By Justin Reynolds
EnQuest, listed on the LSE market (ENQ.L), is one of the largest independent production and development companies operating in the North Sea.
The company was formed in 2010 through the combination of the North Sea assets of Petrofac and Lundin Petroleum. It also has a presence in Malaysia. EnQuest operates two major North Sea fields, the well-established Magnus field, operated for many years by BP, and the new Kraken development, the largest asset in the company’s portfolio.
OPEC, Covid-19 – and debt
Like its North Sea peers Premier Oil and Tullow, Enquest has had to weather turbulent waters since the industry was overcome by the brief OPEC price war and the collapse in demand caused by the Covid-19 outbreak.
Through March EnQuest’s share price fell 38pc from its pre-crisis level, to settle around 10p. In its most recent operations statement, published last month along with its full-year results for 2019, the company announced revised production and spending forecasts.
Production for 2020 is forecast to fall from 61,000-68,000 boepd to 57,000-63,000 boepd. Operations at two North Sea fields, Heather and Thistle, temporarily suspended last year for repairs, will not resume, allowing the company to cut capital spending by half, to around $120m. And operating costs will be cut by some 30pc to $375m. This restructuring is designed for a free cash flow breakeven point of around $33 boe for 2020, and $27 boe for 2021.
EnQuest’s position – again like Tullow and Premier Oil – is complicated by a debt hangover from the last oil price crash of 2014, which obliged the company to refinance to pay for capital-intensive projects to which it was already committed.
The Kraken wakes?
Tough times then. But if – if – the oil and gas sector does benefit from a significant and sustained increase in demand as economic activity recovers Enquest is surely well placed to benefit.
This is a company with firepower. The Kraken field has produced more than 26 million boe since first oil in June 2017 to the end of 2019. Forecasts indicate continued production of around 30,000 to 35,000 boepd, and that it may have a field life of more than 20 years, with relatively low decommissioning costs.
And though it was first discovered more than 45 years ago, the Magnus field, wholly owned by EnQuest since 2018, may have yielded only half its potential, with estimates indicating it still has 869m recoverable barrels of oil. The deal with BP that secured Magnus also included one of Europe’s largest terminals at Sullom Voe, and the Northern Leg Gas Pipeline, which transports gas to the Brent A platform.
At the end of 2019 EnQuest’s total assets amounted to net 2P reserves of 213 MMboe and net 2C resources of 173 MMboe.
Strong production at Kraken and Magnus, and the PM8/Seligi field, drove a good set of 2019 results. Production averaged 68,606 boepd in 2019 24pc up on 2018. Revenue increased to $1,711.8m from $1,201.0m (EBITDA was up to $1,006.5m from $716.3m). Debt was 20pc down from $1.8bn in 2018 to just under $1.4bn, bringing the company’s net debt-to-cash profit ratio down from 2.5 times to 1.4. Cash and lending facilities (available until October next year) stood at $268.2m.
The company has adjusted its post-Covid production plans to focus on Magnus, Kraken, and PM8/Seligi. It is following up on a drilling programme at Magnus undertaken last year, and has a two-well programme underway at Kraken.
Reading the runes
The extent to which EnQuest stands to gain from a strong upturn was indicated when its share price – now standing at around 14p – shares soared 20per cent in the early session, as the company (today) announced an operations update. The market for oil and gas rallied on signs that the market might be rebalancing as the gradual easing of lockdown measures stimulate demand and the effect of shut-ins and the prospect of sustained OPEC cuts ease the supply glut.
In today’s update EnQuest Chief Executive, Amjad Bseisu, said :
“Our continued focus on operational excellence has ensured our operations remain materially unaffected by the ongoing COVID-19 pandemic. Performance at Kraken and Scolty/Crathes has been ahead of expectations, while production at Magnus and PM8/Seligi has also been good, with the two new wells drilled on Magnus coming onstream in March.
For EnQuest any recovery needs to be strong and stable enough to allow the company to realise the potential of its assets and clear its debt. Right now it is impossible to say just when that upturn will arrive, and how sustained it will be. Or to forecast the extent to which the crisis will allow alternative sources of energy to steal a march on the oil and gas sector.
Effective investment in the North Sea has always obliged investors to do their homework on the prospects for the wider economy. Today’s exceptional conditions make that due diligence more important than it has ever been. For those optimistic the industry has a secure future in a robust recovery, EnQuest is worth considering.
