Next year will be a year of reckoning for the oil industry. Exploration and production companies such as Enquest (LSE: ENQ), Tullow Oil (LSE: TLW) and Premier Oil (LSE: PMO) could struggle to make it through the year as oil prices remain depressed and debt levels build.
Analysts at investment bank Merrill Lynch have gone so far as to say that 2016 could be “the year of capital injections” for the oil explorers. Capital markets are now closed to these companies leaving them with only one option, and that’s to ask shareholders for additional cash.
Merrill Lynch’s figures suggest that the sector could need as much as $3.6bn in new equity next year. Tullow, Premier, Enquest and Gulf Keystone Petroleum all need to shore up their balance sheets.
Looking to boost cash flow
Enquest is taking drastic measures to increase liquidity. The company is looking to sell stakes in some of its producing assets, which should help fund the development of the group’s other North Sea assets.
The company has launched a process to farm out a stake in the Heather/Broom field. Enquest currently owns 63% of the field. It’s also been reported that Enquest was seeking to sell up to a quarter of its stake in the Kraken field, and a 10%-20% share of the Scolty/Crathes fields, in which it has a 50% interest. Enquest has vowed to press ahead with the development of these two new North Sea oil fields next year and management is targeting a 33% year-on-year rise in production in 2016.
Worth zero
Shares in Premier Oil have slumped by 75% this year amid concerns about the state of the company’s balance sheet.
Indeed, at the beginning of November a group of City analysts warned that without a recovery in oil prices, Premier’s shares were worth almost nothing, as the value of the company’s assets is currently insufficient to pay off existing debt. Higher interest payments will absorb nearly all of Premier’s free cash flow going forward, which means new developments are likely to be delayed. Even the start-up of Premier’s key project, the $1.9bn Solan field off the west coast of Shetland, is unlikely to make a dent in the group’s debt pile.
Even after selling a selection of Norwegian assets for $120m several weeks ago, Premier’s debt is still greater than three times earnings before interest, tax, depreciation and amortisation.
Meanwhile, Tullow’s debts are getting out of control. For example, Tullow reported net debts of $3.6bn at the end of June, against net assets of $3.8bn. City analysts forecast net debts to rise to $4bn by the end of December, against pre-tax profits of only £68m for full-year 2015 and £142m for full-year 2016. It’s not clear how much longer the company can continue to live beyond its means.
