Can Premier Oil plc and Tullow Oil plc defy the latest oil price slump?

Oil is on the slide again. Excitable analysts who thought crude would press on after breaking the $50 a barrel mark have been proved wrong. Instead, $50 is starting to look like a ceiling, the level at which the new generation of technology-fuelled US shale drillers can turn a dime and re-supply the market. The prospect of one or even two US rate hikes this year could also drive down the price.

It’s the stockpiles, stupid

Latest US Energy Information Administration (CIA) figures showed a second week of stockpile increases, with an extra 2.3m barrels, further hitting crude. Oversupply is an enduring problem, and the combination of a rising dollar and falling oil price is bad news for stock markets.

It’s also bad news for UK-listed oil explorers such as Premier Oil (LSE: PMO) and Tullow Oil (LSE: TWL), although you wouldn’t know that looking at their recent share price performance, which has been robust, with their share prices rising 27% and 18% respectively over the last month (despite slipping in the last week).

Both were helped by positive notes from Barclays in late August. The broker is overweight in Premier Oil with a 100p target against today’s 67.5p, which would suggest a rather juicy 48% upside. It’s also overweight on Tullow Oil, with its 310p target a full 43% above today’s 216p. Promising?

Premier’s league

Premier has helped its own cause by hedging 30% of oil production at $73.40 a barrel, almost 65% above today’s crude price, this will only last until the end of the year. This is a worry for a company that flagged up net debt of $2.635bn by 30 June, up from $2.24bn at year-end 2015. 

Premier is currently renegotiating its covenants and is benefitting from monthly deferrals while talks continue. It has taken advantage of falling oil, snapping up Eon’s North Sea assets at ‘bargain’ prices, although they don’t look such a bargain at today’s crude level. It has been busily slashing costs and capex like everybody else in the industry. After a period of heavy investment management reckons it can generate free cash flow at $45 a barrel – today’s price. This is too close for comfort, especially if the oil price slips again.

Tullow to go

In July, Tullow Oil posted £30m first-half profit after tax and pre-tax operating cash flow of $256m and investors remain happy to renew and extend its debt facilities while the company looks to exploit its successful run of oil discoveries. Tullow has also hedged cleverly, with 38,500 daily barrels of second-half 2016 production hedged at an average of $74.

TEN Project remains on budget and is on schedule for first oil in early August, which should boost Tullow’s group net production by around 60%, while the Jubilee field is now expected to average 85,000 barrels a day. Net debt has now climbed to $4.7bn, up from $4bn on 30 December and $3.6bn a year ago, dwarfing its current market cap of £1.96bn ($2.60bn).

Neither company is in serious trouble but investors have a right to feel edgy as oil heads south. Perhaps OPEC can save the day with a production freeze, in which case you can expect their share prices to rebound sharply. But an oil price dip would inflict further pain on both company’s prospects.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.