You wouldn’t know it looking at the respective share prices of TLW, PMO and ENQ but all companies have thus far managed their debt piles, completed or part completed, large development projects, grown production levels and are now on the verge of reducing sizable chunks of debt. Tullow have already begun lowering debt and Premier (via asset sales) are following closely behind. These 3 companies are all trading at levels last seen when PoO was in the $30’s. Today, PoO has virtually doubled.
Today’s news from Enquest confirms that covenants have been relaxed which is another sign that debt holders believe recovery is around the corner. Earlier in the week, Tullow secured a new RBL further endorsing confidence in the business. It’s been a tough 2 to 3 years, but it looks like all 3 companies will survive and should indeed begin to flourish again with PoO in the $60’s. The latter is of course unpredictable but all companies hedge portions of production to ensure downside risks are protected – to some degree. PoO will always be unpredictable but with Saudi’s seeking an Aramco IPO next year, it’s highly likely that PoO will be higher in 2018 than it was in 2017.
News emerged yesterday that OPEC and NON OPEC (Russian’s) are expected to agree a further 9 month extension to the production levels set this time last year. That’s positive for PoO but still requires a decent level of compliance. Wild cards like Iraq and Iran recently said that they agreed to the 9 month extension but figures show that neither are keeping to their agreed quotas. Iraq should hang their heads in shame. They have systematically gone about raising production higher and higher and their compliance levels were at just 52% according to some sources. The recent spate with the KRG has seen production fall over the last couple of months which is ironically the only reason why their compliance has risen. I would expect today’s OPEC meeting to focus firmly on ‘compliance’ as without it, the production deal is weak.
The MENA region has been in conflict for decades now and recent stirring by the Saudi’s is not helping relations. Whether it’s Qatar, UAE, Yemen, Lebanon, Israel or Iran… the Saudi’s seem intent on throwing their weight around. Markets in general have been watching supply and demand closely via US data but have paid little attention to production levels dropping across the globe. Venezuela is in deep trouble. Investment in African producing regions has fallen due to increased or unpredictable tax regimes and corruption. Investors no longer look at Nigeria as an investment in the same way as before. The North Sea is becoming more attractive due to Government tax policies but also due to the stability and quality of the licences. It’s hard to tell where the new supplies are going to come from but a year or two at $60pb or better should certainly allow the industry to test the impact of US shale recovery. Hence, it’s going to require constant monitoring by investors and that includes EV’s and other technologies that seek to move demand away from traditional energy resources.
The next few years will be interesting to watch and assuming PoO settles in the $60’s or better, Tullow, Premier Oil and Enquest should all recover well. Finally, watch out for M&A. Historically, it tends to kick off when the green shoots are past the frosty period and looking stable. Still vulnerable, many ‘recovery’ companies in the sector may get picked off in 2018.
TLW, PMO and ENQ are part of thesharehub top ten picks for 2017.