After a strong start to the year, the price of oil has slumped over the past few weeks, thanks to growing worries about the state of the oil market and resurgence of production from shale oil fields. Rising US shale production threatens to undo the market rebalancing achieved by last year’s supply cut by OPEC , and investors are unwinding their bullish bets on the commodity as this threat persists.
It’s not clear how many companies will be able to survive another oil price downturn. Many haven’t recovered from 2015/16’s price weakness, as last week’s $790m surprise rights issue from Tullow Oil shows. In fact, this cash call is a warning to all oil investors that many companies in the sector are now struggling to survive, and may have to undertake extreme measures to keep the lights on.
However, some companies are better placed to weather another downturn than others. Enquest (LSE: ENQ) and Genel Energy (LSE: GENL), for example, both look strong enough to be able to manage their way through further oil price weakness as other companies flounder.
This time last year it looked as if Enquest would struggle to remain in business as oil prices plunged. But thanks to management’s quick reactions — cutting costs, fortifying the balance sheet and reducing spending — the business looks as if can make it through the storm.
At the beginning of this week, Enquest said it brought costs down 17% in 2016, to $24.60 a barrel, and is targeting unit operating costs in the low $20s per barrel once the new Kraken development is on stream. Thanks to lower costs and the company’s hedging programme, full-year earnings before interest, tax, depreciation and amortisation rose to $477m, up from $474m, topping the $469m expected by analysts. On top of these impressive figures, the company agreed a $400m debt restructuring at the end of last year, which should help reduce pressure on Enquest’s balance sheet.
When Kraken comes on stream later this year, the company should be able to start reducing its hefty debt pile organically. City analysts are expecting Kraken to boost Enquest’s earnings per share to 17.8p by 2018.
Genel Energy flies under the radar of most London investors because the company and its management is relatively media-shy. Still, that doesn’t mean the business isn’t worth taking a look at.
Genel’s production comes from two main oil fields in Iraq, Taq Taq and Tawke. According to the firm’s most recent trading update, production from these fields amounted to 44,000 barrels during January, but it’s not really Genel’s production that leads me to believe that the company is the best oil sector pick whether or not there’s a further downturn in oil prices.
Indeed, Genel’s most attractive quality is its cash pile. The group’s unrestricted cash balance at 31 December 2016 stood at $408m, up $3m from the end of the third quarter, and net debt at 31 December 2016 stood at $240m, down $1m from the end of the third quarter. Even if oil prices slump by another 50%, with $408m of cash on the balance sheet, Genel will be able to keep the lights on for some time yet.
Rupert Hargreaves 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.