If you’re looking for FTSE 100-beating stocks, then there’s no need to look further than oil producer EnQuest (LSE: ENQ). It might seem difficult to believe, but over the past 12 months, shares in this company have added 6.4%, outperforming the FTSE 100 by around 10%, excluding dividends. Including distributions to investors, the outperformance is lower but still positive at around 6.2%.
It has been a volatile year for EnQuest’s shares. Investor sentiment has swung with oil prices, sending the stock surging to new 52-week highs, before quickly erasing gains. Between January and May, the stock jumped 50% before retreating.
A taste of things to come
I think EnQuest’s recent outperformance is a sign of things to come. Over the past two years, the company has transformed itself into one of the North Sea’s most prominent and efficient oil producers. When the price of oil first began its dramatic descent in 2014, EnQuest was still waiting for the start-up of its flagship Kraken project. Production in 2014 averaged 27,895 barrels of oil equivalent per day (boepd).
Today, the company is an entirely different beast. Kraken is producing oil, and the firm recently completed the acquisition of a selection of assets, which included its outstanding interest in the Magnus oil field.
Total production averaged 54,268 boepd in the 10 months to end-October, and management is now predicting output to reach 63,000 boepd to 70,000 boepd during 2019.
Unfortunately, after surging during the first half of 2018, the price of oil has slumped by around $25/bbl over the past few months. This is bad news for EnQuest, but I don’t think it’s the end of the world for the company. According to its results for the six months to the end of June, the group’s average operating cost per barrel of oil produced was just $22.6, compared to the current oil price of around $62/bbl. Economies of scale that come with higher production volumes should help reduce the average production cost in 2019 as well. Management has hedged a significant portion of oil production for 2019, at around $70/bbl.
With production rising and costs falling, EnQuest is beginning to chip away at its massive debt load. I believe this debt is the reason why many investors are afraid to touch the company so, as it falls, investors should return, helping EnQuest continue to outperform the FTSE 100.
According to today’s trading update, group net debt had fallen to $1.77bn at the end of October, down from $1.97bn at the half-year point. According to the update, a further $65m of debt was paid off in November.
While there’s still a long way to go before EnQuest is debt-free, the reduction is a huge step forward for the business, in my opinion. As the company generates more cash from operations, debt paydown should accelerate, helped by falling interest costs as obligations are paid off (total group financing costs amounted to $128m in the first half of 2018).
So overall, after several years of turbulence, I think EnQuest is now on the comeback trail. And as its outlook continues to improve, the stock is highly likely to continue to outperform the FTSE 100.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.