Ever since the price of oil began to grind higher last year, small-cap North Sea oil producer Enquest (LSE: ENQ) has been on my value radar.
After several years of rough trading, it now looks as if Enquest is back on track. The company’s flagship Kraken development is online, and the producer is now guiding for oil production of 50,000 to 58,000 barrels of oil per day for 2018, up from last year’s figure of 37,405 bbl/d.
Cash flow growth
According to Enquest’s full-year 2017 numbers, which were published today, this year the firm expects its production cost per barrel to fall to $24, compared to 2017’s figure of $26. Meanwhile, capital spending is set to drop 47% to $250m. The group has hedged 7.5m/bbls of oil at an average price of $62/bbl. 2017’s average realised oil price was $52.2/bbl.
Put simply, during 2018 Enquest’s oil production is set to grow 55%, and the average cost of production will fall approximately 8%. All in all, this implies Enquest’s profitability should jump during 2018, and it should be able to start meaningfully reducing its debt.
Net debt was just under $2bn at the end of 2017 or around 6.6 times EBITDA.
According to my calculations, if cash produced from operations jumps 55% during 2018, (in line with the higher level of production to $471m) Enquest could be on track to report free cash flow from operations of $221m this year. That’s enough to pay down 10% of the debt mountain (in the long term City analysts are forecasting a free cash flow of as much as $700m). These figures do not take into account higher oil prices, nor the lower average production cost of each barrel, so they are highly conservative estimates.
And based on these estimates, shares in the company are trading at a price-to-free cash flow ratio of 2.3, making Enquest one of the cheapest stocks around today. If the firm can get debt under control, then I don’t believe it will be long before the shares attract a higher multiple.
Another small-cap oily I’m positive on the outlook for is Faroe Petroleum (LSE: FPM). Faroe’s portfolio consists of approximately 60 exploration, appraisal, development and production licenses in the North Sea, and it is unique among early-stage oil companies as it’s actually producing oil.
According to the firm’s final figures for the year to the end of December, the company produced an average of 14,349 bbl/d in 2017, down 18% on the year due to the suspension of production from two key assets, the Njord and Hyme wells.
Still, 2018 could be a transformational year for the company as management has earmarked £80m for the development of key assets as it pushes towards its target of more than doubling production to 35,000 bbl/d. With unrestricted gross cash of £149m at year-end, Faroe has plenty of capacity to pursue this goal.
If everything goes to plan, and the company can continue to produce oil while unlocking value from its portfolio of assets, City analysts estimate Faroe could earn 3.4p per share in 2018, giving a forward P/E of 31. This multiple might look expensive, but in my view, it does not take into account any potential upside from higher production or a successful drilling programme. With this being the case, I believe shares in Faroe could leap higher if performance in 2018 turns out better than expected.