328 Reasons to sell 88 Energy Ltd, Enquest plc and Cairn Energy plc

Royston Wild explains why investors need to give 88 Energy Ltd (LON: 88E), Enquest plc (LON: ENQ) and Cairn Energy plc (LON: CNE) short shrift.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Although hopes of an output cut from OPEC may have failed to materialise, investors in the fossil fuel sector have remained buoyed by a steady decline in the US oil rig count in recent months.

A backdrop of low oil prices has encouraged North American producers to steadily scale back their operations, driving the number of producing rigs as low as 316 earlier this month. This is a stark comparison with the record 1,609 units in operation back in October 2014.

However, Brent’s recent charge back above $50 per barrel has encouraged many US producers to plug their hardware back into the ground.

Indeed, latest Baker Hughes data showed the number of rigs in operation up to 328 in the week to 10 June. This represented the first consecutive weekly rise since last August, and suggests that industry shutdowns in the country may now have bottomed.

Production pains

To me, this bodes extremely ill for the oil price, particularly as the aforementioned OPEC production freeze — as well as that of Russia — appears as far away as ever, the political and economic faultlines across the cartel as pronounced as ever.

Drastic production cuts are required to provide bloated stockpiles with sustained support. Sure, supply disruptions in Nigeria and Canada may have resulted in recent drawdowns. But signs that the US is getting back into gear on the production front are likely to lead to further builds in the months ahead.

Risks outweigh rewards?

News of rising US output is, of course, bad news for the entire oil industry, both for huge operators like BP and Shell as well as fledgling drillers like 88 Energy (LSE: 88E), Cairn Energy (LSE: CNE) and Enquest (LSE: ENQ).

The unpredictability that accompanies oil and gas exploration always makes small producers such as these a bit of a gamble for stock selectors. But when you throw in signs of worsening supply/demand dynamics, their risk profiles rise by a notch or several as economic viability of their operations comes under severe scrutiny.

There’s no doubt that these companies boast some outstanding assets. For example, 88 Energy’s Icewine asset in Alaska has drawn the headlines in recent months as positive testing data continues to emerge.

But the capital-intensive nature of their operations means that Enquest et al desperately need to start generating strong revenues to realise this solid growth potential — indeed, Enquest again touted the possibility of asset sales last month in order to keep its head above water.

Cairn Energy, Enquest and 88 Energy are all expected to keep nursing losses until 2017 at the earliest. And with crude market imbalance looking set to persist, I don’t believe any of these oilies are sound stock picks at present.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended BP and Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Person holding magnifying glass over important document, reading the small print
Investing Articles

The market is wrong about this FTSE 250 stock. I’m buying it in April

Stephen Wright thinks investors should look past a 49% decline in earnings per share and consider investing in a FTSE…

Read more »

Black father and two young daughters dancing at home
Investing Articles

1 FTSE 250 stock I own, and 1 I’d love to buy

Our writer explains why she’s eyeing up this FTSE 250 growth phenomenon, and may buy more shares in this property…

Read more »

View of Tower Bridge in Autumn
Investing Articles

The FTSE 100 is closing in on 8,000 points! Here’s what I’m buying before it’s too late!

As the FTSE 100 keeps gaining momentum, this Fool is on the lookout for bargains. Here's one stock he'd willingly…

Read more »

Investing Articles

3 ideas to help investors aim for a million-pound Stocks & Shares ISA

The UK has a growing number of Stocks and Shares ISA millionaires, and this plan may be one of the…

Read more »

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »