Many investors were caught by surprise when Afren (LSE: AFR) admitted it might need to raise £200m from investors earlier this week — but the Nigeria-focused firm is unlikely to be the last casualty of low oil prices.
Two other firms which have been hit hard by the oil collapse are Premier Oil (LSE: PMO) and Enquest (LSE: ENQ): shares in both firms have fallen by around 50% over the last three months.
Enquest
Enquest shares soared last week after the firm announced that its lenders had agreed to relax the terms of Enquest’s debt until mid-2017.
This may be a short-term lifeline for Enquest, which has net debt of $1bn, but the fact it was necessary suggests it won’t be enough to solve the problems the firm will face if oil prices stay low.
Bond investors seem to agree — according to Bloomberg data, the yield on Enquest bonds has risen from 5% in July 2014 to around 13% today.
The problem is that Enquest isn’t generating enough cash to fund its capital expenditure, let alone repay any of its debt. Enquest’s numbers suggest to me that despite making cuts, it will have to draw down significant amounts more debt during the coming year, in order to fund its planned expenditure of $600m.
This could leave Enquest unable to service its debt unless oil prices recover strongly — a big risk.
Premier Oil
Premier is a larger firm than Enquest, and should be in a stronger financial situation, in my view, but there are some similarities.
Premier spent $1bn on capital expenditure in 2014, and plans to spend $600m in 2015. Based on the firm’s most recent reported figures, I estimate that the firm’s operating cash flow from last year will be around $1bn, including one-off gains from asset sales of $147m.
Net debt is currently $2.1bn, with cash and undrawn facilities of $1.9bn.
Although a significant portion of Premier’s sales are gas, the firm has only hedged around 40% of its oil output for 2015. In my view this means that the firm is likely to have to draw down more of it debt to fund its operations and capex, creating a hefty repayment burden for future years — and putting the firm’s dividend at risk.
Premier vs Enquest
I think Enquest is at greater risk of Afren-style financial problems than Premier, but I’m not comfortable with either firm’s position, as both are already heavily indebted and likely to become more so this year.
