2021 for OFS: Despite the rebound in share prices across the board in Q4, 2020 will still go down as a very difficult year for the oil & gas value chain; characterised by COVID-19 disruption and a sharpening focus by markets on climate-credentials among energy companies. Will the recent momentum continue into 2021? We are cautious as market fundamentals have changed little in last few months in our view, risking a detachment between markets and  fundamentals. We downgrade five stocks but continue to see some value in a handful of offshore names.

We believe there are five key questions for 2021 which are likely to determine the shape of recovery, or rather lack of it in the OFS space: 1: Does the oil price outlook matter? 2: Will renewables / clean energy come to the rescue? 3: Will acquisitions and  consolidation be a major factor in 2021? 4: Is offshore the main overlooked value play? 5: Is there an emerging Digital & Software story in the sector?

What we change: We roll forward valuations to 2021e/22e, which drives most of our target price changes (we only change estimates for SUBC, WG and SPM). Our broad view is that oil services will only see a gradual recovery from the lows of this year and that market valuations risk becoming lofty - e.g. we see US onshore oil production and activity down YoY in 2021 and in offshore, we think only strategic projects will go ahead while a significant tail of maller/higher cost assets will remain in hibernation. With the recent share price rises (40% on an average from October lows), we think valuations have moved ahead of fundamentals for the more diversified names like SLB, HAL, BKR, FTI and WG - all of which we downgrade. We still see some selective value in offshore on potential re-rating despite a challenging backdrop –Buy on BOKA, SBMO, SPM, DRLCO.