Penny stock EnQuest (LSE:ENQ) has seen its share price increase over 80% in the year to date. But should I add the shares to my holdings? Let’s take a closer look.
EnQuest shares rally
EnQuest is an oil and gas production and development business with operations in the UK North Sea and Malaysia. It was formed in 2010 when certain assets from Petrofac and Lundin Petroleum merged to create EnQuest. It added its Malaysian assets four years later.
A penny stock is a stock that trades for less than £1. So what’s been happening with the EnQuest share price? Well, as I write, the shares are trading for 33p. At this time last year, the shares were trading for 16p, which is a 106% increase over a 12-month period. The shares were trading for 18p at the beginning of the year, meaning they are up over 80% based on current levels.
I believe EnQuest shares have rallied because demand for oil has increased, supported by macroeconomic factors as well as recent geopolitical events. In addition to this, EnQuest has reported positive performance recently, but more on that later.
A penny stock with risks
One of my biggest issues with EnQuest currently is its high levels of debt. In its latest set of accounts, EnQuest confirmed debt stood at $1,222m. This is a concern for me as it could affect any potential returns I hope to make as a shareholder. After all, paying down and servicing debt must also be a priority.
The other issue I have with EnQuest is that the shares are currently trading close to all-time highs. The last time the penny stock reached current levels was in 2018. If the business were to encounter any operational or financial issues or headwinds, the share price could fall significantly.
Recent developments & verdict
EnQuest released its annual financial report on 24 March for the period ending 31 December 2021. I thought the report was generally positive. EnQuest reported revenue increased by 46.5% to $1,265.8m compared to 2020 levels. More importantly for me, a $566m loss in 2020 turned into a $352.4m profit for 2021. Free cash flow also increased by close to 90% to boost the balance sheet.
Looking ahead, EnQuest recently purchased two new oil fields in Aberdeen and Shetland. I like when a business has an eye the future and is looking to grow organically, especially a penny stock.
The demand for oil post-pandemic has continued on an upward trajectory. In recent months, macroeconomic and geopolitical factors have pushed oil prices to record highs. Despite the general volatility linked to oil and commodities, I am buoyed by the current outlook ahead and burgeoning demand for oil. I believe EnQuest could benefit and this could boost any returns I hope to make.
I believe EnQuest is a good penny stock option for my holdings currently. The shares look dirt-cheap on a price-to-earnings ratio of just two! I’d add the shares to my holdings and believe they will provide me with stable returns in the long term.
