EnQuest (LSE:ENQ) has seen its share price soar in the past 12 months. So why has the EnQuest share price increased and what helped me decide to buy the shares for my holdings?
EnQuest share price soaring
EnQuest is an oil and gas production and development company. Its core operations are in the UK North Sea and Malaysia. The business was formed in 2010 as a result of assets from Petrofac and Lundin Petroleum merging.
As I write, EnQuest shares are trading for 32p. At this time last year, the shares were trading for 16p, which is a 100% increase over a 12-month period. The shares have been on an upward trajectory increasing nearly 70% in the year to date, from 19p to current levels.
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I believe the EnQuest share price has been boosted by increased demand for oil as well as a positive full-year report.
The risks I took into account
EnQuest shares are trading close to all-time highs. This is a risk I must consider for any stock I buy for my holdings but this is heightened for small-cap stocks as they are seen as riskier investments generally. This is usually due to their smaller operations, lack of a track record and history, and, sometimes, a less cash-rich balance sheet. If EnQuest were to report any negative trading information or be hit with any operational issues, the EnQuest share price could fall sharply.
Next, EnQuest’s balance sheet shows a lot of debt on its books, $1,222m to be specific. Now debt can often be a red flag. However, I take into account other things, including performance and market conditions and look at why EnQuest has debt on its balance sheet. I can see the first two factors are favourable (more on these later). As for the reason, EnQuest is on a mission to grow. One of the ways it does this is by acquiring new sites, which can accrue a debt position.
Why I purchased EnQuest shares
Firstly, market conditions for oil companies are looking favourable. According to Statista, demand for oil is only increasing for the next few years and next year, demand should surpass pre-pandemic levels. This is good news for EnQuest as it should help boost performance and shareholder returns.
Next, despite the EnQuest share price trading close to all-time highs, the shares still look like good value for money to me on a price-to-earnings ratio of just two.
What about EnQuest’s performance? Well, its most recent annual financial report was released in March for the year ending 31 December 2021. Revenue increased by close to 50% and a loss in 2020 turned into a $352.4m profit for 2021. Cash flow also increased by close to 90%. I do understand that past performance is not a guarantee of the future, however.
Finally, EnQuest has one eye on the future for growth which appealed to me. It recently bought two new oil fields close to the North Sea.
My investing mantra has always been to buy and hold for the long term. I am always on the look out for small-cap gems to diversify my holdings. I do wish I purchased the shares before the EnQuest share price has risen so sharply in recent months, however.
