After a sluggish start to the year, shares in Enquest (LSE: ENQ) are charging higher today after the company issued a welcome trading update.
The company revealed that full-year production for 2014 was at the high end of guidance, although revenue and earnings are both set to be lower year-on-year. Production increased by 17% during 2014, to 28,267 barrels of oil equivalent per day (boepd), and the company also gave guidance for production of between 33,000 and 36,000 boepd for 2015.
Still, despite upbeat production figures Enquest said that its full-year 2014 revenue is set to fall on the back of lower oil prices. Year-on-year, revenue is set to decline by 1.1% to $950m, compared to $961m as reported for 2013. Additionally, earnings before income, taxation, depreciation and amortisation for 2014 are expected to fall in the range of $530m to $580m, down around 10% year-on-year.
Good news
However, what’s really excited the market this morning is the news from Enquest that it expects revenue in the coming year to suffer only a minimal impact from oil price volatility. 8m barrels of production have been hedged at prices in the high $80s, which works out at around 80% of 2013s total production, but only covers around 70% of the coming year’s total production.
Nevertheless, alongside this news Enquest also announced that its lenders have relaxed the covenants on its debt facilities owing to the lower oil price. This is great news, as City analysts have been expressing concern about Enquest’s level of debt for some time.
Specifically, analysts were worried about Enquest’s $1.2bn revolving credit facility, which was granted on the condition that Enquest’s debt-to-EBITDA ratio would stay below the key threshold of 3 to 1 for the duration of the facility. With oil trading below $50 a barrel, figures suggested that Enquest’s debt to EBITDA ratio would balloon to five times.
But now lenders have given Enquest some breathing space. The banks supporting the facility have agreed to raise the net debt/EBITDA covenant on the credit facility to five times until 2017, giving the company room to manoeuvre and ride out the volatile oil market.
In addition to this support from lenders, Enquest has decided to cut its capital expenditure plans for 2015 by 40%, down to $600m. Further, the company has stated that it is working with its contractors and supply chain to achieve further cost savings.
The bottom line
So overall, today’s trading statement from Enquest shows that despite the falling price of oil, Enquest remains profitable and expects to continue operating profitably, with the support of its lenders, for the foreseeable future.
