The EnQuest (LSE:ENQ) share price is down by double-digits this morning after management released an operations update. Despite the current almost-15% drop, the stock’s 12-month return still stands at an impressive +72%. So, what was in this update that has investors running for the hills? And is this sell-off actually a buying opportunity? Let’s take a closer look.
The share price versus operational performance
I’ve explored this business before. But as a quick reminder, EnQuest is an offshore oil production company operating around the UK and Malaysia. 2021 has been a particularly challenging year, with several of its projects encountering production disruptions. This is what caused the EnQuest share price to take a bit of a tumble back in September.
Since then, solutions have been devised and are slowly being executed. Today management provided an update on how things are going. And since the stock is once again suffering through double-digit declines, I think it’s fair to say, investors aren’t exactly pleased.
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The disruptions experienced at its Magnus and Kraken oil fields appear to have been more extensive than initially anticipated. Consequently, average net production has fallen to 44,306 barrels per day. And management expects this figure will come in at around 45,000 by the end of the year. That’s below the previously reduced guidance of 46,000-52,000 barrels. It’s worth noting that in 2020, production volumes were sitting at just over 66,000 barrels. So seeing the Enquest share price tumble on this news is hardly surprising to me.
Looking on the bright side
As frustrating as the drop in oil production is, there are some optimistic takes from this update. Firstly, oil prices are back on the rise. Over the last 10 months, the average price per barrel stood at $66. That’s up 63% from $40.60 a year ago. And it will undoubtedly help offset some of the revenue loss from reduced production and boost profit margins.
At the same time, EnQuest also acquired a new oil field called the Golden Eagle area for a total consideration of $325m. The company estimates that this new drilling site will increase annual net production by just over 10,500 barrels, with at least two product deliveries before the end of the year. Assuming Golden Eagle doesn’t suffer the same disruptive fate as its other projects, performance throughout 2022 could improve significantly.
The bottom line
The operational interruptions in 2021 have been frustrating. But they’re ultimately short-term issues with unfortunate timing. Management has already begun taking the necessary steps to return production back to full capacity. And with the addition of Golden Eagle in the portfolio, this recovery process may have just been accelerated.
Having said that, my overall opinion of this business remains unchanged. I still believe there are better growth opportunities to be found elsewhere. Therefore, even if EnQuest’s share price drop is a buying opportunity, it’s not one I intend to act on.
