North Sea oil group Enquest (LSE: ENQ) has now refinanced its loans and started production at its Scolty/Crathes project in the North Sea. Despite climbing by 45% this year, Enquest shares are worth 72% less than they were five years ago. But the group isn’t the only mid-cap stock to have suffered.
Defence engineering firm Chemring Group (LSE: CHG) has lost 62% of its value since November 2011. Chemring is finally expected to return to profit this year, after three consecutive years of losses.
In this article, I’ll ask whether either company deserves a buy rating after today’s news.
Low costs and rising production
Enquest says production has now started from its ‘small pool’ Scolty/Crathes project in the North Sea. Initial operating costs are expected to be just $15/bbl., and production is expected to continue until 2025.
The firm’s much larger Kraken project is moving towards completion. The Floating, Production, Storage and Offloading (FPSO) vessel commissioned for Kraken will shortly set sail from Singapore. It is expected to arrive in the North Sea in January, on-track for production to start during the first half of next year.
Refinancing complete
Enquest also announced the completion of its recent financial restructuring today. The firm’s loans have been extended until at least 2021, and interest payments on some debt will be rolled over until oil reaches $65 per barrel. Enquest has also raised £82m by issuing new shares. This cash will be used to complete the development of the Kraken field, ahead of next year’s production start date.
This refinancing should mean that Enquest avoids defaulting on its debts. But I’m not sure it makes the stock any more attractive for equity investors. Enquest’s net debt was $1,681m at the end of June. The group is only expected to report a profit of $83m in 2017. Unless the oil market stages a stunning recovery, it will take a long time for Enquest to repay its debts. In the meantime, the firm is unlikely to be able to pay dividends or invest in major new projects. In my view, Enquest’s debt burden means that shareholder returns are likely to remain poor.
A brighter outlook?
The situation at Chemring may be more appealing. The company confirmed today that full-year profits should be in line with expectations. Net debt fell from £154m to £88m during the year to 31 October, putting it well within Chemring’s target range of less than 1.5 times earnings before interest, tax, depreciation and amortisation (EBITDA).
Chemring’s revenue rose by 26% to £477m last year, up from £377m in 2015. Even if exchange rate effects are excluded, revenue would still have been higher, at £440m. Expected earnings of 9.5p per share for the year just ended give Chemring a forecast P/E of 16.5. This seems reasonable, at this early stage in Chemring’s recovery.
We don’t yet know if Chemring will pay a final dividend this year. The interim dividend was passed, but consensus forecasts do show a payout of 2.05p for the current year. If paid, this would give a forecast yield of 1.3%.
I’m encouraged by the reduction in Chemring’s debt levels and the stabilisation of its revenue levels. I believe now could be a good time to consider investing in the group’s medium-term recovery.
