In line with a recovering oil price, investor appetite in black gold specialists BG Group (LSE: BG) and Enquest (LSE: ENQ) has surged in recent weeks. The former has leapt 22% from last month’s trough of 794.7p per share, the cheapest for more than six years, while its peer has seen its stock more than double from January’s all-time lows of 22.25p.
But given the precarious state of the oil market and subsequent effect on these firms’ operations, could this resurgence prove nothing but an expensive ‘dead cat bounce’?
Can Lund transform BG Group?
BG Group’s shareholders were given a boost this month when the high-profile appointment of Helge Lund from Statoil was brought forward to 9 February, giving the new man an extra few weeks to get to grips with a difficult trading environment.
In response to these problems, the company has slashed capital expenditure for 2015 from $8bn-$10bn to $6bn-$7bn, a scenario that could undermine the earnings potential of its growth assets. BG Group is due to see production gush at its Queensland Curtis LNG project in Australia and offshore projects in Brazil this year and next, although a depressed oil price and rising costs — combined with supply chain problems — could hamper the performance of these projects looking ahead.
Given these uncertainties, it could be deemed that earnings forecasts from Barclays make BG Group a costly stock selection at the current time.
BG Group is expected to see earnings slump from 118 US cents per share in 2014 to 52 cents this year, before taking off to 98 cents in 2016 as production spews forth. These projections leave the business dealing on P/E ratings of 29.5 times prospective earnings for 2016 — far above the watermark of 15 times which represents attractive value — but which falls to 15.7 times for next year.
Enquest to slide into the red
However, Barclays is less optimistic over Enquest’s bottom line in the medium term. The London firm is expected to slip from earnings of 24.4 US cents per share in 2013 to 15 cents last year, results for which are due on March 19.
And further woe is expected this year, with Enquest anticipated to slip into the minus column this year with losses of 1 cent. A modest recovery, to earnings of 2 cents, is pencilled in for 2016. Of course this year’s expected negative result results in an invalid P/E rating, while next year’s recovery leaves the firm on a lofty readout of 33.4 times.
Investors breathed a sigh of relief last month when the business struck a deal with creditors to ease covenants on its debt until mid-2017. But a period of sustained oil price weakness could still exert unbearable pressure on the balance sheet, worsened by Enquest’s position as a high-cost producer and inability to significantly reduce capex. And should start-up at its massive Alma/Galia field in the North Sea experience further delays the explorer could find itself in deep water.
High risk at a high price
So in my opinion, both BG Group and Enquest are a gamble too far given the current state of the oil market, and especially at current share prices.
Although BG Group certainly provides better value for money than its rival, given the operational uncertainty facing both firms — not to mention the effect of a murky supply/demand balance on future oil prices — I believe that heavy earnings downgrades remain a very real possibility, a scenario which could prompt a severe share price retracement.
