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Is Enquest plc’s 130% share price surge set to continue?

Image: Premier Oil: Fair use

In the last year, oil and gas development and production company Enquest (LSE: ENQ) has recorded a share price rise of 130%. Certainly, some of that gain is due to improving prospects for the oil price following OPEC’s decision to cut production in the latter part of 2016. However, progress made by the company has also been at least partly responsible. Following Tuesday’s release of its 2016 results, could further gains be ahead for the company?

Strong performance

Enquest’s performance as a business in 2016 was relatively impressive. Production averaged 39,751 barrels of oil equivalent per day (boepd), which is a rise of 8.7% on 2015. Unit operating costs were slashed to $24.60 per barrel from $29.70 per barrel in 2015. This caused cash from operations to improve to $408.3m from $221.7m in 2015, while a capex reduction of almost 19% also boosted free cash flow. And with the company’s proven plus probable (2P) reserves rising by 5.9% versus one year ago, its long-term outlook appears to be bright.

In addition, Enquest’s key Kraken development has continued to progress. It is under budget and is on target for its first oil by the end of June. The company has reiterated production guidance of between 45,000 boepd and 51,000 boepd for the full year. It will also seek to reduce average unit operating expenses to between $21 per barrel and $25 per barrel including the Kraken production. It is also making transition activities regarding its acquisition of interests in the Magnus oil field and the Sullon Voe terminal.

Growth potential

Although the outlook for oil and gas stocks such as Enquest and sector peer Premier Oil (LSE: PMO) is rather uncertain, both companies appear to offer wide margins of safety. This means that their share price performance may be relatively strong – even if the oil price fails to rise.

For example, in Enquest’s case it trades on a forward price-to-earnings (P/E) ratio of just 2.4. Clearly, there is scope for its forecast profit figure to be downgraded. This could easily take place if, for example, OPEC decides to increase output once its production cut has expired halfway through 2017. However, the market seems to have anticipated further problems for the industry. Given Enquest’s low valuation, share price gains seem to be on the cards even though it has already risen by 130% in the last year.

Similarly, Premier Oil trades on a forward P/E ratio of 2.3. Its strategy has been sound throughout the oil price crisis. It has sought to reduce costs in order to create a leaner and more sustainable business model. It has also invested in acquisitions such as EON’s North Sea assets. They could improve the company’s long-term profitability. Alongside a low valuation, this could allow Premier Oil’s share price to outperform the wider oil and gas industry, as well as the wider stock market.

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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.