UK Oil Equities Fall As Downgrade Roils Market Sentiment

U.K. oil equities continued to fall Monday, tracking the 3% drop in crude prices as investors reacted to the unprecedented downgrade by Standard & Poor's of U.S. debt and as worries over the health of the world economy and global energy demand intensified.

However, the impact was less keenly felt by the majors than by smaller exploration and oil services firms, which are seen as more directly exposed to crude prices.

The FTSE 350 Oil & Gas index, which tracks the U.K.'s largest listed oil and gas firms, closed 2.3% lower.

The country's large integrated majors BP PLC (BP.LN) and Royal Dutch Shell PLC (RDSA.LN) both finished the session weaker, closing 1.8% and 2.1% lower respectively. Both firms slightly outperformed the broader FTSE 100 index, which ended a volatile session 2.8% lower.

Oriel Securities analyst Brendan Wilders said this was partly due to investors retreating from riskier stocks. The oil majors, while offering less upside, are perceived to be more stable with reliable, if relatively modest, payouts.

Shares in smaller peer BG Group PLC (BG.LN), which have risen 21% in the past year, ended the session down 4.9% from Friday's close.

Worse hit were exploration and production firms and oil services companies. The specter of lower crude prices amid fears of falling demand appears to have curbed investor enthusiasm for these types of companies, analysts said. E&P fortunes are most closely aligned to the oil price, relying as they do on lucrative discoveries to offset their steep initial capital expenditure.

"As for the smaller E&Ps, who don't pay dividends and are more reliant on higher oil prices, in a bull market investors are happy to pay for the potential upside but not when confidence levels drop," said Wilders. "These companies are also a favorite of retail investors, who are more likely to be squeezed out by margin calls."

Evolution Securities said in a note earlier Monday that the sharp falls among E&Ps reflect the market re-valuing these stocks in light of lower oil price--and demand--assumptions.

"The market may be catching up with reality," said Evolution.

The sector's more established players, Tullow Oil PLC (TLW.LN) and Cairn Energy PLC (CNE.LN), were both badly hit, each ending the session 5.9% lower. Soco International was among the biggest losers, closing Monday 10% lower.

Within the rest of the sector, oil services firm Lamprell PLC (LAM.LN) was among the worst hit, its shares ending down 14%, while rivals Hunting PLC (HTG.LN) and Petrofac PLC (PFC.LN) finished 6.2% and 8.2% lower respectively.

Despite not directly dependent on the price of crude itself, demand for oil services rises in tandem with exploration activity and much of the recent bullishness towards the sector has been driven by expectations of increased investment by oil producers. With the prospect of a sustained economic downturn coming into view, some of this sentiment appears to have reversed, analysts said.

-By Alexis Flynn, Dow Jones Newswires; +44 2078429471, alexis.flynn@dowjones.com

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