That these are hard times for the oil business is nothing new, but the pain is being felt disproportionately across the industry. Costs of production vary enormously depending on the location of the oil, with the North Sea one of the most expensive places to be drilling.
It’s not just the cost of those mammoth rigs and of getting the oil ashore from hundreds of miles out at sea, as there’s also the declining productivity of many of the fields and the aging of the infrastructure. The cost per barrel rises as less and less is pumped out and equipment maintenance leads to more and more delays — and with crude fetching only around $63 a barrel, there’s not a lot of safety margin built in.
That’s high on the agenda at the annual oil and gas industry conference currently happening in Aberdeen, at which Scottish First Minister Nicola Sturgeon has urged restraint on taxation for the industry. But which British companies are most effected?
Cairn
Cairn Energy (LSE: CNE) is based in Edinburgh, and has a significant investment in the British and Norwegian areas of the North Sea. The risk of that is offset somewhat by offshore interests around Ireland, Greenland, other parts of Western Europe and West Africa. But low oil prices have still sent Cairn shares slipping by 12% over the past 12 months to 182p today.
Cairn is also in the precarious position of not having any profits forecast for at least the next two years, but the company is in a good capital position and has some impressive assets under its control.
Enquest
By contrast, Enquest (LSE: ENQ) is focused almost entirely on the North Sea, and the extra fears are apparent in a 12-month price fall of 67%, to 48p — although the price has doubled since January’s low, as oil prices have picked up from below the $50 mark to around $63 today.
Results for 2014 included impairments of $335m due to the lower oil price, and Enquest ended with net debt of $933m (up from $381m a year previously). Brokers are cautious on Enquest, and I can understand that as a downtick in the oil price will surely hurt.
Premier
My third is Premier Oil (LSE: PMO), which has interests around the world, including Vietnam, Indonesia and the potentially lucrative Falklands basins, but still gets almost half its turnover from the North Sea. Premier is unique amongst these three in that it’s expected to produce profits this year and next, but that hasn’t stopped a 54% share price plunge in 12 months to 159p.
All three carry their share of risks, but I can’t help feeling we’re looking at pricing based on $60 oil continuing for some time. And with demand actually rising, there are many who think we’ll see a stabilization around the $70 level — and that should give these three some reasonable support.
Bargain shares?
Anything the Scots can wheedle out of Westminster to support the industry would help, but analysts seem to be warming towards these North Sea oilies now, with the most bullish stance towards Cairn. I think they could be right.
