Over the last 12 months, shares in North Sea firms Enquest (LSE: ENQ) and Ithaca Energy (LSE: IAE) have both fallen by 74%.
Both firms are now trading at all-time lows, but is either company a buy?
Enquest
Shares in Enquest fell by 5% this morning after the firm announced underlying first-half profits of $33.7m, down by 56% from $77.2m during the first half of 2014.
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Production rose by 17% to 29,665 barrels of oil equivalent per day (boepd) and Enquest confirmed full-year guidance of 33,000-36,000 boepd. This looks realistic, as first oil from the Alma/Galia field is expected “in the next few weeks”.
During the first half, income of $99m from the firm’s hedging programme made a significant contribution to total revenue of $444m. This helped Enquest achieve an average oil sale price of $77.5 per barrel.
However, net debt rose from $932m.8m to $1,287m, and Enquest’s hedging prices for the next 18 months are in the mid-$60s. This suggests to me that the average oil sale price is likely to fall below $65/bbl.
Although operating expenditure is expected to drop to the “low $30s/bbl” in 2016, this may not be enough to generate returns for shareholders. This opex figure doesn’t make allowance for the cost of finance and debt repayments, or for the cost of replacing reserves which have been produced.
Enquest says that including depletion of oil and gas reserves, its current operating cost is $63 per barrel — significantly higher than the price of oil.
I think that Enquest is a risky buy. Until oil prices start recover significantly, the firm could be forced to operate in run-off mode, repaying debt but leaving little for equity investors.
Ithaca Energy
It’s a similar story at Ithaca. A cash gain from hedging contributed $31.8m, or 50%, to the firm’s first-half revenue of $62.2m. This enabled the firm to report an average realised oil price of $62 per barrel.
Like Enquest, Ithaca expects operating expenditure per barrel to fall this year, to an average of $35. However, like Enquest, Ithaca is finding it harder to hedge profitably. Ithaca has 8,800 bopd hedged at $70/bbl until June 2016, after which it has 4,000 bopd hedged at $69/bbl for a further year.
Final thought
Both Ithaca and Enquest are developing big projects that looked very attractive when oil traded at $100 per barrel. In today’s oil market, with oil seemingly likely to trade between $50 and $70 for several years, I’m not sure that the picture is so attractive.
There is a reason why both firms’ shares are trading at a discount of around 70% to their book value.
When production starts from Kraken and Stella in 2016/17, cash flow will be used to service debt. I suspect that rewarding shareholders and funding new projects will come a distant second.
For this reason, I believe both Ithaca and Enquest could continue to fall.
