price €22.4).
Fast reactions to the price slump
The downturn in crude prices in summer 2014 came in a specific environment for the industry. As
early as 2013, a number of oil companies, notably Statoil and Total, became concerned about the
inflationary drift in costs in the sector, which was making future developments uneconomical, despite
crude price assumptions of close to $100/b. Against this backdrop, quite a few projects, across a
range of geographic zones, were pushed out. Meanwhile, independent oil companies (E&P), notably
those exposed to shale developments, were beginning to call into question their business model
which was based on overconsumption of cash flow given the debt levels reached. Groups like
Chesapeake, Devon, Hess as well as smaller players such as Sandridge began, under pressure
from the markets, to cut back investment budgets and divest assets as early as 2013/14.
Sharply lower oil prices then acted as a spur for companies to step up the policies already in place.
The fact that the slump was so swift and to broadly unsustainable levels for the sector as a whole,
merely exacerbated the difficulty.
Very significant cash flow impact
In view of the sensitivities given by the groups and based on our price scenario of $52/b for 2015
and $56/b in 2016, the negative impact on 2015 net profits works out to around 89%, all else being
equal, relative to 2014 earnings and around 81% for 2016 net profits all else being equal. ENI and
OMV are set to be the most affected given their greater-than-average earnings sensitivity in the
sector.

Table 7: Calculation of sensitivity to crude prices
M currencies NP 2014 at
$99.22/b
Impact
$1/b
Impact with
Brent at $52/b
% of
2014 NP
NP 2015e Impact with
Brent at 56 $/b
NP 2016e Change
2016/14 (%)
BP ($) 12,136 165 -7,791 -64 4,345 660 5,005 -59
Shell ($) 22,562 320 -15,110 -67 7,452 1,280 8,732 -61
Total ($) 12,837 170 -8,027 -63 4,810 680 5,490 -57
ENI (€) 3,707 140 -6,611 -178 -2,904 560 -2,344 -163
Repsol (€) 2,003 18 -850 -42 1,153 72 1,225 -39
OMV (€) 1,133 28 -1,322 -117 -189 112 -77 -107
Average -89 -81
Sources: Companies, Natixis
Nonetheless, we need to exercise caution in this analysis, bearing in mind that companies’
sensitivity indicators are seen as reliable only for limited fluctuations in crude prices. With a change
of $47/b, the indicators are less credible. For continental European firms, €/$ variations are another
factor in earnings volatility, ENI being the most exposed to changes in the euro.
Table 8: Calculation of sensitivity to €/$ variations
M currencies Chg. (%) Pre-tax impact Post tax impact 2015 impact for a €/$ rate from 1.33 to 1.10
Impact 2015 pre tax Impact 2015 post tax
Total ($) +0.1,$/€ -700 -200 -1,610 -460
ENI (€) +0.05,$/€ -280 -100 -1,288 -460
Repsol (€) +0.13,$/€ -350 -200 -619 -354
OMV (€) +0.1,$/€ -250 -175e -575 -403
The fall in earnings automatically produces reductions in cash flow, which are also very significant
and all the more damaging because the capex is on a high base.
Table 9: Impact of lower prices on cash flow
M currencies
Cash-flow 2014
(after chg. WCR)
Impact Brent at
$52/b
% of cash flow
2014
Cash flow
2015e
Capex
2014
Funding deficit if capex
stable
BP ($) 32,754 -7,791 -24 24,963 26,400 -1,437
Shell ($) 45,044 -15,110 -34 29,934 35,300 -5,366
Total ($) 25,608 -8,027 -31 17,581 26,429 -8,848
ENI (€) 15,089 -6,611 -44 8,478 12,200 -3,762
Repsol (€) 3,183 -850 -27 2,333 4,195 -1,862
OMV (€) 3,666 -1,322 -36 2,344 2,480 -136
Rapidly reduced capex budgets
The financing imbalance created by lower oil prices has led groups to scale back their capex
budgets. But the adjustment seems to be on a larger scale and faster than in previous crises.
Indeed, oil budgets have historically had a low level of flexibility as projects that are already in
progress do not tend to be halted. In the previous crisis, in 2008/09, only the Manifa project
(>€1.5bn) was rescheduled. This development had been launched in July 2008, just before the rapid
collapse in prices and work was still in the early stages. The most flexible portion of the budgets is
exploration spending (2/4%). In 2009, major groups reduced their capex by 13%. Globally, world
E&P capex budgets are estimated to have been cut by 15%.

Table 10: Majors’ capex trends between 2008 and 2010
$m Capex
2008
Change
08/07 (%)
Change
08/04 (%)
Capex
2009
Change
09/08 (%)
Capex
2010
Change
10/09 (%)
Total 20,071 25,0 81,2 18,606 -7 21,587 16
BP 24,143 22,7 47,4 21,391 -11 21,415 0
ENI 27,342 -1,5 145,0 22,737 -17 18,641 -18
Royal Dutch Shell 35,714 47,9 178,0 29,192 -18 28,888 -1
Repsol 8,220 11,7 148,1 6,221 -24 6,773 9
OMV 4,753 49,7 546,9 3,075 -35 2,769 -10
ExxonMobil 26,143 -6,6 75,5 27,092 4 32,226 19
Chevron 22,775 13,7 174,4 22,237 -2 21,755 -2
ConocoPhillips 19,855 53,9 190,0 12,011 -40 10,733 -11
However, relative to 2009, investment in shale oil and gas has made budgets more flexible. Indeed,
developments in this area tend to be very intensive in terms of drilling, where there is greater
spending flexibility than for a deep-water field.
Table 11: Projected capex budgets for 2015
$bn Capex 14 Capex 15 Change (%)
Tullow 2.10 2.00 -5
BHP Billiton 14.80 14.20 -4
Genel 0.65 0.3-0.35 -50
CNRL (CADbn) 11.96 8.60 -28
Suncor (CADbn) 6.80 7.2-7.8 10
Santos 3.50 2.00 -43
Canadian Oil Sands 0.94 0.56 -40
Pacific Rubiales 2.30 1.50 -35
Parex Resources 0.29 0.33 14
Precision Drilling 0.89 0.49 -44
Pembina Pipeline 1.40 1.93 38
Athabasca Oil 0.67 0.27 -60
Meg Energy 1.20 1.20 0
Baytex 0.765-0.79 0.575-0.65 -21
Trilogy Energy 0.43 0.25 -42
Vermilion Energy 1.28 0.53 -59
Oasis Petroleum 2.50 0.75-0.85 -68
Goodrich Petroleum 0.26 0.15-0.2 -31
Husky 5.10 3.40 -33
Marathon 5.50 4.3-4.5 -20
Rex Ener 0.35-0.365 0.18-0.22 -44
Cumulative amount 80.39 64.77 -19

Table 12: Majors’ capex budget trends in 2015
$m Organic capex in 2014 Chg. 2014/13 (%) 2015 trend (organic) Trend 2015 (%)
Total 26,429 -23.2 23-24 000 -11.1
BP 22,677 -7.8 20 000 -11.8
ENI 16,225 -8.2 <16 225 -€2bn on constant currencies
Royal Dutch Shell 35,300 -15.0 < 35 300 <0
Repsol 5,580 5.8 3 800 -29% Upstream
OMV 3,301 1.0 2 500-2 800 €m -20/-35% in €
ExxonMobil 38,500 -0.1 34 000 -11.7
Chevron 40,946 -2.2 35 000 -13.0
ConocoPhillips 17,085 10.0 11 500 -32.7
The initial investment trends given by the majors show a faster pace of reduction than that seen in
the previous cycle downswing. The pattern is likely to become more marked in 2016 given the
flexibility resulting from projects not being launched but also the impact of lower prices in the
services chain. Shell estimated its budget flexibility at 10% in 2015, with 30% in 2016 and 50% in
2017. But this flexibility also has an impact on production (and therefore cash flow) as budget
reductions affect work in mature zones where the rate of decline is rapid: OMV estimated the decline
in its mature zones in Austria and Romania at 10%/year, without work.
The speed of the investment cut-backs stems both from proactive attitudes and passive trends.
Proactive attitudes: drastic exploration budget cuts from a high base
Drawing on the themes highlighted by the successes of the major exploration groups (Tullow, BG,
Anadarko, Repsol), all the groups stepped up their exploration expenditure. The 2013 results were,
however, disappointing and the hopes placed in a number of new zones failed to live up to
expectations, though further drilling will have to provide confirmation. Because of the poor results in
drilling, exploration spending booked as charges has increased and taken a toll on quarterly
earnings. Basins that had been the focus of previous acquisition were also subject to impairments
(Brazil/BP, Liquid Rich Shale/Shell).

Project status overview
Table 13: Key projects in the pipeline
Projects Operator Type Zone Estimated launch date Status
Bressay Statoil Offshore North Sea UK FID 2016 Selection of concept expected in 2015
Johan Castberg Statoil Offshore Barents Sea Selection of concept expected in 2015
Rosebank Chevron Offshore North Sea UK No more official date In FEED phase
Mad Dog phase 2 BP Offshore Gulf of Mexico No official date Existing plans revised
West Nile Delta BP Offshore Egypt On hold (political situation)
Fram Shell Offshore Cancelled
Browse LNG Woodside LNG Australia FID expected mid 2016 Delayed several times, FEED expected in 2015
Prince Rupert Petronas LNG Canada 2019, FID delated in 2014
Scarborough ExxonMobil LNG Australia FID delayed in 2013, no date FLNG option seen as the best option
Edradour Total Offshore UK Development launched in June 2014
Maria Wintershall Offshore North Sea Development contract awarded in January 2015
KGD 6 Reliance Offshore India Blocked by a legal dispute
Kudu Offshore Namibia Tullow withdrew from partnership in November 2014
Banda Gas export Tullow Trunkline Africa Project approved on 29 May 2014
Prosperidade Anadarko Offshore Mozambique First gas expected in 2017
Bonga SW RD Shell Offshore Nigeria FID expected in 2015-16
Rosebank Chevron Offshore North Sea UK FID expected in 2015 FEED entered in 2012
Area 4 FLNG ENI LNG Mozambique FID expected end 2015
Browse FLNG Woodside LNG Australia FID expected mid-2016
NEB 3 Adco Onshore EAU EPC due for completion in Q4 16
Khurais expansion Aramco Onshore Saudi Arabia Start of production expected in 2017
Nasr Field development Adma Opco Offshore UAE Start-up expected end-2018
LNG Canada Shell Onshore Canada FID expected 2016-17
As excessive cost pressures were severely undermining project profitability, companies began to
push out developments in all the major basins from 2013. Many were subject to re-engineering
phases with a view to lowering costs. On Kaombo, for example, Total obtained a cost reduction of
$4bn for a project valued at over $20bn. BP is also in the process of reviewing the budget for Mad
Dog 2, down from $22bn to $14bn.
Plummeting oil prices are encouraging this trend for project deferral, which means groups have to
review the stress-test scenarios for developments.
Passive trends: end of investment cycles
The drop in investment levels announced by the main international players relates in part to the
completion of an extensive phase of activity, culminating in a number of major project launches as
early as 2013 (with some difficulties as well) and in 2014, and continuing in 2015 and 2016.
The projects with the highest capital intensity (in bold in the tables) are also in most cases,
particularly for Australian LNG, long-plateau developments offering upsides through debottlenecking,
tie-backs and expansions.

Table 14: Main start-ups in 2013
Shell BP Total ENI Repsol ExxonMobil Chevron ConocoPhillips
Majnoon Atlantis North MLE Margarita Ph2 Kearl Papa Terra
North Rankin North Rankin CAFC Sapinhoa Nigeria Satellite
BC-10 El Merck Carabobo Kipper Tuna Turrum El Merck
Gumusut Chirag Junin Gumusut
Kashagan1 Kashagan1 Kashagan1 Kashagan1
Angola LNG1 Angola LNG1 Angola LNG1 Angola LNG1
Jasmine Jasmine
Abo Ph3
1 Difficult start-up.
Mars B Mars B Block 15-06 Block 15-06 PNG LNG Jack/St Malo
Cardamon Na kika Ekofisk South Ekofisk South Cold Lake Nabiye Tubular Bells Ekofisk South
Petai Kinnoul Laggan Tormore Kinnoul Barzan Big Foot
CLOV CLOV Perla Perla CLOV
Sunrise Ofon2 Lucius Lucius
Bonga SW Bonga SW Bonga SW Bonga SW
Hadrian South Hadrian South
Goliat
Gorgon GLNG Sapinhoa Gorgon Gorgon AP LNG
Surmont 2 Big Foot Surmont 2
Eldfisk Eldfisk Eldfisk
Moho North (Ph 1 bis)
Companies that were at the end of their investment programmes had therefore begun to scale back
their budgets. This has weighed on the trend for goods and services prices since 2013, particularly
capital costs which have stabilised.

Shifting value chain
Chart 12: Construction cost and operating cost trends upstream (base 100 in 2000)
Source: IHS CERA
With reduced cash flows, all groups now have to drastically ramp down their investment spending.
Several segments in the services industry are starting to see price reductions, particularly those
most exposed to exploration activities, namely drilling and seismic. This negative momentum is all
the more marked given that new capacity will continue to come on stream in 2015 in these two
segments.
In the previous crisis of 2009, companies’ production costs saw a similar reduction to that of
services. The drop in unit production costs came to 5% on average.
Table 17: Unit production cost trends
$/b 2007 2008 2009 Chg. 2008/09 (%) 2010 Chg. 2009/10 (%)
Royal Dutch Shell 7.36 7.67 10.40 35 10.06 -3
BP 6.85 7.00 6.19 -12 6.52 5
Total 4.90 6.42 5.88 -8 6.19 5
ENI 4.94 5.44 5.71 5 6.17 8
Repsol 9.68 12.42 9.97 -20 12.74 28
Statoil 8.08 7.11 6.40 -10 8.02 25
OMV 13.20 14.38 12.04 -16 12.21 1
Exxon 6.70 8.15 7.86 -4 7.64 -3
Chevron 7.95 9.66 9.38 -3 10.27 10
ConocoPhillips 7.24 7.52 7.33 -3 7.61 4
Average 7.69 8.58 8.11 -5 8.74 8
Cost adaptation, while it may not be immediate, is all but inevitable. The financial and stock-market
performances of oil services companies suggest that this is under way.
90
110
130
150
170
190
210
230
250
2000 2002 2004 2006 2008 2010 2012 2014
Upstream Capital Cost Index Upstream Operating Cost Index

Chart 13: Cost adaptation time in previous crises
Source: BP Upstream presentation, December 2014
Impact of reductions in non-operated investments
The effects of lower investment budgets is spreading through the industry, with the impact both for
operated projects, for which the groups are leading developments, but also non-operated projects
for which they are partners. The proactive attitude of operators such as Statoil in a country like
Norway where it is one of the main operators, has a knock-on effect on all the groups active there.
Shareholder returns at risk
High payout ratios
The scale and duration of the fall in prices could undermine shareholder returns. Share buybacks
are the first to be targeted in the case of reduction and in our sample, Shell, BP and ENI are the only
players active in this sphere.
Table 18: Share buybacks since 2012
M currencies 2012 2013 2014
Royal Dutch Shell ($) 1,492 5,000 2,357
BP ($) 0 5,475 4,055
ENI (€) 0 0 292
Dividends could also be revised if the crisis persists. On this front, ENI, with a payout ratio of nearly
100% in 2014, is clearly the most exposed, although, unlike the previous crisis of 2009 when ENI
had to cut its dividend, groups still have access to bank credit.
2004 2007 2010 2013
40%
30%
20%
10%
0%
-10%
20%
15%
10%
5%
0%
-5%
Oil Price (LHsc) Upstream costs (RHsc)
lag
lag

Table 19: Pay-out ratios
M currencies Adjusted net profit 2014e Dividend paid 2015e Payout ratio (%)
BP ($) 12,292 6,078 50
Royal Dutch Shell ($) 22,562 11,866 53
Total ($) 12,837 6,679 52
ENI (€) 3,707 4,434 120
Repsol (€) 2,003 1,499 74
OMV (€) 1,133 677 60
To address the issue of cash consumption due to dividend payments, BP, following Macondo, and
Repsol, after the expropriation of YPF, put in place scrip mechanisms, allowing dividends to be paid
in shares. The flipside of limiting cash outflows is that it dilutes EPS. Total announced at the Q4
earnings release that it was putting in place a scrip dividend mechanism, with an expected option to
receive payment in shares. Two-thirds of the dividend could be paid in shares.
Low gearing ratios prior to the crisis
Having maintained proactive portfolio management policies, groups now have comfortable gearing
ratios which should allow them to absorb a portion of the cash flow deficit. The ratings agency S&P,
which revised the outlook for the whole sector to negative and placed ENI and BP on negative
watch, noted that compared to 2008, the combined debt of the five European majors amounts to
$240.4bn, versus $162.9bn, so their flexibility is reduced.
To strengthen balance sheets, while there is an abundant supply of cash and rates low, Total issues
€5bn worth of hybrid notes at the start of February. Repsol is also planning a hybrid bond issue of
€5bn to refinance the acquisition of Talisman.
Based on the deficits identified, gearing ratios should remain in the desired range, except for OMV,
Total and ENI where they could rise to nearly 40%.
Tableau 20: Target gearing ratios
% Gearing end-2013 Gearing end-2014 Target Sensitivity
BP 19.7 20.5 10%-20%
Royal Dutch Shell 19.2 13.8 0%-30% +10% on gearing ratio creates resource of $20bn
Total 23.7 31.9 <30% +1% on gearing ratio creates a resource of $1bn
ENI 24.5 22.0 10%-30%
Repsol 27.6 14.3 Keeping investment grade
OMV 28.8 33.6 <30% long term

Sector reshuffle
For ‘aggressive’ reasons (portfolio repositioning, discounted valuations) or defensive ones (balance
sheet strengthening, synergy generation), oil crises tend to lead to sector reshuffles. As things
stand, we do not see a wave of mergers similar to 1998/2000 until the rise in prices becomes visible,
with transactions picking up on the exit from crisis.
Consolidation in times of crisis
Wave of consolidation in 1999/2000
Chart 14: Crude prices in 1997/99 ($/b)
Source: Datastream
The price slump from 1997, which gathered momentum as of the Jakarta OPEC meeting in
November 1997, acted as a trigger for the string of mergers in 1998/2000.
Table 21: Major deals in 1998/2000
Acquirer Target Date Price ($bn) Methods of payment
Arco Union Texas Petroleum 04/05/1998 2.5 Cash
BP Amoco 11/08/1998 48.2 Stock
Exxon Mobil 27/11/1998 75.3 Stock
Total Petrofina 01/12/1998 11.6 Stock
Repsol 15% YPF 21/01/1999 2.0 Cash
BP Amoco Arco 01/04/1999 26.8 Stock
Repsol 85% YPF 01/05/1999 13.4 Cash
Elf Saga Petroleum (failure) 29/05/1999 2.2 Cash
Statoil-Norsk Hydro Saga Petroleum 11/06/1999 2.6 Cash and stock
TotalFina Elf 05/07/1999 54.0 Stock
Chevron Texaco 15/10/2000 35.1 Stock
Phillips Conoco 18/11/2001 35.0 Stock
It is worth noting, however, that major moves began to be announced in August 1999, while the low
point price-wise came in December 1998/February 1999. Visibility on the upturn in prices did not
improve until the third quota reduction was unveiled at the OPEC meeting in March 1999.
8
12
16
20
24
28
1997 1998 1999 2000

Table 22: OPEC quota trend in 1998/99
Date Change in quota Aid from non OPEC players
29/11/1998 Increase of 2.5 Mb/d
(+10%) to 27.5 Mb/d
31/03/1998 Reduction of 1,245 Mb/d Norway promises reduction of 100,000 b/d
24/06/1998 Reduction of 1,355 Mb/d Russia, Oman and Mexico promise reduction of 500,000 b/d
23/03/1999 Reduction of 1.7 Mb/d Non-OPECs promise reduction of 388,000b/d
Cumulative Reduction of 4.3 Mb/d (-15%) Promised reduction of 988,000 b/d
Sources: OPEC, Natixis
Less repositioning in the financial crisis of 2008/09
Chart 15: Crude price trend in 2007/09 ($/b)
Source: Datastream
The price collapse triggered by the 2008 financial crisis did not generate the same frenzy of deals as
in 1998. The decline was indeed more dramatic and swifter, with OPEC quickly announcing output
cuts of 4 Mb/d. Importantly, the crisis greatly limited access to bank credit.
Table 23: Acquisitions in 2008/09
Acquirer Target Date Price in $bn Methods of payment
ConocoPhillips 50% Origin Energy 30/10/2008 8 (AUD$9.6bn) Cash
ExxonMobil XTO 14/12/2009 41 Titres
Overall, these transactions had fairly mixed results. They did help reposition portfolios and increase
groups’ scale and resistance, but operating and financial performances have disappointed.
20
40
60
80
100
120
140
160
2007 2008 2009 2010

Fresh motivations in 2015
Mega mergers harder to imagine
At this stage, we do not expect any mega mergers, for four reasons:
− The financial performances of the majors have disappointed, as they have struggled to maintain
profitability against a backdrop of high prices. Big is no longer beautiful. Some have even
divested operations through spin-offs to boost profitability, among them downstream activities
(Marathon, ConocoPhillips).
− The giant mergers of 1998/2000 were largely on a national basis. The two cross-border deals
proved unconvincing. BP-Amoco-Arco is subject to legal entanglements in connection with the
Macondo accident and Repsol parted company with YPF after a damaging expropriation process.
− Over the course of the wave of mergers, the anti-trust authorities adopted an increasingly tough
stance in terms of their demands, making synergies more complicated to implement. Also, “safe”
countries that are a particular focus of attention, such as Australia, Norway or recently Canada,
after CNOOC’s offer for Nexen, have tightened the rules in relation to predators.
− Major players in the sector are talking more about asset purchases, which includes small single-
asset companies rather than large-scale targets.
Meanwhile, large operators have been weakened by the current turbulence:
− BG Group’s management has changed and the company has yet to make any moves on the
asset disposals that will help fund production growth, which has proved disappointing.
− The dividends of ENI and Statoil are seen as being under threat, given their investment
requirements and financial structures. But the fact that these national champions are partly state-
owned suggests that mergers are not on the cards.
− With the Sword of Damocles hanging over BP because of heavy US penalties and Rosneft’s
exposure to international sanctions, the group again looks under pressure in the low price
environment. The scale of the potential liabilities could thus put predators off.
The sector reshuffle has begun
Under severe pressure from lower crude prices, independents have seen their valuations slump by
around 51% since the high points of June 2014 for those exposed to international markets, and by
40% for those active on the US onshore market.

Table 24: Valuation of independents with international exposure
Companies Price at Market cap Market cap Chg. Geographical exposure
27/02/15 M currencies $m 16/06/14 ($m) (%)
Afren (£) 0.09 95 147 2,634 -94.4 Nigeria, Ivory Coast, Kurdistan, Ghana, Saint Tomé et Principe,
Congo, Ethiopia, Kenya, Seychelles, Tanzania, Madagascar, South
Africa.
Africa Oil ($CAD) 2.39 884 708 2,166 -67.3 Kenya, Ethiopia, Somalia, Puntland.
Gulfkeystone (£) 0.49 439 679 1,246 -45.5 Kurdistan, Algeria
DNO (NOK) 14.98 15,329 2,009 3,634 -44.7 Kurdistan, Yemen
Cobalt ($) 10.24 4,212 4,212 7,705 -45.3 Gulf of Mexico, Gabon, Angola
Northern Petroleum (£) 0.05 5 8 43 -81.5 French Guyana, UK onshore
Gulfsands Petroleum (£) 0.01 1 2 7 -75.7 Syria
Ophir Energy (£) 1.39 789 1,219 2,394 -49.1 Tanzania, Madagascar, West Africa
Hardy Oil (£) 0.50 36 56 119 -52.6 India
Chariot Oil & Gas (£) 0.09 24 37 62 -41.0 Namibia
Premier Oil (£) 1.69 861 1,330 3,127 -57.5 Indonesia, Vietnam, North Sea, Pakistan, Kenya, Mauritania,
Egypt, Sahara occidental
Maurel et Prom (€) 7.68 934 1,047 2,039 -48.6 Colombia, Tanzania, Gabon, Namibia, DR Congo, Mozambique
Cairn Energy (£) 2.04 1,173 1,812 1,990 -8.9 Greenland, Spain
Seplat (£) 1.51 835 1,290 2,321 -44.4 Nigeria
Tullow (£) 3.87 3,528 5,452 13,244 -58.8 Liberia, Ghana, Sierra Leone, Ivory Coast, Mauritania, Uganda,
Kenya, Ethiopia, Madagascar, Tanzania, Gabon, French Guyana,
Guyana, Suriname, Pakistan, Holland
Sources: FactSet, Companies, Natixis
Table 25: Valuation of independents exposed to US onshore segment
Company Price at Market cap Market cap Chg. Geographical exposure
27/02/15 M currencies M$ 16/06/14 ($m) (%)
Talisman ($CAD) 9.73 10,082 8,074 11,077 -27.1 US onshore and Canada, Colombia, Peru, North Sea, Poland,
Algeria, Kurdistan, Vietnam, Malaysia, Indonesia, Papua New
Guinea, Australia.
Anadarko ($) 84.23 42,675 42,675 54,728 -22.0 Onshore US, Gulf of Mexico, Brazil, Liberia, Ghana, Cote d'Ivoire,
Mozambique, Mauritania.
Apache ($) Onshore US, UK, Egypt, Argentina, Canada, Australia.
Hess ($) 65.84 24,822 24,822 37,876 -34.5 Onshore US, Colombia, Peru, Brazil, Kurdistan, North Sea,
Algeria, Libya, Egypt, Azerbaijan, Russia, China, Thailand,
Malaysia, Indonesia, Brunei, Australia, Ghana, Equatorial Guinea.
EOG Resources ($) 75.08 22,447 22,447 30,129 -25.5 US onshore, Canada, Trinidad and Tobago, North Sea, China,
Argentina.
Chesapeake Energy ($) 89.72 49,206 49,206 62,318 -21.0 US onshore.
Devon ($) 16.68 11,093 11,093 20,286 -45.3 US onshore.
Noble Energy ($) 61.59 25,190 25,190 31,910 -21.1 US onshore, Gulf of Mexico, Equatorial Guinea, Cameroon,
eastern Mediterranean (Israel et Cyprus).
Southwestern Energy ($) 47.23 17,275 17,275 27,506 -37.2 US onshore
Linn Energy ($) 25.08 9,643 9,643 16,354 -41.0 US onshore
Continental Resources ($) 12.02 4,033 4,033 10,320 -60.9 US onshore
Sources: FactSet, Companies, Natixis
The sector consolidation that has begun is being driven by a number of factors:
− A defensive approach, with link-ups aimed at strengthening balance sheet structures and
generating synergies within a particular geographic zone (as with the planned combination of
Afren and Seplat or Salamander and Ophir).
− A search for positions facilitated by attractive valuations (Repsol’s offer for Talisman, with a
premium of 42% but a valuation still 27% below that of mid-June 2014).

IOCs have so far played a fairly small role in the reshuffle and are still in a position to sell assets
rather than buy.
Table 26: Asset disposal plans
$bn Plan Period Achieved Previous plan Period
Royal Dutch Shell 15 2014/2016 11.6
BP 10 2013/2015 4.0 38 2010/2012
Total 10 2015/2017 10-15 2012/2014
ENI 15 2014/2017 7.6
BG 2012/2014 14.5
Statoil 2010/2014 23.0
The substantial slump in the valuation of upstream assets could prompt IOCs to tailor their disposal
programmes towards midstream or downstream assets (pipelines, storage, networks). Companies
could also opt to seize acquisition opportunities.
Filling out portfolios
Table 27: Geographic breakdown of production
% BP Total RD Shell ENI Repsol
(pre-Talisman)
BG Statoil OMV
USA / Gulf of Mexico 19.5 3.3 13.9 7.4 9.2 9 14
Russia / Caspian 30.2 9.7 5.2 6.3 14.5 3.9
Europe / North Sea 4.2 17.1 24.8 21.3 1.8 15.8 75.2 73.6
North and West Africa 10.0 28.6 10.9 54.3 10.2 23.7 10.6 11.0
Middle East 7.4 23.3 11.9 5.5
Asia / Pacific 11.8 10.6 22.1 10.7 13.6 5.7
South America / Trinidad and Tobago. 16.8 7.3 1.2 74.6 22.9
Others 0.1 10.0 4.2 0.5 0.2 0.3
The upstream profiles of the various European groups show a high degree of contrast, with
overexposure to zones putting their portfolios out of kilter, as with BP in Russia, ENI in Africa and
Statoil or OMV in Europe.
Acquisitions could be aimed at:
− Establishing a major position in a zone with a view to finding a new growth platform.
− Bolstering existing exposures to take advantage of synergies.

Table 28: Potential developments
Companies Weaknesses Opportunities
Shell Profitability of US downstream and global downstream Exposure to east Africa, strengthening LNG
BP Russian exposure, US litigation Exposure to Africa, including east Africa
Total Russian exposure, limited exposure to shale Exposure to east Africa, strengthening LNG, US onshore
ENI Overexposed to Africa, limited exposure to shale Strengthening onshore in US, Middle East, South America
Source: Natixis
anne.pumir@natixis.com

Oil services: pressure at all levels
If oil prices remain low, this will encourage oil companies to continue adjusting their investment
budgets in order to balance their finances. E&P (Exploration & Production) capex should be cut by
15% in 2015 and should then, at best, remain flat in 2016. All segments along the oil services chain
will see their markets shrivel: exploration budgets cut (-20% in 2015e), awards pushed back further,
margins continually under pressure. In such circumstances, the oil industry will have to transform
itself. This will involve forming closer ties between oil companies and subcontractors, which will
benefit the most integrated oil service companies, or even carrying out M&A. As a result, we prefer
asset-light profiles. GTT (Buy, target price €65) is our top pick. Fugro (Neutral; target price €22),
Subsea 7 (Neutral; target price NOK75) and Petrofac (Neutral; target price 800 p) are potential
targets. We steer clear of those with the weakest balance sheets (Saipem, PGS, SBM
Offshore, Bourbon).
Chart 16: E&P capex and oil prices
Source: Natixis
All segments along the oil services chain are affected
A tough time for exploration
Exploration is the most early-cycle of all the segments and is already being affected by the lower oil
price. This market is expected to contract by 20% in 2015. Oil companies are focusing on mature
basins and abandoning frontier zones. The seismic market is set to shrink by about 15% in 2015. As
for the offshore drilling segment, new capacity is coming on stream and oil companies are losing
their appetite, taking a heavy toll on day-rates which are down by more than 30%.
Greenfield projects pushed back
Setting exploration aside, oil companies have little leeway to adjust their capex budgets as projects
that have already kicked off are almost never shelved. Brownfield projects (extension/modification of
existing units) are the main adjustment variable in development and production budgets. If oil prices
continue to fall, oil companies will delay launching new greenfield projects and regain flexibility as
and when ongoing projects are completed. As far as E&C (Engineering & Construction) companies
are concerned, their healthy backlogs provide cover for 2015 but delayed awards will take a toll on
their activity as of 2016.
0
20
40
60
80
100
120
0
100
200
300
400
500
600
700
800
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Capex ($bn, LHsc) Average Brent price ($/b, RHsc)

Any pockets of resistance?
Oil companies might have to limit themselves to strategic projects with the closest deadlines. This is
the case, for example, of:
− Mexico, where block auctions are scheduled for 2015 as part of the constitutional reform.
− the Gulf of Mexico (the American part), where lease rounds are scheduled for 2016.
− new zones, such as Mozambique, where ENI and Anadarko intend to launch LNG projects.
− exploration licences nearing expiry: oil companies will want to meet their exploration
commitments (seismic, drilling) in order to get their licences renewed.
− From the license expires on blocks
Margins under pressure
Oil companies are scaling back their investments not only because of a smaller volume of projects
being launched but also because service prices are falling. Certain ongoing offshore drilling
contracts are having their prices renegotiated (by about -20% to -30%). Signed and sealed E&C
contracts do not come with any rebates but it is now more difficult to negotiate amendments, putting
margins under pressure.
The oil industry will have to reinvent itself
Oil-producing fields are being depleted and oil companies will have to renew their reserves, so they
will not be able to cut back their E&P investments forever. Moreover, pressure on the services chain
has its limits. Project costs are rising not only because of fatter margins at service companies, but
also for the following reasons:
− The increasing complexity of projects.
− More stringent regulations and safety standards.
− The over-engineering of oil companies, which means that certain equipment and facilities are
oversized.
So if oil prices remain low for a long time, the oil supply chain is likely to overhaul itself by
establishing closer working ties between oil companies and service providers.

Restructuring… then M&A
The oil services sector is resolutely adapting to the slowing market, and it might have to adjust its
headcount and capacity further. Moreover, a wave of consolidation is likely, with defensive deals
between small players and strategic operations for the sector’s leaders.
More restructuring
The full-year reporting season was an opportunity to announce restructuring measures involving
staff cutbacks and capacity adjustments.
Table 29: Main restructuring programmes announced
Company Date announced Main restructuring measures
CGG 26-Feb.-15 Fleet reduced from 13 to 11 vessels - 400 staff cutbacks in 2015 – capex cuts
Fugro 27-Feb.-15 Capex cuts – full or partial disposal of the Subsea division and Seabed JV
SBM Offshore 11-Dec.-14 1,200 staff cutbacks (11% of the workforce)
Subsea 7 Dec.-14 170 staff cutbacks (Norway)
Technip Feb.-15 Fleet reduced from 25 vessels in 2015 to 20-23 in 2017 – partnerships in new assets to reduce capex
Schlumberger Jan.-15 Withdrawal of 6 seismic vessels – 9,000 staff cutbacks (worldwide)
Halliburton Jan.-15 6,000 staff cutbacks (worldwide)
Baker Hughes Jan.-15 7,000 staff cutbacks (worldwide)
Weatherford Jan.-15 7,000 staff cutbacks (worldwide)
These restructuring efforts might not be enough if oil prices remain low for a long time. This is the
case, for example, of CGG which has launched the second phase of its restructuring plan and is
cutting its fleet to 11 vessels (vs. 13) after having withdrawn 5 seismic acquisition vessels in 2014.
One of the challenges facing the sector’s groups will be to hold onto key resources and know-how in
anticipation of the cycle upturn.
M&A on the cards
The slowing services market should trigger a wave of consolidation.
Several groups have had their credit ratings downgraded on account of lower oil prices (Petrofac,
which owns production assets), shrinking markets (CGG and PGS in the seismic segment, Seadrill
in the offshore drilling segment) or exposure to struggling clients (Petrobras).
We have identified a number of potential defensive deals, particularly between ‘tier 2’ and ‘tier
3’ players:
− In the seismic segment, a merger between the two newest entrants, Polarcus and Dolphin
Geophysical.
− In the offshore segment, the sale of Fugro’s Subsea division. The McDermott / Petrofac alliance
could, eventually, result in the two groups merging.
− The leading oil service providers could seize opportunities to beef up/diversify their business
portfolios. Such more strategic operations do not seem imminent and are likely to wait until
visibility on oil price trends improves.

This is the case, for example, of:
− Technip: “Technip should not grow by doing more of the same”, says T. Pilenko, its CEO.
Growth will come from developing its services and product range. In the services segment, one
priority is reservoir technologies despite the aborted deal with CGG. Groups like Reservoir
Modeling are potential targets. In the equipment segment, the ‘subsea factory’ theme is a growth
relay for the medium/long term. Players in the SPS segment (Subsea Production Systems –
FMC, Cameron, Aker Solutions) are so large that alliances between them would be the easiest
arrangement.
− Schlumberger: Technip’s argument in favour of combining reservoir and engineering
technologies suggests that Schlumberger could look for a way into the E&C market. Lastly,
CGG’s restructuring and the new focus on less capital-intensive activities (GGR) to the detriment
of data acquisition activities should, ultimately, revive the group’s speculative appeal. We think
Halliburton / Baker Hughes could be a potential buyer as it has a similar profile to Schlumberger.
alain.parent@natixis.com

OCTG equipment: prepare for the worst
If oil prices remain low for some time, the tubes sector will be heavily affected as it invested
massively in new capacity during the previous cycle. It always takes a long time to adjust
capacity in this type of industry whereas the market is volatile because of fluctuating oil
prices. North American is the biggest market as far as the consumption of OCTG (Oil Country
Tubular Goods) tubes is concerned, and has always been the most sensitive (smaller players with
less solid balance sheets and higher breakeven points since the development of the shale segment).
The Middle East should, once again, fare well.
As the markets deteriorate, tube manufacturers have begun to react by announcing staff cutbacks
and capex reductions and also by booking impairment charges. Portfolio premiumisation is still a
strategic priority for companies wanting to avoid being penalised even more by tubes imported by
Asia in particular.
In light of this, we favour players with solid balance sheets and which could become takeover
targets, such as Schoeller Bleckmann (Neutral; target price €69).
Pressure on the drilling segment
If oil prices remain low for some time, it will have a big impact on the number of drill rigs in operation
and, ultimately, on tube consumption. According to the initial projections published by tube
manufacturers, OCTG tube consumption could fall by close to 50% in 2015 and we also need to
take destocking into account. If this scenario lasts for a long time, lots of market operators (clients)
will opt to keep their capex budgets small so that they can balance their finances.
North America is the most volatile market
North America is the most sensitive market and alone accounts for 45% of global demand for OCTG
tubes. Independent companies which still benefited from hedges in early 2015 will also have a rough
ride. Investments and therefore drilling activities will be slashed even more drastically if oil prices
remain below cash breakeven levels, despite companies having learnt their lesson and lowered their
breakeven points (the figure of $10/year is often mentioned).
The rig count began to fall in August 2014 and has continued to decline ever since. It stood at 1,358
rigs on 13 February 2015, of which 78% oilrigs, i.e. down by almost 406 rigs yoy in the USA.

Chart 17: Oil rig count and WTI prices
Sources: Baker Hughes, FactSet
All in all, the North America rig count is almost 30% lower than when it peaked in September 2014.
The downtrend is unlikely to reverse any time soon. During the last market trough (2007/08), the
North America rig count plummeted by almost 60% in the space of 9 months (peaking on 12
September 2008 and bottoming out on 19 June 2009). It then managed to rebound thanks to an
upturn in the number of oil rigs to the detriment of gas rigs.
So the situation observed early this year is likely to continue deteriorating. According to the IEA,
48% of US output has a breakeven point above $50/b and about 63% of volumes will have fallen
below this breakeven point by 2020. So the rig count is set to fall below the low point that it reached
during the 2008/09 crisis, and we think total tube consumption in North America could drop below
2m tonnes/year.
Chart 18: North America rig count and US consumption of seamless tubes
Sources: Baker Hughes, MBR, Natixis estimates
Promising zones are at risk
New promising shale oil and gas zones, such as Argentina (100 kt of OCTG in 2013) with the
development of Vaca Muerta in the Neuquen basin, could also be threatened by big oil groups
deciding to cut their capex budgets. Like the development of unconventional reservoirs in the USA,
drilling in the Neuquen basin requires premium tubes which will provide support for tube
manufacturers’ margins. The cost cuts, achieved thanks to progress on the learning curve, are
limited given that oil is priced at between $50 and $60 and that this is an emerging zone, ultimately
making investments somewhat unattractive.
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Support from the Middle East
The most resilient region in these circumstances would be the Middle East (1.3 Mt of OCTG in
2013), where the rig count is historically a lot less volatile. Extraction costs per barrel in this part of
the world are advantageous, encouraging oil investments.
Chart 19: Middle East rig count and Brent prices
Sources: Baker Hughes, FactSet
Saudi Arabia (574 kt of OCTG) still wants to continue investing despite the drop in oil prices, with the
aim of increasing and regaining market share. Saudi Aramco has since H1 14 adopted an
aggressive destocking policy (after having awarded lots of mega tenders for tubes over a long
period), so it should quite naturally return to the market as of H2 15.
During previous downcycles and market downturns, this region has always proved highly resilient
and we think it will be again this time around.
Surplus capacity in the market, adjustments on the
cards
A market downturn with disastrous timing
Tube manufacturers have enjoyed a boom in the North American unconventional market in the past
ten years, thanks particularly to the development of directional and horizontal drilling. Tube
consumption has soared by 160% since 2009. To meet this demand, groups have invested in new
premium capacity which is only just beginning to reach the market.
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Chart 20: Overview of new tube capacity in North America (Mt/year)
Sources: Companies
These new facilities were aimed at keeping up with growth in the North American market. This
market is now trending downwards, which is likely to create surplus capacity as of 2015 and the
situation is set to worsen after Tenaris starts up its new plant (capacity for 650,000 tonnes/year, to
become operational as of 2016 after a planned ramp-up period of two years). These new facilities
have now started producing, but the demand will no longer be there. So with oil prices at between
$50 and $60, we expect demand for seamless tubes to fall by 44% between 2014 and 2016.
Such market conditions suggest rather that tube manufacturers’ margins will continue to contract, so
the big question is what will happen with tube imports from Asia. Import duties will last until 2017.
Upcoming adjustments
Adjustments to headcounts and investment budgets
As the market continues to slow down, we expect to see more staff cutbacks (employees or temps).
Groups like Vallourec approach the permanent staff issue based on 3/5 years of standard activity.
Variations in business activity at a peak or a trough are managed using local solutions to increase
flexibility (labour loaned from one plant to another, reduced working hours, fixed-term contracts,
etc.). Vallourec began to adjust its workforce back in 2014 with the number of hours worked in its
rolling mills cut by 15% and its headcount reduced by 7% (its age pyramid was conducive to
departures). The programme it has launched is ambitious in terms of the targeted cost savings
(€350m) and the time-frame (2 years). Called Valens, it aims above all to make certain functions
more centralised (purchasing, IT, HR, etc.) in order to become more flexible and generate savings.
For groups not in the midst of a heavy investment spree, capex will be adjusted and should be
limited mostly to maintenance. Vallourec has just emerged from a massive investment drive and its
normative capex level has dropped by more than 20% to €350m. Groups are clearly focused on
generating free cash-flow.
Accounting adjustments
The changing environment and assumptions used in the financial asset impairment tests should
encourage groups to book more impairment charges. Vallourec already wrote down its assets by
€1.1bn in 2014 (€539m for European assets and €522m for its new Brazilian plant). The Brazilian
Jeceaba plant was written down due to oversupply and fierce competition in the Middle East, as the
facility is geared towards exporting premium products which are then threaded in this zone in
particular.
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So far no impairment charges have been booked for the American assets, and we think they could
end up being considerable if oil prices stay low for a long time, especially considering the average
age of production plants in this part of the world.
Vallourec’s North America Cash-Generating Unit passed the annual asset impairment tests in 2014,
but the group might have to write down its value if the oil price remains in the region of $50/$60 for
several years.
This might also be the case for Tenaris, which has taken the investment decision for a new 650 kt
plant in the USA which is set to start up in 2016 with a 2-year ramp-up period.
Potential impact on group ratings
In these circumstances, the balance sheet will be affected, penalising the gearing ratios of those
groups that have booked impairment charges, and Net Debt/EBITDA ratios will also be inflated
because of weaker EBITDA.
Rating agencies have already placed Vallourec on negative watch; any further adjustments to its
capital and an oil price below $60 could prompt them to downgrade its credit rating (currently at
BBB/A-2 with a negative outlook at S&P, which adopted this outlook as there is a risk of the EBITDA
margin falling well below 15% over 2015/16), thus pushing the group’s borrowing costs upwards.
The groups most at risk in our sample are TMK and Vallourec.
Tenaris (net cash position) and Schoeller Bleckmann (even after taking over 67% of Resource Well
Completion Technologies in Canada) have more comfortable balance sheets and face little risk in
these conditions.
More downtrading on the demand side?
The cost of an OCTG tube accounts for 5/7% of a well’s total costs. Drilling companies want to curb
their costs and could be tempted to resort to cheaper tubes; in the unconventional segment, this
could put the focus on semi-premium connection tubes which generate much lower margins than
premium tubes.
This could benefit Korean and Indian companies to the detriment of the stocks in our sample which
are more positioned at the high end of the market, such as Vallourec which generated 66% of its
business from heat-treated products in 2014 (58% in 2008 and a target of 70% for 2019). However,
premium products are likely to remain essential for all offshore/ultra-deep offshore developments
(25% of drilling activity outside North America).
baptiste.lebacq@natixis.com

6. Sector impact mostly positive
Aerospace: Low oil prices are good
news
Fuel is the biggest expense for airlines. So the steep fall in oil prices will boost their earnings growth
and this, combined with robust traffic trends, should raise demand for new aircraft and thus support
the aerospace sector. Our top picks in the sector are Safran (Buy; target price €74), MTU
AeroEngines (Buy; target price €94) and Airbus Group (Buy; target price €73). For the short term we
are more cautious about Zodiac Aerospace (Neutral; target price €29) and Rolls-Royce (Neutral;
target price 930 p).
With oil at $50-60 per barrel, we estimate that fuel accounts for 21% of an airline’s opex (at $50 per
barrel). This is significantly lower than when fuel costs peaked at 35% of total costs but fuel is still
their biggest expense, well ahead of maintenance, ownership or staff costs. The percentage is even
higher for low-cost airlines than for traditional airlines, which means they will become even more
cost-efficient.
So airlines are likely to become extremely profitable over the coming years, as from 2015, assuming
air traffic remains robust. IATA expects their combined net earnings to reach $25bn in 2015, which is
an all-time high.
Table 30: Combined net earnings of IATA member airlines vs. global traffic trend
$bn 2008 2009 2010 2011 2012 2013 2014 2015e
Net result -26.1 -4.6 17.3 8.3 6.1 10.6 19.9 25.0
Global traffic (% chg.) 1.9 -1.1 7.9 6.3 5.1 5.4 5.9 7.0
Source: IATA
Historically airlines spend more on new orders and maintenance when they generate more profit and
traffic is buoyant, and this is a very likely scenario given the planned cuts to airline ticket prices.
In such a scenario airlines will need new capacity and have to place new orders. This should largely
offset the fact that the fleet renewal market (35-40% of the total market vs. 60-65% for the new
capacity market) will probably be a little less buoyant, as airlines have less of an incentive to switch
old aircraft for recent more fuel-efficient models.
As regards the maintenance segment, engine manufacturers and companies with prominent
aftermarket activities (Safran, MTU Aeroengines, Zodiac Aerospace and, to a lesser extent, Rolls-
Royce) will benefit fully from the fact that airlines are in a healthier position and will keep their aircraft
in service for a little longer.
antoine.boivinchampeaux@natixis.com

Food retail: positive direct and indirect
effects
If oil prices remain low for some time, the situation will have an overall positive direct and indirect
impact on the food retail sector. It could boost margins by at most 30bp. Direct impacts will include
1/ stronger sales via trading up (+10bp for the margin), 2/ lower logistics costs (+4bp) and 3/ a
mechanical boost to the margin as petrol will account for a smaller share of the sales mix (+2bp to
+9bp). Indirect impacts will include a more moderate natural rise in inflation-indexed costs (primarily
wages and rents; +7bp). As regards the stocks in our universe, we favour those exposed to the
USA, Ahold (Neutral; target price €16) and Delhaize (Neutral; target price €80), and non-food
retail stocks, Metro (Buy; target price €33), Carrefour (Buy; target price €35), GROUPE FNAC
(Buy; target price €65) and DARTY (Buy; target price 90 p).
Higher consumer spending, via trading up for the food retail segment
As our Natixis economists have shown, household consumption should benefit if oil prices remain
low for some time. If the oil price remains at current levels for the next three years, they calculate
that it will add 1 percentage point to growth in household consumption in the USA and euro zone
combined over the three years. They also note that pump prices in the euro zone have adjusted
more rapidly in Germany and Spain than in France and Italy, so they think that the lower oil price will
benefit consumer spending more in the first two countries than in the last two (+1.5 points in
Germany and Spain vs. +0.7 point in France and Italy).
Moreover, it appears that consumer spending on food, household equipment, rents, water and
residential energy should benefit most if oil prices stay low for a long time. These are mostly
consumer staples, so the news if particularly good for lower-income households which consume
more when their income is rationed less.
In the food retail segment specifically, although there is no proven price/volume elasticity, we often
note that any additional disposable income (especially via lower prices) results in trading up. The
consumer will spend his/her extra disposable income on better-quality, more upmarket products. For
example, in France in 2014, food deflation came to ~-1.2% for consumer goods as a whole but this
was more than offset by a trading-up effect of ~1.5%.
Overall, and all else being equal (flat gross margin rate, flat fixed operating costs), we calculate that
an extra 0.5% of consumer spending would push food retailers’ EBIT margins up by 10bp.

Lower logistics costs driven by lower transportation costs
Logistics costs, and particularly the cost of transporting goods, should benefit from lower petrol
prices. According to data published by Ahold, logistics costs represent on average ~3% of a
retailer’s sales. We estimate that a third of these logistics costs are linked to transportation (i.e. 1%
of a retailer’s sales).
Chart 21:
Breakdown of a retailer’s operating costs Breakdown of transportation costs in France (%)
(incl. logistics costs) as a % of sales
Sources: Natixis, company data (Carrefour)
Based on data from the CNR (Conseil National des Routiers), petrol accounts for 25% of
transportation costs (i.e. 0.25% of sales).
So we calculate that a 20% drop in petrol prices will, thanks to lower transportation costs, boost a
food retailer’s EBIT margin by 4bp.
Natural cost inflation will be moderated, particularly staff and rental costs
We believe that the steep and lasting drop in oil prices will indirectly bolster retailers’ P&L accounts
as natural cost inflation, usually estimated at between 2% and 3% / year, will be moderated. Our
economists estimate that energy accounts for 8% to 10% of a developed economy’s overall
consumer price index. So lower energy prices considerably moderate, or even lower, the inflation
indices used to calculate rental growth rates (ICC and ILAT in France) and minimum wages (SMIC
in France, adjusted on the basis of a consumer price index and purchasing power gain index).
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Chart 3: Correlation between ICC (construction cost index) and Brent
Sources: INSEE, Datastream
Chart 4: Year-on-year trend for the SMIC (minimum wage) since 1990
Source: INSEE
Wages and rents account for ~11% of a food retailer’s operating costs (cf. chart 2). If we assume
that sales grow by 1% lfl, that wage and staff costs are stable in absolute terms, and that other
operating costs show natural inflation of 2%, then the impact on a food retailer’s EBIT margin
would be 7bp.
Accretive impact on food retailers that sell petrol
Retailers that sell petrol at the pump will see their EBIT margins expand as the price of oil falls.
Retailers often consider petrol to be a loss leader, prompting them to sell it at cost price and
generate zero margin. So lower petrol prices, at constant volumes, should have a positive business-
mix effect. The prominence of petrol in the sales mix varies considerably from one retailer to another
depending on the format it operates: petrol is often sold in hypermarkets or even supermarkets.
Depending on the share of petrol sales (between 5% and 15%) and the extent of the decline in
pump prices (between 10% and 20%), we estimate the impact on a food retailer’s EBIT margin
at between +2bp and +9bp.
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Stock picks: exposure to the USA with Ahold and Delhaize, and to the non-food
retail segment with Metro, Carrefour, GROUPE FNAC and DARTY
Given the information given above, we think the following retailer categories will benefit the most
from lower petrol prices:
− Retailers operating in countries were the oil price in local currency has fallen the most (e.g. USA).
− Retailers heavily exposed to the non-food segment (and thus the most likely to benefit from a
rebound in private consumption).
− Retailers whose petrol sales account for a large share of their sales mix (e.g. hypermarkets).
In light of this, our top picks on the oil theme are:
− Ahold and Delhaize owing to their US exposure (respectively 60% and 70% of their EBIT).
− Metro and Carrefour which generate respectively 50% and 25% of their sales in the non-food
segment. Note that Carrefour’s EBIT margin will also get a boost from its petrol sales as they
account for ~5% of its total sales.
− GROUPE FNAC and DARTY should benefit from a rebound in consumer spending driven by
lower oil prices and thus higher purchasing power.
Oil prices have not fallen steeply enough to trigger
credit rating upgrades
Our equity analysts estimate that EBIT margins will get a boost of at most 30bp if oil prices remain
low for a long time.
This is certainly a substantial potential boost to margins, but not enough to trigger credit rating
upgrades for the food retail stocks in our universe. Retailers’ EBIT margins have been trending
downwards since 2005: they averaged more than 4% in 2005 but are now only in the region of 3%.
As margins have deteriorated, so have ratings.
Chart 22:
2014 EBIT margin vs. 2005 2014 credit rating vs. 2005
S&P rating 2005 2014 Variation
Auchan A stable A- stable 
Carrefour A+ stable BBB+ stable 
Casino BBB- stable BBB- stable 
Metro BBB stable BBB- stable 
Tesco A+ stable BB+ stable 
Sources: Companies, S&P, Natixis
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This margin expansion, of 30bp at most, will not be enough to improve credit ratios to levels that
would trigger rating upgrades. In the cases of Auchan, Metro and Tesco, their adjusted FFO/ND
ratios would have to improve by 10 points to trigger any rating upgrade (cf. chart below).
The only two issuers with credit ratios above the minimum levels required to maintain their ratings
are Casino and Carrefour and, all else being equal, we think the only potential candidate for an
upgrade could be Carrefour. However, if it wants to return to S&P’s “A” category, it would need a
good track record in terms of same-store sales growth and margin expansion in all the markets in
which it operates, particularly Spain, Italy and China. Moreover, with interest rates so low and
market access so easy for corporate issuers, we think it would not be in Carrefour’s interests to get
upgraded and it will probably prefer to use its additional financial headroom to make acquisitions or
increase its shareholder returns.
In Casino’s case, there is little scope currently for an upgrade given its complex financial structure
with lots of minority interests limiting the amount of cash transferred up to the level of Casino SA.
Chart 23: Adjusted FFO/ND ratio at end-2014, minimum FFO/ND ratio required for the rating to be upgraded or maintained
Sources: Companies, S&P, Natixis
pierre-edouard.boudot@natixis.com
nicolas.langlet@natixis.com
sandra.soyer@natixis.com
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FFO/ND 2014 Threshold for an upgrade Minimum required to maintain rating

Media: Support for consumer spending
and thus for advertising stocks
Oil prices have plummeted by more than 50% since summer 2014 and the resulting disinflation
should increase purchasing power and thus boost household consumption of non-energy goods and
services. There is a very close correlation between household consumption and the advertising
market (R² of 89% since 2001). Advertisers only advertise when they have the prospect of selling
their goods or services. European TV stocks should benefit most from this, particularly Pro7Sat1
(Buy; target price €46). We also advise investors to take up positions on Publicis (Buy; target
price €82) owing to its US exposure.
The European and US advertising markets should
benefit significantly
Based on the estimates of Natixis’ economic research analysts, we think there is a high degree of
elasticity between oil prices and household consumption in the euro zone as well as the USA (which
is more dependent on oil). Our economists say that if oil prices remain at current levels for the next
three years, instead of rising back to $75 by end-2016 as per our core scenario, then household
consumption will be 1 percentage point higher in the USA and euro zone combined over the three
years. Pump prices in the euro zone have adjusted more rapidly in Germany and Spain than in
France and Italy. So we can assume that low oil prices will benefit consumer spending more in the
first two countries than in the last two (+1.5 points in Germany and Spain vs. +0.7 point in France
and Italy). In the French market, for example, we see household consumption growing by 1.3% in
2015, i.e. twice as fast as in 2014 (0.6%). Conversely, advertising markets in oil-producing countries
(Russia and the Middle East) should be less buoyant as low oil prices will have the opposite effect
on their purchasing power.
European TV stocks should benefit the most
All stocks exposed to the advertising market will benefit from this jump in consumer spending: ad
agencies, TV, outdoor advertisers, etc. But we expect European TV stocks to benefit the most as
they harbour considerable leverage (80% fixed costs): every extra 1% of growth has a positive
impact of about 4% on their EPS on average in Europe (vs. ~1.5% on average for TV agencies). The
benefits will, of course, vary from one market to another depending on each specific competitive
landscape, but the momentum is favourable and could prompt upward revisions to earnings
forecasts if oil prices remain low for some time.
The guidance targets issued during the full-year reporting season confirm this momentum.
Pro7Sat1, for example, emphasised that the year had got off to an excellent start in Germany. This
was confirmed by the two Spanish TV groups (Atresmedia and Mediaset Espana). Note that these
two markets are quasi-duopolies (with the two leaders commanding a combined market share of
~90%), enhancing the impact on prices and bolstering the leverage effect.
So Pro7Sat1 is our top pick in these circumstances and we also recommend buying Publicis given
its positioning in the US market, which we expect to be particularly dynamic in 2015 (52% of
Publicis’ revenues in 2015 following the acquisition of Sapient).
jerome.bodin@natixis.com

Construction & Concessions : good
news for Motorways and Airports
A broadly positive impact on the Concessions sector. Winners: Motorway and Airport
operators, particularly ADP (Buy; target price €110). Loser: Groupe Eurotunnel (Neutral;
target price €10). Broadly neutral impact on the Contracting (Construction) sector (but
negative in regions such as Africa).
Low oil prices are good news for the Concessions sector. First of all they will favour airport operators
(a boost to air traffic + more disposable income for passengers making purchases in airport
boutiques) as well as airport operators (a boost to motorway traffic). The loser, on the other hand, is
Groupe Eurotunnel (the surge in the yield fuelled by the Marpol regulations will perhaps be smaller
than expected in 2015). Low oil prices have a broadly neutral impact on the Contracting
(Construction) sector. But watch out for certain regions (e.g. Africa), where clients’ financial capacity
depends on the oil price. Note that Africa represents estimated annual sales of €2bn for Vinci, i.e.
5%e of its total sales, and close to 25%e of Salini Impregilo’s sales.
Airports: ADP the winner
Lower oil prices benefit airlines (depending on how their oil-price swaps are structured) as they
lower their costs and ultimately, enable them to tap into more traffic… and this in turn benefits airport
operators. Lower oil prices, i.e. cheaper fuel, also mean more disposable income for passengers
and therefore greater purchasing power in airport boutiques. Our top pick in this segment is ADP. All
else being equal in our SOP models, an extra 1-point of traffic growth in 2015 vs. our current
estimates would push our target prices up by +2.0%e for ADP and by +1.7%e for Fraport.
Motorways
There is no doubt that lower fuel prices boost motorway traffic, which is fundamentally positive for
Atlantia, Eiffage, Vinci and Abertis. All else being equal in our financial models, an extra 1-point of
traffic growth in 2015 vs. our current estimates would boost our target prices by +2.0%e for Atlantia,
by +1.3%e for Eiffage, by +0.9%e for Vinci and by +0.6%e for Abertis.
GET the loser
Low oil prices favour GET’s rivals, i.e. ferry operators, as energy costs account for 30%e of their
opex. This scenario would give ferries a little leeway to adopt more aggressive prices and thus limit
the positive impact on GET that the Marpol regulations should have as of 2015. GET’s management
says that Marpol will indeed benefit GET but only in the longer term.
gregoire.thibault@natixis.com

Global Markets Research I57
Food-HPC: strong sensitivity to oil,
especially for Unilever
The fall in oil prices is favourable to the Food-HPC sector both on the stock market and
operationally. Admittedly, the fall in raw materials costs may compress the price effect and therefore
organic growth rates, but between the positive impact on consumption and the benefit to margins,
the effect of oil prices remaining low would be positive. A scenario of a durably low oil price could
trigger a favourable cycle of modest growth and soft inflation, which would strongly rebalance the
relationship between growth and profitability and support the current high valuation levels. Unilever
(Neutral; target price €40) is in our view THE oil stock in the sector.
The stock market correlation between the relative performance of Food-HPC stocks and oil
price has been sharply negative since at least 2007.
Chart 24: Performance of the MSCI Staples Europe index relative to the Euro Stoxx 50 (right) and oil prices (left)
Sources: Natixis, Datastream
This negative correlation derives from both stock-market and fundamental factors.
On the stock market, in times of falling oil prices, investors switch to defensives at the
expense of cyclicals. Indeed, leaving aside geopolitical factors, a fall in the oil price is a sign of
slowing economy, particularly in emerging countries. European Food HPC groups, which are 50%
exposed on average to emerging countries, are affected by this macroeconomic slowdown, but less
so than cyclicals. In addition, the current fall in the oil price is fuelling deflation fears, which underlie
the ECB’s accommodative policy and therefore the switch to stocks offering solid yields.
The fundamental reasons are to do with the fact that a large share of raw materials costs are
themselves correlated to oil prices. The risk of deflation is present in the minds of most investors
but the positive impact on margins of lower costs should not be overlooked, even though part will be
passed on to consumers, and nor should the indirect effect on purchasing power and therefore
growth, especially in mature countries. All told, while a low oil price compresses the organic growth
outlook via the price effect, we believe that the net impact on earnings is positive.
Unilever is the group most sensitive to oil due to its product mix. The stock is admittedly seen
as an emerging country play, but in stock market terms its shows a sharply negative correlation
with oil prices. This is due to the sensitivity of its costs to raw materials prices directly and indirectly
linked to oil. A durably low crude price could therefore offer more potential.
35
55
75
95
115
135
155
sept.-07
févr.-08
juil.-08
déc.-08
mai-09
oct.-09
mars-10
août-10
janv.-11
juin-11
nov.-11
avr.-12
sept.-12
févr.-13
juil.-13
déc.-13
juin-14
nov.-14
-20%
0%
20%
40%
60%
80%
100%
120%
MSCI euro staples relative to Euro Stoxx since sept07 (RHsc) crude oil Brent in $ (LHsc)

Food for fuel: Agricultural raw materials? or oil?
The biggest and most visible operating impact of low oil prices concerns raw materials costs. But the
indirect impact on consumer spending, and therefore on organic growth, as well as the resulting
impact on underlying inflation (fixed costs), is also positive.
Contrary to what one might think, the groups in our universe mainly transform raw materials
that are correlated to oil either directly or indirectly.
Packaging and petrochemicals are strongly dependent on oil prices even though there is often a
lag of 3 to 6 months as with PET, due to the storage effect.
− But there are also agricultural raw materials, and particularly oilseed plants (soybeans, corn and
palm oil), the prices of which are increasingly dependent on oil prices since the emergence of
biofuels. This is the famous ‘food for fuel’ issue, which has emerged since 2007, the principle of
which is simple: the higher the oil price, the more competitive the biofuels industry and the
stronger the demand for oilseeds. In Indonesia, palm oil is used to fire power stations. In the
USA, 40% of corn production is destined for biofuels and 60% for animal feed.
Raw materials purchases represent 20% to 40% of the sales of European Food-HPC groups
and those whose prices are directly and indirectly correlated to oil represent on average 30%
of the raw materials purchases of European Food-HPC large caps. Unilever is the most exposed
with 51% of its raw materials purchases correlated to oil, by our estimates. We include here
vegetable oils, petrochemicals, PET and other plastics.
As a % of sales, raw materials purchases correlated to oil account for up to 20% of sales for a group
like Unilever. Although the strength of the USD against the € and emerging country currencies
reduces the impact of raw materials gains, the saving on purchasing costs is theoretically
considerable and the gross (and theoretical) impact on the operating margin is even greater. A fall of
10% in purchasing prices correlated to oil has a gross impact of +200bp on Unilever’s underlying
operating margin, which represents a 14% increase in underlying operating profit.

Table 31: Breakdown of raw materials purchases as a % of sales: as a % of sales, Nestlé and L’Oréal are the least sensitive
% of sales Unilever Danone Nestlé Henkel Reckitt Beiersdorf L'Oréal Average
Correlated to crude oil 20 8 5 11 11 6 5 9
o/w vegetable oils 7 0 1 0 0 0 0
o/w others products correlated to crude oil 13 8 4 11 11 6 5
Agricultural raw materials 8 21 25 0 0 0 0 8
o/w milk 2 15 7 0 0 0 0
o/w specialties (coffee, tea, fruits & cocoa) 5 3 13 0 0 0 0
o/w other agricultural raw materials 2 2 5 0 0 0 0
Others 10 9 5 19 14 15 12 12
Total purchases 38.5 38.5 35.9 30 25 20 16 29
(1) correlated to crude oil 20 8 5 11 11 6 5
(2) agricultural raw materials 8 21 25 0 0 0 0
(3) Packaging not directly correlated to crude oil 5 5 4 2 3 5 4
(4) Others 6 4 0 18 12 10 8
(1)+(2)+(3)+(4) = Total purchases 38.5 38.5 34.9 30 25 20 16 29
Packaging within above purchases 13 11 9 10 11 10 8 10
o/w correlated to crude oil 8 7 4 8 8 5 4
o/w not correlated to crude oil 5 5 4 2 3 5 4
Net of the deflationary effect, the impact is positive
A consensus formed at the end of 2014 and at the start of the year around the idea that
deflation was the main risk for the sector. This consensus is based mainly on the idea that: 1/ the
fall in commodities prices will squeeze organic sales growth rates due to the fall in the price effect;
and 2/ that from a stock market standpoint, this is not favourable insofar as organic growth is a key
indicator for investors.
− We do not subscribe to this idea although this does not mean that we dismiss the risk.
The negative impact of deflation on organic growth is a “false problem”. What would be the
value of higher organic growth, if it were only achieved thanks to a price effect that would be
nothing other than the exact corollary of stronger inflation? Organic growth is one of the key
performance indicators, but it is just an indicator. We are more concerned with EPS, operating
profitability, operating FCF and the ROIC, and organic growth is just one of the ways to assess a
group’s quality and long-term survival.
− The fall in commodities prices will probably in large part be passed on in selling prices but
the impact is sufficiently large for it still to have a positive and visible effect on margins.
The following example is just theoretical but it can quickly show that there is no incompatibility
between a rise in margins and the passing on of the fall in commodities prices in consumer
prices. Purchases correlated to oil account for on average 10% of the sales of European
Food-HPC groups. An average fall of 20% in the price of purchases correlated to oil (after
factoring in the fall of the € vs. the $ and hedging impacts) has a theoretical average impact of
200bp on the operating margin. Passing on 90% of the fall in selling prices nevertheless leaves a
net gain of 20bp for margins.
− The appreciation of the USD from creates a competitive environment that is unfavourable
to massive price cuts. North American groups (P&G, Mondelez, Colgate, PepsiCo, Coca-Cola,
etc.), the main global rivals to European groups, are faced with a strong $, which is hurting their
earnings. P&G recently said that the $ was going to reduce EPS by 12% over its fiscal year and
that it would offset part of this impact via pricing (mainly in emerging countries) and via cost

savings. Although this is a mistake in our view (consumers don’t care about the impact of the $
on P&G’s EPS), this policy might be favourable to a limited fall in prices and enable European
groups to either retain a larger share of the raw materials gains or reinvest in prices with
better-than-expected leverage on volumes (market share gains).
− The positive leverage on volumes should not be overlooked. Oil prices have a direct impact
on consumer spending, as our economists show. And the marginal return on volumes varies from
30% to 65% for higher value added products, and even 80%/90% for products such as perfume.
Lasting effect?
The fall in oil prices obviously has a cyclical effect on purchasing costs and indirectly on consumer
spending. But the positive effect of low oil prices on the European Food-HPC sector could be
more durable on two conditions:
− If European groups make good use of part of this raw materials gain to tactically capture market
share. Faced with US rivals forced to exercise greater cost discipline to offset the impact of the $
on their EPS, it could be a good time for them to be a little more aggressive commercially
speaking.
− If the continuing low level of oil prices were to open up a cycle of modest growth/soft inflation. In
concrete terms, when organic growth rates were 8% to 10% in emerging countries, how come
levels of operating profitability didn’t skyrocket? In reality, between one-third and half of this
growth created only very little (or artificial) value since it merely reflected just the passing-on of
inflation in raw materials costs in prices. In addition, this very same inflation in raw materials
costs drove high-single-digit underlying inflation in fixed costs in certain emerging countries. The
impact is not neutral in that fixed costs represent nearly 30% of sales.
Unilever: the oil stock
Unilever is in our view THE oil stock in the European Food-HPC sector. Durably low oil prices would
be clearly favourable to the operating profitability outlook but also the share’s valuation.
As the previous tables show, Unilever is the group whose raw materials purchases are the
most sensitive to oil. Its product mix (washing powder, cooking aids, sauces, margarines,
cosmetics) combined with its mass market positioning account for the large share of plastics,
petrochemicals and vegetable oils in its raw materials purchases. We believe that nearly 50% of its
purchases are directly or indirectly correlated to oil. On the stock market, this sensitivity has
been clearly identified as illustrated by the negative correlation between its share price and
the oil price.

Chart 25: Unilever’s performance relative to the Euro Stoxx 50 (right) and the oil price (left)
Sources: Natixis, Datastream
pierre.tegner@natixis.com
35
55
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95
115
135
155
sept.-07
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juil.-08
déc.-08
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mars-10
août-10
janv.-11
juin-11
nov.-11
avr.-12
sept.-12
févr.-13
juil.-13
déc.-13
juin-14
nov.-14
-35%
-15%
5%
25%
45%
65%
85%
105%
125%
UNA rel perf vs Euro Stoxx from sept07 (RHsc) crude oil Brent in $ (LHsc)

Capital goods: impact will vary from
one group to another
The correlation between electrical engineering stocks and oil prices seems to depend more
on the industrial markets of the groups in our sample than on their cost bases. From this
perspective, certain groups such as Legrand (Neutral; target price €48) appear to be relatively
immune to a fall in commodity prices because there is no mechanical correlation with their market
outlets and because replacement products account for a large share of their sales mix (about 50%).
Positive close correlation with share prices
There is a positive close correlation between certain electrical engineering stocks and oil
prices. It stands at 65% for Prysmian, 60% for Rexel, 57% for Schneider, 55% for ABB and 42% for
Legrand since 2004. By way of comparison, integrated oil stocks are most closely correlated with oil
prices (about 80%). In electrical engineering, this correlation is much closer with oil prices than with
non-ferrous metal prices (28% with nickel for Saft, 25% with copper for Nexans, negative correlation
with copper for ABB and Prysmian), even though these metals are essential to their production
processes.
Chart 26: Rebased oil price (Brent/$) vs. ABB (CHF) and Schneider (€)
Source: Natixis estimates
Yet there is also a proven historical correlation between Brent and in electrical engineering (T&D)
capex in the USA and industrial capex in OECD countries. So an empirical approach suggests that
lower oil prices will have a mechanically negative impact on electrical equipment makers’ capex in
2015 in terms of orders and in 2015/16 in terms of billings. Certain groups (ABB, Nexans, Rexel) say
there will probably be delays in project phasing.
0
100
200
300
400
500
600
Dec-04
Jun-05
Dec-05
Jun-06
Dec-06
Jun-07
Dec-07
Jun-08
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Jun-09
Dec-09
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Jun-11
Dec-11
Jun-12
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Jun-13
Dec-13
Jun-14
Dec-14
Oil / Brent ABB Schneider Legrand
Rexel Nexans Prysmian

Chart 27: Correlation between Brent and electrical engineering capex in OECD and USA
Source: Datastream
Correlation with operating performances mainly
concerns market outlets
The correlation seems to depend more on the market outlets of the groups in our sample
than on their cost bases. On this basis, the groups most exposed to the oil/gas segment within our
universe are Saft (10% of 2014 sales), ABB (10%), Nexans and Prysmian (7/8%), Schneider (6/7%)
and then Rexel (4%), which needs to be considered in relation to its exposure to the upstream oil
segment. Conversely, certain groups appear to be relatively immune to falling commodity prices as
there is no mechanical correlation with their market outlets and they have a large share of
replacement products in their sales mix (about 50%), such as Legrand.
Lower purchasing costs might appear to be a potential godsend, but we think it will be very
limited because of the deflationary climate. ABB, Nexans and Legrand currently have less pricing
power in mature countries and in systems and projects. Oil is used to produce plastics (insulation,
casing) but only accounts for a tiny share of purchasing costs compared with non-ferrous metals
(especially copper, aluminium and silver). It also seems to account for only a modest share of
energy costs for the groups in our sample. Moreover, existing hedges will delay the impact by about
3 to 6 months. Lower costs would be beneficial if selling prices continue to rise, but this seems to be
less the case since late 2013. So wage inflation (2/2.5%/year on average) can only be effectively
tackled with higher productivity, not with widespread price hikes.
More specifically, market outlets in the upstream/downstream oil segment have very different
cyclical profiles depending on the group in question. Almost all the groups in our sample, except for
Rexel (a distributor), show an imbalance between their oil-related production costs and their oil-
related sales, with Saft, Prysmian, Nexans, ABB and Schneider having the biggest imbalances. Most
market outlets are in the upstream oil segment, both onshore and offshore. Production cycles are
relatively long, especially in offshore (6 to 15 months). So lower oil prices will not have an immediate
impact; they will initially cause book-to-bill ratios to contract in 2015, assuming oil prices remain in
the region of $50/60/bbl.
-200%
-150%
-100%
-50%
0%
50%
100%
150%
200%
-60%
-40%
-20%
0%
20%
40%
60%
Q168
Q369
Q171
Q372
Q174
Q375
Q177
Q378
Q180
Q381
Q183
Q384
Q186
Q387
Q189
Q390
Q192
Q393
Q195
Q396
Q198
Q399
Q101
Q302
Q104
Q305
Q107
Q308
Q110
Q311
Q113
Q314
Prod US Electrical Prod including OECD ex Construction
Prod including US Brent ($/b FOB)
Capex US T&D

Table 32: Operational exposure to oil and gas markets
Group %
sales
o/w
upstream
Upstream
exposure
Input Output Margins
vs. average
Market outlets Lead time
Saft 10 55 5/6   In line Onshore & offshore, chemicals, marine 3-6 months
Prysmian 7/8 >75 5/6   Higher Onshore & offshore, marine 3-15 months
Nexans 7/8 >75 5/6   Higher Onshore & offshore, marine 3-15 months
ABB 10 40 4   Higher Onshore & offshore, chemicals, marine 3-15 months
Schneider 6/7 50 3/4   Higher Onshore & offshore, chemicals 3-6 months
Rexel 4 66 2/3   In line Onshore, chemicals 1-3 months
Legrand <1 50 <<1   ns ns 1-3 months
Sources: Companies, Natixis estimates
arnaud.schmit@natixis.com

Utilities: very low impact
Oil prices remaining low over the long term should, all other things being equal, have
minimal consequences for European utilities. The gas segment would nonetheless be the
hardest hit. Within our coverage universe, the companies most affected would be GDF Suez
(Neutral; €18.5 target price) and, to a lesser degree, E.ON (Reduce; €11.75 target price) and Gas
Natural/Fenosa (Neutral; €21.3 target price).
Generally speaking, the prices of the main fossil fuels (oil, gas and coal) are moving independently
of one another save in special cases. We have therefore assumed in our scenario that low oil prices
over the long term would not directly impact the prices of other fossil fuels (coal and natural gas).
When it comes to electricity generation, Europe does not have many oil-fired power plants in
operation today due to technological (obsolescence) and environmental considerations (carbon
intensity). Even if they became more cost competitive in relation to gas- and coal-fired units, it would
not affect their position within the European mix. Moreover, because of structural changes in the
European sector since the start of the decade, the coal price is now the main driver of wholesale
prices.
Environmental services specialists (Suez Environnement and Veolia Environnement) are only
directly exposed to oil prices through costs at their waste management and energy services
businesses (Veolia Environnement; via Dalkia International). But energy costs are subject to pass-
through mechanisms at these businesses, meaning rises and dips in costs are more or less
automatically passed through to final customers without affecting operators’ margins. On the other
hand, the positive impact of an uptick in GDP on industrial output would have a positive effect on
industrial waste management volumes.
The recent fall in the oil price will have a direct impact on operators in the gas segment in 2015,
though effects will vary greatly in magnitude and even in direction depending on the businesses and
geographic areas exposed. Operators with exposure to oil exploration and production and sales of
liquefied natural gas (LNG) in Asia (sale prices indexed to oil prices) will be the hardest hit. Among
the companies we cover, the impact will mainly be felt by GDF Suez (estimated €900m EBITDA
impact in 2015) and, to a lesser extent, E.ON and Gas Natural/Fenosa. Where GDF Suez is
concerned, continuously low oil prices would take away a margin growth catalyst (assuming a barrel
price applied by the group of $67 in 2016 vs. $60 in 2015). This would probably lead the group to
speed up implementation of its existing strategic plan, which involves reducing the portion of
revenue exposed to commodity risk, notably by scaling back hydrocarbon-related investments
(exploration-production, LNG activities).
ivan.pavlovic@natixis.com
philippe.ourpatian@natixis.com

Hotels, Leisure & Catering: positive to
varying degrees
Cruise and tour operators stand to gain most from the fall in oil prices. To a smaller extent,
duty free, hotels and contract catering groups should also benefit. Our top picks are Carnival
(Buy; target price 3,600p) and TUI (Buy; target price €17.5).
The oil price decline is positive for the Hotels, Leisure & Catering sector. Groups stand to benefit in
different ways, 1/ directly on their cost base for groups that buy fuel (Cruise and Tour operators) and
2/ via consumers’ increased purchasing power (Hotels, Duty Free and Contract catering).
Cruise & Tour Operators: main beneficiaries
Fuel is one of the biggest cost items for cruise operators (ca. 20% of their operating costs). Carnival
and Royal Caribbean are thus excellent vehicles to play the fall in oil. In its last update and based on
Brent prices of $63, Carnival was looking for a fall in its fuel bill of $475m in 2015 (vs. a total fuel bill
of $2bn in 2014). On the whole its sensitivity is as follows: a $10 fall in oil prices accounts for $0.13
/share (i.e. ca. 5% on 15e EPS). As for Royal Caribbean, its sensitivity is ca. 3% on EPS for a 10%
variation in oil prices.
Tour operators with their own aircraft fleets should benefit from the fall in oil prices. TUI operates a
fleet of 136 aircraft and Thomas Cook 88. We estimate that the impact should be contained in
2014/15 (virtually-nil for the winter season and slightly positive for the summer) in light of the groups’
fuel hedging policies. Moreover, the groups estimate that they should be able to pass on part of the
savings to customers. Therefore, although this will have a globally positive impact in 2015, we
believe that 2016 holds most of the potential for nice surprises (fiscal year beginning on 1 October) if
oil prices remain sustainably low.
Duty Free, Contract catering and Hotels: Also positive
The oil price decline will support motorway and air traffic figures. Autogrill and Elior are exposed to
this traffic via their contract catering businesses. Dufry and World Duty Free also stand to gain.
To a lesser extent, hotels will benefit as some of the additional traffic will have a knock-on benefit for
hotels.
geoffrey.dhalluin@natixis.com

Automotive: a positive effect that must
be qualified
Sustainably low oil prices are globally positive for the automotive sector even though certain side
effects must not be overlooked. For car manufacturers, beyond partially supporting demand, this
situation should result in a richer sales mix (which will be more tangible in North America than in
Europe) and improved operating costs (energy and logistics), partly compensated by various
perverse effects (lower return on fuel efficiency investments, pressure on certain emerging markets).
While it is difficult to identify the real winner/losers in the current climate, Daimler (Buy,
target price of €91), in light of its trucks exposure, might stand to gain most.
For Auto parts suppliers, beyond gains tied to potentially higher automotive demand or a richer
mix, the clearest gains will be made on commodities and their retention rate after renegotiations with
their car manufacturer clients. Faurecia (Buy; target price €48) and Plastic Omnium (Buy; target
price €30) could thus stand to gain most, given the larger share of plastic in their raw
materials purchases.
Last, tyre manufacturers could benefit from more upbeat trends on the replacement market owing
to richer mix trends and to a smaller extent, a potential increase in distances travelled. Even so,
remember also that this climate has perverse effects on pricing conditions which will probably play
more in favour of low cost players, at the expense of premium ones. On the whole, it is difficult to
single out any real winners in the short term on this segment, Nokian Tyres (Reduce; target
price €20) stands to lose most, owing to its strong exposure to Russia.
Indirect impact on demand, more significant on the mix
The impact of sustainably low oil prices on automotive demand is not easy to determine. We believe
the relationship is essentially indirect, reflecting the reallocation of implied purchasing power gains in
the purchase of new vehicles. This factor is far from being the main driver for automotive demand
which is more sensitive to other variables such as interest rates (70% of purchases in Europe and
90% in the USA are financed via credit or leasing), the unemployment rate and demographics. This
supportive factor will probably be a marginal, perhaps even ineffective support in countries where
demand is already stimulated by tax breaks (e.g. the PIVE plan in Spain). Moreover, price sensitivity
to oil will be more tangible in the USA given the low share of taxes in fuel prices (10/15% vs. 60/80%
in Europe). At this stage of the cycle, given the level of profitability reached (high for premium
players, recovering for broadline), any additional growth in demand will be felt more on the mass
market segment (Peugeot, Renault, Fiat Chrysler Automobiles) where capacity utilisation rates
are much lower than in the premium segment.
The theoretical impact on demand could be more significant in the trucks segment, owing to the
development of rail freight and a greater investment capacity on the part of transportation
companies, whose profitability is sharply influenced by fuel price trends (this line item accounts for a
good third of their operating costs). The combination of low oil prices and low interest rates post-QE
might speed up the recovery in demand for trucks in Europe, beyond current forecasts that are
underpinned by replacement needs after the recent crisis (5% increase expected by Volvo, +0% to
5% by Iveco, vs. Natixis estimate of +3% for the segment > 16T). This also applies to the US trucks
market which is still remarkably upbeat despite the clear recovery in 2014 (+14%). This climate
should benefit Daimler whose trucks business accounts for 21% of 2015e EBIT as well as
Volkswagen whose trucks division, undergoing restructuring, accounts for 14% of 2015e OP.

OE suppliers should, unsurprisingly, be supported by greater manufacturing momentum but it is
difficult to identify one particular winner. Among tyre makers, and beyond the continued impact on
OE sales, there is a strong correlation between distances travelled and growth in the replacement
tyres segment. But although it does exist, it is much weaker when it comes to fuel prices, including in
the USA where, as indicated previously, the weight of taxes is much lower than in Europe. Amid this,
it would appear that beyond a fall in fuel costs, the macroeconomic climate remains predominant,
which means we prefer Michelin as it is more exposed to North America (30% of sales). Last, in the
long term, manufacturers should benefit from an improved mix in favour of SUVs that have bigger
sized tyres. Moreover, the group has the most exposure to the trucks segment (31% of sales)
compared with other manufacturers, particularly in North America.
Beyond the impact on demand, keeping oil prices low should skew the sales mix in favour of
larger vehicles that consume more fuel. This trend has already been observed in the USA where
fuel prices have fallen to around $2/gallon (a level not seen since spring 2009), thus boosting sales
of light trucks and SUVs that now account for 55% of demand (historic peak of 60%) versus 42% in
June/July 2008 when fuel prices culminated at $4/gallon. As this segment is the most profitable, this
trend promises improved margins, and the Detroit 3 (Ford, GM, FCA) will be the main beneficiaries.
In Europe, the situation is patchier due to tax breaks for more low-key vehicles (e.g. eco penalty in
France).
Perverse effects
The fall in oil prices has an impact that is not only positive for the automotive sector. Indeed, its
impact is negative for emerging economies that are highly dependent on commodities and
hydrocarbons in particular. This is notably the case of Russia where the recent difficulties,
exacerbated by international sanctions and the collapse of the rouble, have led to automotive
demand plummeting (-20% to 30% expected in 2015 after a 10% fall in 2014). Nokian Tyres is
undeniably the stock that is most sensitive to crude price fluctuations, as its share price is strongly
linked to oil prices (see our report 13/01/15 Still too early). Renault is also widely exposed to the
Russian market, both directly (7% of its sales) and via Avtovaz that will not be fully consolidated
before 2016. The group’s challenge will be to avoid sinking into the red and offset the shortfall in
Russia with solid operating leverage in Europe, as it brilliantly managed to do in 2014.
Moreover, a lasting fall in fuel prices might mean that consumers have (even) less interest in
alternative powertrains (full electric, hybrid, plug-in hybrid) which are still significantly more
expensive than conventional (internal combustion) engines. This could push back the prospect of a
mass development of these technologies, making it more difficult to generate returns on the heavy
investment made by the global automotive industry (>50% of R&D efforts are tied to these issues)
under increased pressure from environmental regulations. This situation calls for an in-depth
examination by US and European regulators as to the upcoming stage of tightening of CO2 emission
standards (further decrease of 18/28% expected in Europe between 2020 and 2025, more than 50%
reduction in the USA between 2016 and 2025) which threatens to widen the gap between consumer
demand and manufacturers’ offering.
What about operating costs?
The industry as a whole stands to benefit from the impact of lower oil prices on its procurement
costs (particularly via indexing clauses with suppliers) as well as on energy and logistics spending.
Car makers do not seem to have factored in particularly favourable assumptions in their 2015
guidance, probably owing to what is still a highly competitive climate. We do not see as much of a
distinction on this theme, which should however play more in favour of broadline manufacturers
(Peugeot, Renault, FCA, VW) given the currently weak profitability on their automotive businesses.

Among parts suppliers, the players with most exposure to plastics, such as Plastic Omnium and
Faurecia, should come out on top amid the current climate as they estimate that they will be able to
preserve between 20 and 30% of the gains after negotiations with car manufacturers. Bear in mind
that for the most part, this pertains to complex plastics and consequently there is not a perfect price
correlation with crude oil.
Last, at tyre manufacturers, we still think that such an environment is challenging as the current
context of low commodities prices plays in favour of low-cost players at the expense of premium
players such as Michelin, and could heighten pricing pressure, thus squeezing the gains made on
raw materials costs.
georges.dieng@natixis.com
michael.foundoukidis@natixis.com

7. Our strategic analysis
Brent vs. Eurostoxx 600: an
econometric analysis
In order to supplement the views of our equity analysts, we use an econometric analysis to
look at the long-term and short-term relationships between the sector sub-indexes making up
the Euro Stoxx and several market variables, including the oil price. The results yielded by
this analysis enable us to determine a basket of sectors that benefit from a durably low oil
price environment. These are Industrial goods & services, Personal & household goods,
Food retailing, Media, and Travel & leisure.
Analysis of the impact of oil shocks on the different sectors of the equity indexes is generally carried
out via factor models. These quantify the sensitivity of yields to variations in clearly identified
economic and financial factors, including oil prices. For our purposes, these models have a major
disadvantage: they are based on variations in statistical data (yield, growth rate). Most of our study
is based on a strong hypothesis, namely a stagnation in oil prices or, put differently, a variation close
to zero over a time horizon of a few years. This is why it is impossible to use factor models and why
we used another statistical technique, cointegration.
Understanding cointegration requires a degree of familiarity with some statistical concepts, in
particular stationarity. To be stationary, a series has to meet three conditions, namely a constant
average, finite variance and last covariance between two periods t and t+h that is solely a function of
the difference in the time h. To summarise, a series is stationary if its average, (finite) variance and
covariance are time-independent. This is generally not the case for variables such as GDP,
consumer spending, the oil price, etc.
The advantage of the theory of cointegration lies in the fact that a large number of financial and
macroeconomic series are not stationary. Consequently, the use of standard regression methods
could then result in two problems, namely fallacious regressions and the fact that certain asymptotic
laws (in particular those that test significance) would no longer be valid, de facto skewing the
evaluation of the test statistics. We therefore chose to focus on error correction models. Indeed,
error correction models make it possible to model the adjustments that lead to a long-term
equilibrium situation. These are dynamic models that factor in both the short-term and long-term
changes in variables.
To this end, we seek to determine whether there exists a cointegration relationship between the
Euro Stoxx, its component sectors and different market variables. The market variables that we
consider are the following: Brent, US and European 3-month deposit rates, and the EURUSD. All of
the variables are logarithmic with the exception of interest rates, which are levels. The period studied
is from January 1999 to the present day, except for the real estate sector, for which the data begin in
2001.

If there are one or more cointegration relationships between the variables, then the series must
necessarily not be stationary. Consequently, we must first determine whether the series are
stationary or not. Several tests exist, each of which has its advantages and disadvantages, but we
opted for the ADF (Augmented Dickey-Fuller) test. Given the test statistics as well as the critical
values associated with them, we observe that all of these series are non-stationary with or without
constant and trend.
The test is then carried out on the differenced variables. This is therefore the yield for equity
indexes, Brent and the EURUSD since the series are logarithmic. It turns out, after analysis of the
test statistics, that the entire differenced series is stationary with or without constant and trend
(Table 1). We may therefore conclude that the logarithmic series or level series for rates are
integrated of order 1 (I(1)). Therefore, the whole point of the concept of cointegration is that can link
non-stationary variables in a relationship that is stationary.
Table 33: Test statistics and P-value for the ADF test
Sectors (log)
Level Difference
Sectors (log)
Level Difference
t-Stats p.value t-Stats p.value t-Stats p.value t-Stats p.value
Banks -2.33 0.44 -5.41 0.01 Automobiles & parts -1.97 0.59 -5.49 0.01
Healthcare -0.66 0.97 -4.75 0.01 Media -1.07 0.92 -4.96 0.01
Industrial goods and services -2.20 0.49 -4.94 0.01 Basic resources -2.24 0.48 -6.06 0.01
Personal & household goods -2.08 0.54 -4.63 0.01 Construction & materials -2.48 0.37 -5.03 0.01
Food & beverages -1.94 0.60 -4.58 0.01 Real estate -1.98 0.59 -4.25 0.01
Insurance -1.58 0.75 -4.57 0.01 Travel & leisure -1.47 0.80 -5.03 0.01
Oil & gas -2.50 0.37 -6.25 0.01 Financial services -2.02 0.57 -4.98 0.01
Chemicals -2.31 0.44 -5.60 0.01 STOXX Europe 600 -2.02 0.57 -4.60 0.01
Telecoms -1.82 0.65 -5.14 0.01 BRENT -2.53 0.35 -5.80 0.01
Government services -1.82 0.65 -4.68 0.01 IR USD 3M -2.06 0.55 -4.30 0.01
Technology -1.86 0.63 -4.94 0.01 IR EUR 3M -2.75 0.26 -3.92 0.01
Food retailing -2.20 0.49 -4.28 0.01 EURUSD -1.17 0.91 -5.04 0.01
Source: Natixis
The next step is to find out whether there is a cointegration relationship within each of the
non-stationary series sets. To this end, two approaches may be used. The first is the Engle and
ranger method, which consist of first estimating the long-term relationship, then subsequently the
error correction model. The disadvantage of this approach is that it cannot distinguish several
vectors of cointegration where they exist. In order to get around this difficulty, we prefer the second
method proposed by Johansen: a multivariate approach (i.e. where several variables are included)
to cointegration based on the maximum likelihood method.
We therefore apply the following procedure. First, we use different criteria, namely the information
criteria of Akaike (AIC), Hannan-Quinn (HQ), Schwarz (SC) and the Final Prediction Error (FPE) in
order to determine the number of lags in the VAR modelling the variables. According to the principle
of parsimony, we choose the smallest lag among those that minimise each of these criteria.
However, we verify that the VAR residuals are not autocorrelated via a Portmanteau test and
incrementally increase the degree of the VAR as long as the null hypothesis is rejected. Second, we
determine the number of cointegration vectors using the trace test proposed by Johansen. We
observe that at the level of 1% we have ONE cointegration relationship for all the equity indexes.

Table 34: Number of lags selected, test statistics and critical values of the trace test
Number
of lags
Test
statistic*
r <= 0
Test
statistic
r = 1
Number
of lags
Test
statistic
r <= 0
Test
statistic
r = 1
Banks 5 101.05 45.61 Technology 5 89.74 44.03
Healthcare 4 90.57 37.54 Food retailing 4 96.46 44.05
Industrial goods and services 6 96.20 49.90 Automobiles & parts 4 86.93 39.35
Personal & household goods 4 84.53 41.78 Media 7 89.29 43.73
Food & beverages 4 87.13 42.39 Basic resources 4 90.33 40.14
Insurance 4 99.50 47.37 Construction & materials 4 85.86 36.60
Oil & gas 3 82.03 38.68 Real estate 4 94.12 44.70
Chemicals 4 89.12 45.19 Travel & leisure 4 93.58 42.44
Telecoms 5 99.25 53.51 Financial services 4 95.83 39.36
Government services 4 94.16 38.42 STOXX Europe 600 4 98.40 44.43
10pct 5pct 1pct
r1 <= 1 45.23 48.28 55.43
r = 0 66.49 70.60 78.87
1 r = number of cointegration relationships
Source: Natixis
Now we have to identify the long-term relationships between variables, estimate using the maximum
likelihood method the VECM model and perform the usual validation tests, namely verify that the
coefficients are significant and that the residuals are indeed white noise.
The cointegration relationships given by the Johansen method are presented in the first part of the
table below. The final columns represent the coefficient associated with the long-term equation in
the estimate of the VECM and the p-value corresponding to the test on the residuals (Table 3).
If we take the example of the Healthcare sector, we have:
𝐻𝐻𝐻𝐻𝐻ℎ 𝑡−1 + 1.03 ∗ 𝐵𝐵𝐵𝐵𝐵𝑡−1 − 0.8 ∗ 𝐼𝐼 𝑈𝑈𝑈 3𝑀𝑡−1 + 1.52 ∗ 𝐼𝐼 𝐸𝐸𝐸 3𝑀𝑡−1 − 1.95 ∗ 𝐸𝐸𝐸𝐸𝐸𝐸𝑡−1 = 𝑍𝑡−1
With 𝑍𝑡−1 a stationery series representing the estimated residual of the long-term relationship in the
VECM.
We observe that the null hypothesis of white noise from the residuals in the VECM is rejected for
media at 1%; at 5% it is not rejected for the oil & gas, chemicals, food retailing, real estate and travel
& leisure sectors. Analysis of the coefficients leads us to eliminate certain sectors. Indeed, if these
coefficients of course have to be significant, they also have to be negative otherwise there would be
no phenomenon of returns.
Consequently, although the correction is fairly weak over one month, we choose to focus on the
following sectors: Healthcare, Industrial goods & services, Personal & household goods, Insurance,
Chemicals, Food retailing, Media, Travel & leisure and last Financial services.

Table 35: Cointegration relationships and associated coefficients in the VECM, P-value of the Ljung-Box test
Sectors1 BRENT IR USD 3M IR EUR 3M EURUSD Coefficient Coint Eq P Value (Ljung-Box)
Banks 1.00 -1.18 1.16 -2.14 0.49 0.016 *** 0.03
Healthcare 1.00 1.03 -0.80 1.52 -1.95 -0.007 * 0.03
Industrial goods and services 1.00 2.14 -1.30 2.23 -6.55 -0.016 *** 0.04
Personal & household goods 1.00 11.37 -5.33 9.91 -27.97 -0.002 *** 0.04
Food & beverages 1.00 50.36 -22.15 39.60 -125.08 0.00 0.03
Insurance 1.00 3.20 -1.95 3.39 -7.21 -0.01 *** 0.04
Oil & gas 1.00 -1.19 0.24 -0.58 3.04 0.027 *** 0.09
Chemicals 1.00 1.71 -1.10 2.05 -5.68 -0.013 *** 0.07
Telecoms 1.00 -1.00 0.33 -0.65 3.56 0.024 ** 0.02
Government services 1.00 -3.01 1.19 -2.21 6.85 0.008 *** 0.02
Technology 1.00 -3.73 1.83 -3.09 11.23 0.012 *** 0.04
Food retailing 1.00 10.78 -5.44 9.86 -26.85 -0.002 *** 0.10
Automobiles & parts 1.00 -47.26 21.31 -38.47 114.81 0.00 0.04
Media 1.00 4.02 -1.62 2.89 -10.17 -0.016 *** 0.00
Basic resources 1.00 -1.29 0.43 -0.79 1.05 0.043 *** 0.04
Construction & materials 1.00 -3.14 1.44 -2.62 5.94 0.009 *** 0.02
Real estate 1.00 -0.98 0.19 -0.62 1.06 0.041 *** 0.10
Travel & leisure 1.00 2.28 -1.19 2.20 -4.97 -0.012 *** 0.06
Financial services 1.00 11.49 -7.14 12.85 -24.68 -0.002 *** 0.04
STOXX Europe 600 1.00 -13.29 6.08 -11.49 33.46 0.002 *** 0.04
1 The series are lagged by one period
Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘-’ 0.1 ‘ ’ 1
Source: Natixis
Coming back to our example, the previous equation is equivalent to:
𝐻𝐻𝐻𝐻𝐻ℎ 𝑡−1 = −1.03 ∗ 𝐵𝐵𝐵𝐵𝐵𝑡−1 + 0.8 ∗ 𝐼𝐼 𝑈𝑈𝑈 3𝑀𝑡−1 − 1.52 ∗ 𝐼𝐼 𝐸𝐸𝐸 3𝑀𝑡−1 + 1.95 ∗ 𝐸𝐸𝐸𝐸𝐸𝐸𝑡−1
+ 𝑍𝑡−1
The idea is therefore as follows, the higher the Brent price, the more it penalises these sectors.
Conversely, a low Brent price favours them.
We now analyse the VECM coefficients associated with the short-term momentum. The first table
below shows the coefficients associated with the returns (or variations) from the explanatory
variables lagged by one month and the second table the coefficients associated with the returns
from the sectors and from Brent for lags ranging from 2 months to 4 months.

Table 36: Estimates of the VECM coefficients
Difference ect1 constant Sector.dl1 BRENT.dl1 IR.USD.3M.dl1 IR.EUR.3M.dl1 EURUSD.dl1
Healthcare -0.007 * 0.083 ** 0.01 -0.02 0.00 0.05 * -0.12
Industrial goods and services -0.016 *** 0.25 *** 0.04 -0.127 * -0.076 *** 0.078 * 0.06
Personal & household goods -0.002 *** 0.101 *** -0.01 -0.09 * -0.035 * 0.073 * -0.04
Insurance -0.01 *** 0.195 *** -0.04 -0.09 -0.1 *** 0.118 ** -0.19
Chemicals -0.013 *** 0.179 *** 0.01 -0.06 -0.06 *** 0.089 ** -0.02
Food retailing -0.002 *** 0.089 *** 0.03 -0.076 * -0.039 ** 0.103 *** 0.04
Media -0.016 *** 0.364 *** 0.07 -0.178 ** -0.03 0.01 -0.01
Travel & leisure -0.012 *** 0.183 *** 0.08 -0.131 ** -0.056 *** 0.07 * 0.11
Financial services -0.002 *** 0.141 *** 0.13 -0.07 -0.037 * 0.074 * 0.18
Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘-’ 0.1 ‘ ’ 1
Source: Natixis
Table 5: Estimates of the VECM coefficients
Difference Sector.dl2 BRENT.dl2 Sector.dl3 BRENT.dl3 Sector.dl4 BRENT.dl4
Healthcare 0.03 0.074 * 0.01 -0.04 -0.154 * -0.02
Industrial goods and services -0.05 0.098 - 0.01 -0.01 -0.05 -0.105 -
Personal & household goods 0.02 0.04 0.04 0.04 -0.02 -0.11 **
Insurance -0.08 0.162 * -0.02 0.05 -0.08 -0.08
Chemicals -0.03 0.087 - -0.07 -0.02 0.05 -0.04
Food retailing 0.00 -0.02 -0.13 - -0.04 0.02 -0.085 *
Media -0.08 0.143 * -0.12 -0.04 -0.05 -0.10
Travel & leisure -0.05 0.02 -0.02 0.00 -0.01 -0.127 **
Financial services -0.07 0.085 - 0.04 -0.02 -0.137 - -0.085 -
Signif. codes: 0 ‘***’ 0.001 ‘**’ 0.01 ‘*’ 0.05 ‘-’ 0.1 ‘ ’ 1
Source: Natixis
As regards the variables lagged by one month, we note that the coefficients allocated to Brent are all
negative but are only significant for Industrial goods & services, Household equipment, Food
retailing, Media, and Travel & leisure. These sectors should therefore benefit from a low level
for Brent via the long-term equation and also from any fall in Brent via the short-term
dynamic. It is worth noting that this short-term effect (negative and significant coefficients)
shows up again a little later, with a lag of four months. These results confirm the
recommendations of the various analysts as given above.
nathalie.dezeure@natixis.com
karim.elali@natixis.com

Equity strategy: how to play lastingly
low oil?
The sharp fall in oil prices is broadly positive for equity markets. The bulk of its impact stems
from the resulting improvement in macro growth prospects. What scale are we talking about?
Eurostat econometric calculations, corroborated by our economists, suggest, based on a 50% slide
in prices since June 2014, a growth supplement of 0.4% for GDP in volume in year one, 1% in n+1,
1.2% in n+2. Hence, though the positive impacts are clear, we also see that the full effect will only be
felt in the context of maintained low prices over a relatively long period (2 to 3 years).
Table 37: Impact of a 10% fall in the oil price on real GDP (annual averages)
% Year 1 Year 2 Year 3
France 0.01 0.02 0.05
Germany 0.16 0.33 0.37
Italy 0.07 0.25 0.36
Netherlands 0.03 0.08 0.10
Spain 0.04 0.21 0.25
Euro zone 0.08 0.19 0.24
Source: Eurosystem Staff Calculations
We have seen that our economists validate this assumption. In fact, this scenario of lastingly
low oil has prompted them, alongside the fall for the euro/$ and inside five months, to raise
their growth forecasts for the euro zone in 2015 from 0.8% to 1.7%. Our EPS growth estimate
model, based on simple regression between GDP in volume (main variable) and EPS growth
(secondary variable), suggests that this upward revision brings EPS growth to 13% this year versus
7.0% expected before, which is of course favourable to the valuation for equities.
Based on current market data
4
these items point to a Stoxx index on a target 12m fwd PE of 15.8x
(14.1x at 24/2/2015)… i.e. an increase of some 12% (ex-dividend) on current levels.
How to play low oil? Long (H1) sectors negatively correlated to the price of
crude (consumption and operating costs)
Basically, the fall for crude can be boiled down to a massive transfer of wealth from oil
producer countries to energy intensive company and households.
What sector consequences? We have downgraded Integrated oil and Oil services from Market
performer to Underperformance. Unsurprisingly, the power of the downward adjustment to prices
upsets economic equilibria for the oil and oil services sector. For Integrated oils, the downward
adjustment to capex risks being insufficient to maintain a level of cash flow compatible with the
present level of high pay out (> 55% in 2013). To avoid selling off these assets on the cheap,
disposals have slowed, even come to a halt. Finally, it looks doubtful that the solidity of balance
sheets (with gearing not over 33%) will be tapped to continue with a generous shareholder return
policy. Fundamentally, the sector is engaged in a negative spiral: declining profitability, upcoming
cuts to investments and dividends.
Aside from the negative message for the Oil sector as a whole (Integrated oil and Oil
services), we have sought how to take advantage of this lasting scenario of weakness for oil
4 Cost of capital of 7.2% (Natixis equity calculation), 49% pay out for the Stoxx index, ROE of 8.1%,and sustainable growth rate of 4.1% (g= RR * ROE)

prices. At end-2014, we examined the 6 month correlation between Brent and sectors. We have
introduced two levels of analysis: 1/ stock market examination (monthly logarithmic return for Brent
and sectors) and 2/ the impact on operating margins (net adjustment to the operating margin over
one month in the consensus and logarithmic return for Brent).
How to profit from these adjustments on the stock market? Basically, it is in the interests of the
investor to sell sectors positively correlated to the Brent price: Integrated oil, Oil services, and, to a
lesser extent, Electricity players and Staples (a decline for oil implies downward pressure on
commodity prices).
Conversely, sectors with a negative correlation should be bought and the most evident
gambles are to be found in sectors for which oil (and its derivatives) represent a substantial
proportion of operating costs: Airlines (watch out however for the possibility of a price war
5
which
would promptly cancel the benefits of the slide in jet fuel prices), Chemicals (=), Capital goods and
Building materials (Cement notably). The sectors which will benefit from extra business (positive
impact on GDP growth, supplementary purchasing power) are also desirable: Environment, Non-
food retailing, Hotels & leisure and Banks (via an increase in loan distribution).
Lastly, the slide for oil equating to a supply shock, cyclical Consumer goods are to be picked
as they profit from the extra purchasing power conferred: Cosmetics (Outperformance), Luxury
goods (Market performer), Media (Market performer), Car makers (Outperformance) and Car parts
suppliers (Market performer).
Fundamentally, our long call on European equities remains intact: we are playing a return to
earnings growth in Europe (+13% based on 1.7% GDP growth in volume terms in the euro zone), at
a time when the cost of capital will remain low for a long while (7.2% vs. a historical average of
9.1%) because of the unconventional monetary policy being implemented. It is true that the overall
climate is conducive to an overweighting of equities, but we would warn investors against any kind of
non-discriminatory approach. Buying growth does not mean buying it at any price.
The factors behind the supply shock ($ and oil prices) benefit European economic growth quite a lot
more than they benefit global growth. The latest forecasts established by our economists put euro
zone growth at 1.7% (in volume terms) in 2015 and 2016 (i.e. an upward revision of 0.5% in the
space of 2 months!) without any similarly substantial upward revision to global growth projections
(2.6% vs. 2.5%).
This constitutes a solid argument in favour of European cyclical stocks (and the financial sector) and
against sectors most exposed to global growth, especially as the latter are trading on historically
high relative multiples. We would support this argument further by emphasising the relative
stabilisation of the euro / dollar exchange rate. This could be good news for European equities,
especially as regards flows from the USA. Moreover, flows from the USA generally imply
investments in value themes. But should we be concerned about one of the main earnings growth
drivers being made obsolete? No, because base effects established by the recent appreciation of
the dollar have by no means been exhausted (most of the positive impact materialises 18 months
after the decline), and the beneficial effects on company accounts are only just beginning to filter
through.
5‘For Ryanair, the slide for oil favours price wars’, Reuters, 2 February 2015

Table 38: Summary of criteria to play oil weakness
Correlation 6M sectors Correlation 6M OM sectors Note
Europe market -0.18 -0.43
Aerospace/ Defence -0.40 0.26 =
Food -0.26 0.53 =
Insurance -0.34 0.27 =
Banks -0.43 -0.84 +
Capital goods -0.28 0.02 =
Beverages -0.05 0.31 =
Construction/concessions -0.19 0.68 =
Chemicals -0.28 0.29 =
Airlines -0.77 -0.50 +
Concessions -0.11 0.00 =
Car makers -0.40 0.70 =
Cosmetics -0.63 0.47 =
Food retailing -0.20 0.09 =
Non-food retailing -0.31 -0.51 +
Energy players -0.02 -0.01 =
Environment -0.33 -0.89 +
Car parts suppliers -0.50 0.50 =
Telecoms equipment -0.64 0.00 =
Hotels and catering -0.28 -0.54 +
Real estate -0.23 0.47 =
Software -0.11 -0.11 =
Luxury goods -0.44 0.32 =
Building materials -0.33 0.53 =
Media -0.53 0.72 =
Metals & Mines 0.36 0.25 -
Integrated oils 0.68 0.53 -
Pharmaceuticals -0.03 0.20 =
Semiconductors 0.07 0.22 =
IT services -0.52 -0.05 =
Oil services 0.70 0.21 -
Support services -0.25 0.58 =
Tobacco -0.42 0.41 =
Telecoms -0.56 0.73 =
sylvain.goyon@natixis.com
stephen.ausseur@natixis.com
benoit.peloille@natixis.com

What consequences for the credit
market?
The underperformance of $ debt vs. € debt since September 2014 is to a great extent
attributable to the fall in oil prices, as the weight of this sector in $ credit indexes is much
greater than that in € IG indexes and even more so in HY indexes. Low oil prices would
trigger a sharp rise in energy sector leverage in $ HY and a rise in the default rate on the $ HY
market of 1.3 points. From an econometric standpoint, the $ HY market already prices in such
a big rise in the risk of default that it offers an incentive to increase long positions on this
market, despite the oil risk. In IG debt, the Oil risk premium is also much greater in $
IG spreads than in € IG spreads. In the medium term, convergence between these risk
premiums may therefore be played on IG Oil & Gas debt.
Allocation between € and $ debt: overweight the € in
the short term on the IG segment
Since the acceleration in the fall in oil prices, € and $ credit indexes have not moved in the same
way. The chart on the left below shows that the € non-financial IG credit market showed little change
throughout the period August 2014 to January 2015, while $ non-financial IG debt suffered strongly
in the same period (45bp widening in spreads against swaps). The chart on the right below intuitively
confirms that the widening of $ credit spreads vs. € is inversely correlated to oil prices - if we exclude
the recent period, which has seen a tightening of credit spreads in both the US and Europe, driven in
particular by the ECB’s announcement of QE on 22 January (despite the fact that corporate debt is
excluded from the programme).
Chart 28:
Asw spread of € iBoxx Non-Fin indexes vs. $
€ - $ spread differential on
iBoxx Non-Fin indexes vs. Brent
Sources: Bloomberg, Natixis Sources: Bloomberg, Natixis
This underperformance by $ credit markets since the fall in oil prices is largely due to the
over-representation of the energy sector in $ credit indexes compared with € credit indexes: the
chart below left shows that the Energy sector accounts for 17% of the iBoxx US$ HY index, while
just 1% of iBoxx € HY non-financial outstanding debt stems from this sector! The exponential growth
40
60
80
100
120
140
160
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
iBoxx € Non fin iBoxx $ Non fin
0
20
40
60
80
100
120
1400
10
20
30
40
50
60
70
80
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
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Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
$ vs € Non-fin spread Brent ICE (rhs)

in shale oil drilling in the US in recent years has engendered a broad debt market in this sector to
finance the heavy investment – with relatively high leverage ratios. All told, US HY credit indexes
include $185bn in HY debt denominated in $, with a strong concentration on BB and B- ratings (cf.
the chart below right). This peak is a cause for concern, insofar as it corresponds to unsustainable
leverage levels, assuming that the EBITDA generated by these companies in 2015 will be strongly
affected by durably low oil prices.
Chart 29:
Share of the Oil & Gas index in
€ and $ credit indexes
Outstanding Oil & Gas sector debt
on the $ HY market
Based on this observation, it is easy to see how a lastingly low oil price level is likely to result in a
continuation of the underperformance of $ credit markets relative to € credit markets, in that the
default rate in the US energy sector will have a substantial impact on the average default rate for
dollar-denominated debt, which will not be the case for the market in debt in €.
What default risk on Oil & Gas HY debt in $?
In order to determine the impact of a rise in the default rate on HY debt in $, we estimated the
impact of the fall in oil prices on the leverage ratios of the main $ HY issuers in the Energy sector. In
a scenario of a fall in the Brent price from $99 in 2014 to $52 in 2015, we assumed a fall of 60% in
EBITDA on average for the sector, generally similar to that observed for the European majors in the
same scenario. These leverage ratios for Energy sector $ HY issuers are weighted by the share of
these issuers’ outstanding debt in the index.
In order to estimate the increase in the risk of default in the sector, we modelled the probability of a
default within the next 5 years by an Oil & Gas $ HY issuer depending on the associated leverage
ratio. Based on the 61 companies with the highest outstanding debts in the sector, we obtain an
average leverage ratio of 4.6x at the end of 2013.
Moreover, assuming stable net debt for the issuers (the decline in operating cash flow being offset
by reductions in capex), average $ HY sector leverage would rise from the current level of 4.6x to
11.6x! In terms of the probability of a default in the next 5 years (weighted by outstanding debt per
issuer), the impact of this scenario would be an increase of 15 percentage points, or 2.5 percentage
points at the scale of the $ HY index as a whole. In terms of the risk of default at one year, this
0%
5%
10%
15%
20%
25%
30%
EUR USD
IG
HY
0%
5%
10%
15%
20%
25%
30%
35%
0
10000
20000
30000
40000
50000
60000
BB+ BB BB- B+ B B- CCC+ CCC CCC-
As a % of non-fin debt (rhs)
outstanding of Oil & Gas debt in $mn

increased leverage in the Oil & Gas sector would potentially represent a rise of 0.5 of a percentage
point in the US HY default rate.
However, this assumption looks relatively optimistic, insofar as the risk of default is in reality a rare
and binary event. If, on the other hand, we assume that leverage above 11x (which corresponds
roughly to a CCC or lower rating in the Oil & Gas sector) automatically triggers a default, then the
chances of a default in a scenario where oil prices remain at $52 per barrel would be 24x greater
than those currently observed in the Oil & Gas sector of the $ HY market. Over a 3-year time
horizon, this would push up the $ HY default rate by 1.3 percentage points.
This may not look like much compared to the default rates historically observed in the HY segment
(cf. the chart below left), but compared with the most recent levels reported by Moody’s (1.91% for
the US HY, 2.05% for the global HY at end-January 2015), an increase of 1.3 points in the $ HY
default rate would be substantial.
In particular, a scenario in which all the Oil & Gas defaults materialise before the end of the year
would push the $ HY default risk up to 4.3% at the end of 2015 (cf. the chart below right), assuming
that our core scenario of a default rate of 3% holds true excluding the Oil & Gas sector.
Chart 30:
Historical trend in the HY default rate according to Moody’s Impact of an oil stress test on $ HY default risk
0%
2%
4%
6%
8%
10%
12%
14%
16%
Feb-95
Jan-96
Dec-96
Nov-97
Oct-98
Sep-99
Aug-00
Jul-01
Jun-02
May-03
Apr-04
Mar-05
Feb-06
Jan-07
Dec-07
Nov-08
Oct-09
Sep-10
Aug-11
Jul-12
Jun-13
May-14
Apr-15
Actual Baseline Forecast
0% 1% 2% 3% 4% 5%
Current default rate
Moody's estimate for year-end
Natixis forecast for year-end
(central scenario)
Stress tests on Oil & Gas
(assuming stable default rates
excluding Oil & Gas)
Stress tests on Oil & Gas
(assuming 3.2% default rates
overall)

Is this risk of defaults in the Oil & Gas sector priced into
$ HY spreads?
Is this risk priced into the $ HY market? To determine this, we applied a stress test with a default
rate of 4.3% on the $ HY market to our forecasting model for $ HY spreads (cf. charts below). This
showed strong divergence between the spreads observed and our model. We estimate the
sensitivity of the $ HY index to a 1 point increase in the default rate at 35bp for OAS spreads. This
would imply a theoretical spread for the $ HY index of OAS+449bp at the end of 2015, taking into
account not just a default rate of 4.3%, but also a rise in the VIX to 17% by the end of the year. As
the chart below on the right shows, $ HY spreads already price in this risk premium.
Chart 31:
Historical $ HY spreads Impact of an oil stress test on $ HY spreads
Consequently, exposure to the $ HY segment has become attractive, even factoring in a worst-case
scenario of oil remaining at $52/bbl until the end of the year.
In the medium term, should investors take up positions
on the $ IG debt market?
The charts below show, at 26 February last, the risk premiums observed in the Energy sector in € on
the left and in $ on the right, by rating category. We can see that the risk premium is low on the € IG
credit market, except for BBB+ and BBB- rating categories. However, these are biased by a large
share of issues by Pemex in the BBB+ category and by Gazprom and Petrobras (probably not for
much longer, since after Moody’s downgrade of Petrobras to Ba2 on 24 February with the rating
remaining on review for downgrade, a one-notch downgrade by S&P or Moody’s would put the
Brazilian corporate in the junk category), hence an emerging risk. For the other rating levels, it must
be acknowledged that the risk premium for the Energy sector on the $ credit market is around
40-50bp for AA- to BBB+ ratings and 150bp for BBB- rating, which is much higher than what is
observed on the € credit market.
We would therefore gamble in the medium term on a convergence of sector risk premiums between
€ and $, i.e. an outperformance of the Energy sector in $ vs. €, at least for the IG compartment
(which will be less affected by the resurgence of defaults to be expected in this same scenario in the
HY category).
0
500
1000
1500
2000
2500
Sep-00
Sep-01
Sep-02
Sep-03
Sep-04
Sep-05
Sep-06
Sep-07
Sep-08
Sep-09
Sep-10
Sep-11
Sep-12
Sep-13
Sep-14HY spread
Model
300
350
400
450
500
550
600
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
HY spread
Model
stress
test

Chart 32:
€ non-fin credit spreads by rating according to sector $ non-fin credit spreads by rating according to sector
Indeed, while the underperformance of $ debt relative to € debt has been visible in all sectors since
September 2014 (cf. charts below), the most marked negative differential on the $ credit market
does indeed stem from the Oil & Gas sector (cf. chart below on the right).
Chart 33:
Credit spreads by sector
Contribution to the change in the iBoxx indexes (€ and $)
since 1 September 2014
thibault.cuilliere@natixis.com
jean-baptiste.teissier@natixis.com
0
20
40
60
80
100
120
140
160
180
200
Oil & Gas Excluding Oil& Gas
632 bp including
Gazprom & Petrobras
including PEMEX
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB-
0
50
100
150
200
250
300
350
400
Excluding Oil & Gas Oil & Gas
AAA AA+ AA AA- A+ A A- BBB+ BBB BBB-
40
50
60
70
80
90
100
110
120
130
50
70
90
110
130
150
170
190
210
230
250
iBoxx € Non fin iBoxx $ Non fin
iBoxx € Oil & Gas iBoxx $ Oil & Gas 1-10Y
iBoxx $ Basic Materials 1-10Y Brent ICE (rhs)
-10
-5
0
5
10
15
20
ConsumerGoods
Oil&Gas
Utilities
Industrials
Telecoms
BasicMaterials
EUR USD

Reference prices are based on closing prices.
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