With Brent crude oil trading near six-year lows, oil explorers have fallen out of favour with investors. It’s easy to see why. Many smaller producers are struggling to break even, and companies are steadily burning through their cash reserves without being able to tap banks or shareholders for more capital.
Many of the smaller producers won’t survive the downturn, but some are better positioned than others to weather market volatility.
Can afford to wait
Rockhopper Exploration (LSE: RKH) and Falkland Oil and Gas (LSE: FOGL) are both in similar positions. The two companies have cash-rich balance sheets and potentially attractive assets.
However, while the price of oil remains depressed, Rockhopper and Falkland’s relatively high-cost deepwater prospects are unlikely to be drilled. With oil companies around the world slashing capital spending, only the best, highest return projects are being commissioned. Premier Oil, the company developing the Sea Lion oil field with Rockhopper, has stated that the field will only get the go-ahead if oil prices remain above $50 per barrel.
At time of writing, Brent crude is trading at $53.4/bbl so it could be some time before Sea Lion gets the green light. Still, as Falkland and Rockhopper had cash balances of $100m and $200m respectively at year-end 2014, the two companies can afford to wait for a turnaround.
Waiting for payment
Genel Energy (LSE: GENL) is one of the few pure-play oil producers that are well placed to weather the oil price storm. The company has a healthy cash balance of $470m and net debt of $220m. Management believes that the company will report revenues of $450m to $500m for full-year 2015, assuming an oil price of $50/bbl. However, the company is owed $378m by the Kurdish Regional Government for oil sold from Kurdistan, and it is unclear when this outstanding bill will be settled.
Room for manoeuvre
Ophir Energy (LSE: OPHR) is another cash-rich explorer that’s got room for manoeuvre. Within its recent trading update, Ophir reported that it had a net cash position of $405m as at 30 June 2015. What’s more, at year-end 2015 Ophir’s management are currently forecasting that that company will be sitting on a cash pile of $700m to $750m with a net cash position of $350m to $400m.
Ophir completed its transformational deal to buy smaller producer Salamander Energy earlier this year. And, as a result of this deal, Ophir was transformed from a vanilla explorer, into a major E&P player. First half production averaged 14,600 barrels of oil equivalent per day. Thanks to cash flow from production, Ophir believes it will have repaid all debt from the acquisition by the end of 2016. Ophir has recently embarked on a company-wide cost rationalisation programme, which has reduced costs by $60m per annum.
Debt troubles
Earlier this year debt had been a concern for Enquest (LSE: ENQ) after two years of heavy spending to get its North Sea oil fields up and running. Luckily, the group was able to renegotiate the covenants on its debt earlier this year, which has given the group more flexibility.
Enquest’s debt can now hit five-times earnings before interest, tax, depreciation and amortisation before lenders pull the plug, and the group had credit facilities available totalling $1.1bn at the end of January. Management believes capital spending will total $600m during 2015.
So, for the time being Enquest seems to be in a stable position. A large percentage of the company’s oil production for this year is hedged at higher prices. Still, Enquest’s highly leveraged balance sheet limits the company’s options.
