Shares in North Sea-focused oil company Enquest (LSE: ENQ) rose by nearly 8% this morning, despite yesterday’s slide in oil prices.
The firm’s gains were driven by a bullish trading update. Production for the second half of the year rose by 26% to 35,022 barrels of oil equivalent per day (boepd), compared to the same period last year.
Production has continued to rise over the last three months, averaging 41,360 boepd between July and November. The gains are being driven by Enquest’s Alma and Galia fields, which have added 13,000 boepd to the firm’s production since the end of October.
What about costs?
Enquest expects to achieve an average operating cost of $26-$28 per barrel in 2016. The firm also has 10m barrels of hedging in place for next year at $65/bbl. That’s equivalent to about 27,000 boepd, and should make a significant difference to cash flow.
Offsetting this is the firm’s net debt, which is expected to total $1.55bn by the end of 2015.
Although the firm does not expect to have to start repaying debt until 2017, interest costs are rising and totalled $21.5m during the first half of this year.
While I am fairly sure that Enquest will be able to stay on top of its debt commitments, I’m not sure whether there will be enough surplus cash to lift the share price or fund any dividends over the next few years.
Personally, I think it’s a little too soon to buy into Enquest’s recovery. I don’t feel that there’s much visibility of cash flow beyond 2016.
Tullow Oil
It’s a similar story at Tullow Oil (LSE: TLW), but there are some differences.
Tullow trades on a price/book ratio of 0.6, compared to 0.2 for Enquest. In my view this suggests that the market is more confident in the future value of Tullow’s shares than those of Enquest.
Tullow also has a stronger hedging profile, with around half of current production hedged at $75/bbl for 2016 and a significant amount hedged at $73/bbl for 2017. Tullow is probably a safer buy than Enquest, but I still think that shareholders are likely to see poor returns over the next few years as Tullow focuses on reducing its debt levels.
Premier Oil
Two years ago, Premier Oil (LSE: PMO) took the bold step of buying into Rockhopper Exploration’s Sea Lion discovery in the Falkland Islands.
Plans for developing Sea Lion have been in the pipeline since then, but Premier hasn’t been in any rush. That’s hardly a surprise, given the oil price crash. In my view, there is zero chance of this development happening until the market improves.
One reason for this is that Premier’s balance sheet looks increasingly stretched by the firm’s debt.
Premier shares currently trade on just 0.3 times their book value. In my view this indicates that the market recognises that the demands of Premier’s $2.3bn net debt are likely to take priority over shareholder returns when the oil market does start to improve.
Like the other two firms, Premier is in the middle of two big developments. Although production is ahead of guidance this year, broker forecasts for the firm’s 2015 earnings have been slashed by 30% over the last three months alone.
In my view, it’s too early to buy back into Premier.
