First Heads Up of 2015 is EnQuest. Yes – another mid tier Oil&Gas player which like Afren has great assets, very decent production and … some pretty hefty debt. It’s the latter (circa $720mln) that has the market worried. Lower oil prices places pressure and stress on any Oil focused business but one that has over £400mln in debt and a market cap of just £260mln is clearly going to see some concern. However, like Afren (Debt of circa £700mln and market cap of £440mln) it’s all about the companies ability to fund that debt via production cash flow. Oil at $50pb is clearly a problem, but oil at $50pb for a short period of time (say 6 months) is not a major issue. Why? Well, players like Afren and Enquest were wise to hedge a large part of their Oil sales at $90 and $105 respectively. It’s that hedge that should see both through the Oil dip turmoil. Assuming it only lasts circa 6 months. If Oil dips to $40pb or even $30pb, it will have an effect on these companies – but it’s still minimal based on the Hedges in place.
The Irony is… the lower Oil goes below $50 and the faster it happens, the better. Insane? Nope. The point is… the lower Oil goes, the higher number of rigs and developments get parked or binned. Shale operators might scrape by at $60 but at $45 or $50 their future becomes short lived. And with that, global production shrinks, reserves shrink and the POO springs back.
In 2017, EnQuest are expected to be producing anything between 50kbopd and 70kbopd based on several projects coming online. At 32.5p today, the stock is a long way from the average broker targets – which even after the plethora of downgrades due to lower Oil prices – still stands at 4 x higher levels circa 120p.
Yes – the likes of Afren and EnQuest are under pressure at the present time, but where will they be in 24 months? If Oil is back into the $100’s per barrel by that time, then Afren and Enquest could both be 5 bagger stocks from today’s levels.
EnQuest looks a bargain today, as it did a few months ago when a number of Directors were mopping up stock in the 90’s and high 70’s.
At 32.5p, it would only take a moderate recovery in the POO (price of oil) for EnQuest to deliver a multi-bagger return.
To the downside, if the POO does get taken to $40 levels or even $35pb as many hedge funds seem only too happy to publicise, then sub 30p per share will be a reality. The key to investing in these stocks is to research them in detail. So look into Enquest and see if you think it’s worth investing in.
The ShareHub initiates coverage on Enquest at 32.5p with a recovery based Target of 65p based on the dust settling on POO which should be around a 6 to 8 weeks before OPEC’s next key July meeting.
EnQuest are presenting at the Macquarie Oil Conference on Monday Jan 12th. See previous post for Agenda/Event details.