It has been a tough 12 months for oil explorers-producers, with Brent crude having collapsed from over $100 a barrel to under $60 today.
Nobody’s expecting a recovery any time soon. BP recently said it expects the oil price to remain depressed for “a couple of years most certainly”, while Shell has similarly predicted a recovery “will take several years” — indeed, Shell is working on an assumption it will take until 2020 for oil to recover to $90 a barrel.
The share prices of FTSE 250 company Tullow Oil (LSE: TLW) — currently trading at 270p — and AIM 100 firm Ithaca Energy (LSE: IAE) — at 44p — have cratered over the past year, both having fallen close to 70%. Furthermore, if you go back to the heady days of 2012, you’ll find their shares were trading above 1,500p and 200p, respectively.
Both companies clearly have multi-bagging potential, but can they get through the current low-oil-price period to price recovery, and deliver spectacular returns for investors today?
Big futures
Tullow and Ithaca may be very different in their geographical locations — the former being Africa-focused and the latter North Sea-based — but they do have one key thing in common. Both have big production projects on the horizon that will contribute substantially to their future revenues and cash flows. Tullow’s TEN project in Ghana is expected to produce first oil in mid-2016. Similarly, start-up of production from Ithaca’s Stella field is expected in Q2 2016.
Of course, the current low oil price has meant lower revenues from the two companies’ existing producing assets, meaning greater stress on the substantial costs required to bring their big projects to production. The good news, though, is that both companies reckon they have sufficient debt facilities to enable them to deliver the projects.
High levels of borrowing are never ideal in the oil industry — just ask shareholders of Afren — but Tullow and Ithaca have significant oil-price hedging protection in place. Near-term oil-price volatility shouldn’t be a worry, but major operational setbacks or delays are things that can’t be hedged, and, if serious enough, could lead to debt becoming a problem.
Stella prospects
Ithaca’s schedules haven’t been immune to revision in the past (indeed, a Canadian ambulance-chasing law firm has recently launched an action of behalf of some investors alleging misrepresentation of information regarding one delay — vigorously refuted by the company), but newsflow this year has been good, both on current producing assets and on progress at Stella.
Last week, in a Q2 update, Ithaca reiterated full-year production guidance. The company also reported Stella on schedule, and said net debt at the end of the quarter was $788m — comfortably within total debt facilities of $950m, and lower than management’s previously indicated expectation that net debt ahead of Stella production would peak at $825m-$850m during the quarter.
Perfect TEN (but production 9)
Newsflow from Tullow has been a little more mixed. In a trading update on 1 July, the company said its TEN project remains within budget and on track. There was also good news on producing assets. Management increased its 2015 working interest production guidance for West Africa to 66,000-70,000 barrels of oil per day (bopd) from 63,000-68,000 bopd, with the company’s Jubilee field performing strongly.
However, a production update on the Jubilee field released this morning was not so good. Tullow reported that gas export from the field has been suspended since 3 July due to technical issues with compression systems; that oil production is currently constrained to around 65,000 bopd; and that management estimates it will take approximately a further three weeks to reinstate gas export and full oil production.
The company said it will review its 2015 production forecast for Jubilee and provide an update on progress at its half-year results on 29 July. The production news is disappointing, but a long way from being desperate. Crucially, current output is within the pre-upgraded guidance, on which Tullow had based its financial projections for 2015.
As such, with their big projects on schedule, decent near-term oil hedging in place, and at least acceptable production, Ithaca and Tullow both strike me as decent bets to multi-bag in the longer term from their current levels — although one would want to monitor progress closely.
