Investors in oil explorers Premier Oil (LSE: PMO) and Tullow Oil (LSE: TLW) finally enjoyed some respite at the end of last month, when their share prices rose sharply on a spike in the oil price. This was a reminder of just how closely their fortunes are tied to black gold.
Not that investors needed any reminding, given the havoc cheap oil has wreaked on Premier and Tullow, which are down 75% and 69% respectively over the past year. The oil price spike proved a false dawn in any case, with Brent Crude dipping below $50 a barrel again, and Goldman Sachs suggesting it could fall as low as $20.
Shale And Hearty
One of the surprise factors keeping the oil price down is the “tremendous resilience shown by US shale players”, according to Christof Ruhl, head of research at Abu Dhabi’s sovereign wealth fund. Ruhl suggests that OPEC made a rational decision in refusing to cut production in the face of falling prices, in a bid to hang onto market share. What they didn’t foresee was that both US and Canadian production would suffer less than forecasters expected.
Once again, US innovation has blown away the competition. Technology advances have helped wildcat drillers drive down costs, and also given them the flexibility to ramp up production in response to changing oil prices. This flexibility could prove key keeping the oil price low, as they can quickly ramp up production as marginal fields become profitable again.
There are some concerns about shale. Wells can deplete faster than conventional fields. Sub-$50 oil have forced some US drillers to restructure or declare bankruptcy. Many are failing to recover their capital costs. But they are still tougher than the Saudis gave them credit for. With a downbeat OPEC saying the oil price will rise by just $5 a year, and probably won’t hit $80 until 2020, Premier and Tullow could find the next few years uncomfortable.
Premier Struggler
Premier needs oil at $60 and beyond to ease its worries. According to OPEC’s numbers, it can’t look forward to that until 2017. It can’t even respond by ramping up production, which has fallen over the last year from 64,900 to 60,400 barrels of oil equivalent per day, although that may reverse when its Solan field comes into production later this year. Shame we have to wait until 2017 until its Catcher field starts pumping.
Nervous investors should shut their eyes now. That way they won’t read HSBC’s recent gloomy prognosis. It said that with Premier’s core net asset value some way below the share price “the market is unlikely to de-risk its unsanctioned, logistically challenging, high cost Sea Lion project”. Ouch.
Tullow Grave
Tullow has some oil price hedging protection but has been struggling to make ends meet at an average first half oil price of $71. Using OPEC’s projections, it will continued to get less than for several more years. That could prove a heavy burden, given its debt load of $3.6bn, even if it has acted to reduce its cash burn.
At least HSBC’s recent verdict on Tullow wasn’t as X-rated. It did slash its target price from 514p to 310p (against 200p today) but continues to see significant upside, with its TEN project in Ghana more than 65% complete and on track for first oil mid-2016. But it’s all down to the oil price now.
