Today’s full-year results from Soco International (LSE: SIA), Enquest (LSE: ENQ) and Gulf Keystone Petroleum (LSE: GKP) show how differently companies are coping with the oil price crash.
Soco International
Despite revenue halving from $448.2m to $214.8m last year, Soco generated $80.3m of operating cash flow and $28.1m of free cash flow in 2015. The group ended 2015 with net cash of $106.3m, after returning $51.1m of cash to shareholders during the year. In today’s results, Soco announced a further dividend of 2p per share, giving a dividend yield of 1.3%.
Soco’s great strengths are its lack of debt and the fact that its cash operating costs are just $10 per barrel. Although the firm’s decision last year to downgrade its reserves was a blow for investors, it’s worth remembering that if oil prices rise again in the future, some of the ‘lost’ barrels of reserves may be added back in again.
In my view, Soco is certain to survive the oil market crash, and is worth considering at current prices.
Gulf Keystone Petroleum
Gulf Keystone warned investors today that oil production from Shaikan will start to decline later this year without capital expenditure of $71m-$88m. Gulf won’t be able to afford this, as its current cash balance is just $50m, and much of this money is reserved for interest payments anyway.
Managing debt repayments is a growing issue for Gulf. The group said today that it “continues to actively review options to secure new funding … to ensure it is able to continue as a going concern”.
Without fresh funding, Gulf appears likely to default on debt repayments of $575m which are due in 2017. I suspect that Gulf may even run out of cash before then, depending on production levels and whether payments from the Kurds continue at the current rate.
Gulf’s likely debt problems means that in my view, the firm’s existing shares have very little value. Gulf remains a strong sell, in my opinion.
EnQuest
Shares in North Sea producer EnQuest were one of this morning’s biggest risers, and are up by 20% as I write.
In its 2015 results, EnQuest reported a 31% increase in production to 36,567 barrels of oil equivalent per day (boepd) and confirmed 2016 production guidance of 44,000–48,000 boepd. Despite this, EnQuest’s operating profit fell by 52% to $173.9m in 2015. Cash generated from operations dropped by 65% to $221.7m. Meanwhile, net debt rose by 18% to $1,548m.
The problem is that EnQuest only has $496m of cash and undrawn debt. This should be just enough to bring the Kraken field into production. However, without a substantial rebound in oil prices, I’m not sure whether EnQuest will generate enough free cash flow to enable it to start repaying its debt on schedule in 2017.
The group said today that it is “pursuing a number of options” in order to raise additional funding. These could include assets sales or issuing new shares. This debt risk means that while I believe EnQuest’s assets are good, I think the shares are too risky to be a sensible investment at the moment.
