As oil industry insiders begin to confront the spectre of a new normal for crude prices well below $100/bbl, is the era of globe trotting super-majors at an end? And if so, will small, nimble producers be able to take their place as investor darlings?
Quest for cost cuts
The trials and tribulations of North Sea producer EnQuest (LSE: ENQ) help explain why the outlook for this high-cost region is becoming increasingly bleak. While the company has had success in cutting spending, operating expenditure (opex) was still a very high $29.7/bbl in 2015. These high costs help explain why the company’s pre-tax loss was $1.3bn despite receiving an average of $70.2/bbl sold.
As if plummeting crude prices weren’t enough of an anchor on EnQuest, its staggering $1.5bn mountain of debt is also constraining growth even as crude prices rise. This level of debt means gearing (total assets/total debt) is an unhealthy 53%, which will inhibit growth going forward. This high debt load and high-cost-of-production assets are the reasons I don’t foresee EnQuest share prices catching the super-majors anytime soon.
Not quite Premier division
Like EnQuest, Premier Oil (LSE: PMO) is saddled with high debt levels from massive capex projects initiated when crude was above $120/bbl. In Premier’s case, net debt at the end of 2015 was a full $2.2bn. Despite this, shares have more than doubled from January lows as the company has announced a series of bolt-on acquisitions of relatively low-cost assets.
In this regard, the company is well positioned going forward as opex per barrel are only $16. This low cost base created operating cash flow of $800m in 2015, which will continue to increase as new production comes online. This leads me to view Premier more favourably than EnQuest, but I still believe staggering leverage will constrain shareholder returns unless crude prices return to astronomical levels.
Super-solid
Super-major BP (LSE: BP) suffered its worst year ever in 2015 as the company’s losses totalled $6.5bn. However bad this loss, it still may be too early to claim it as evidence of the end of the era of the super-major as $9.8bn went out of the door for Gulf of Mexico oil spill-related charges.
These fines aside, the underlying business model for BP remains very solid. Operations brought in $19bn of cash thanks largely to downstream refining assets, whose profits are normally negatively correlated with the price of crude. Great downstream assets and five years of selling high-cost-of-production assets to pay spill-related fines have allowed the company to target around $50/bbl as the company’s new break-even price target.
BP’s gearing at the end of 2015 was also a relatively low 21.6%, giving the company room to manoeuvre as it attempts to simultaneously maintain dividends and reset its cost basis. Earnings don’t cover this 7.8% yielding dividend, but management appears determined to not slash dividends for the time being, whether or not this is a wise move. With a healthy balance sheet, wide-ranging low-cost assets and its incredibly profitable refining arm, I believe BP will continue to reward long-term shareholders more than either EnQuest or Premier Oil.
