10.3 Million Reasons To Sell Afren Plc And Enquest Plc

Royston Wild explains why investors should continue to give Afren Plc (LON: AFR) and Enquest Plc (LON: ENQ) short shrift.

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Shares in oil explorers Afren (LSE: AFR) and Enquest (LSE: ENQ) have both received a boost in Wednesday trading, the effect of Royal Dutch Shell’s £47bn takeover of BG Group boosting sentiment across the entire oil sector.

Still, investors should not forget that these companies have suffered extreme price weakness since last summer as crude prices have crumbled. Enquest has conceded 72% of its value since last June, when Brent was trading at around $115 per barrel versus $58 recently, while Afren has seen its shares collapse 98% during the period.

And fresh signs emerged overnight that Saudi Arabia is prepped to keep pumping with a vengeance, a scenario that could drive prices still lower in the coming weeks and months. Oil minister Ali al-Naimi announced last night that the Kingdom pumped a record 10.3 million barrels of oil per day in March, up from 9.64 million barrels the previous month and usurping the previous high of 10.2 million punched in August 2013.

OPEC poised to keep output bubbling

Saudi Arabia has previously resisted calls for OPEC to curtail production in a bid to improve the market’s supply/demand balance, and previously commented that it would be prepared to see crude prices drop as low as $20 per barrel.

The country is committed to bumping up its market share, and yesterday reiterated its reluctance to slash output without meaningful cutbacks from other major producing nations. Indeed, al-Naimi said that the Saudis should continue to produce around 10 million barrels each day, a terrifying situation for the entire oil sector.

Enquest announced plans last month to shell out $600m in 2015 alone to develop its projects in the North Sea. But even though its gigantic Alma/Galia asset remains on course to produce maiden oil in the next few months, the effect of a declining black gold price could put paid to plans to develop its Kraken project as finances come under pressure — the company’s net debt pile stood at an eye-watering $932.8m as of the close of 2014.

Meanwhile, Afren remains on the precipice of total collapse, and still has to agree a $300m funding deal with its bondholders. Although the firm says that such a deal should be concluded “imminently,” with industry veteran Alan Linn waiting in the wings to become chief executive should an accord be signed off, a positive development is certainly no foregone conclusion, particularly given the poor state of the oil market and intrigue surrounding the company during the past year.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild 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.

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