What is the main Quest for EnQuest
“…Should the North Sea industry pick up again the company’s shares might offer a reliable means of tracking the sector’s recovery…”
With an operations update out this morning and 2020 performance in line with guidance along with strong cash generation where next for EnQuest?
The fragility of the recovery of the North Sea oil and gas industry has been highlighted again in the past few days by the ongoing difficulties of some its larger operators. Tullow Oil (LSE:TLW) continues to work to create breathing space to pay down its debts, while BP (LSE:BP) reported its first annual loss in a decade after a 96pc drop in fourth-quarter profit.
But EnQuest (LSE:ENQ) seems to be entering 2021 on a surer footing reading todays update. Formed in 2010 through the combination of former assets of Petrofac and Lundin Petroleum, the company operates a cluster of fields in the North Sea, and also has interests in Malaysia.
EnQuest’s largest asset, the Kraken field, has produced more than 25 million barrels since first oil in June 2017. Further development of the field’s western area may yield an additional 70 to 130 million. The company also operates the venerable Magnus field, overseen by BP during the industry’s 1970s and 80s heyday. Though first discovered more than 45 years ago, the field, wholly owned by EnQuest since 2018, may have yielded only half its potential, with estimates indicating a 2C resource base of around 38 MMbbls and around 250 MMbbls of movable oil to evaluate. On acquiring Magnus EnQuest also became operator for the Sullom Voe Terminal, one of Europe’s largest, and the Northern Leg Gas Pipeline, which transports gas to the Brent A platform.
The company has interests in Malaysia worth 22 MMboe of 2P reserves and 76 MMboe of 2C resources, and in July increased its asset base further through an agreement with Equinor to take a 40.81pc interest in the Bressay field, adding up to 115 MMbbls of 2C resources. Bressay offers the opportunity for a sub-sea tie-back project that may extend the Kraken field’s life.
Weathering 2020
Like its peers EnQuest endured a sobering start to 2020, its shares tumbling from 25p in February to less than 8p a month later as oil prices collapsed. The company responded by setting out a plan to cut its operating costs by a third, notably through the abandonment of future production at two significant North Sea fields, Heather and Thistle, which had been temporarily suspended in 2019 for maintenance.
But interim results published in September and an operations update two months later suggested EnQuest had weathered the storm reasonably well. Production for the 10 months from 1 January to 31 October indicated that full year production would be only slightly below the mid-point of the 57,000 to 63,000 boepd guidance range.
Kraken performed strongly, with average gross production at 37,783 bopd for the ten months period 10pc up on the previous year. Production at Magnus was forecast to be slightly lower than 2019 due to natural declines and temporary sea water lift pump system issues, but at 17,569 boepd was close to the previous year’s 18,645 boepd.
Production took the biggest hit from the decommissioning of the Thistle and Heather fields, reducing output from the company’s other North Sea operations from 17,294 boepd to 9,456 boepd. The fields’ well abandonment programme will be carried out this year. Malaysian production was also down by some 15pc to 7,115 boepd, due to an emergency shutdown at the Seligi Alpha platform. Partial operations resumed a couple of days later, and remediation activities to allow production to be returned to normal levels are currently being assessed. There was better news regarding the Bressay oil field, where scheduled well abandonment activities were completed successfully, paving the way for EnQuest to take over as operator.
Debt management
EnQuest’s faces the same challenge as other larger North Sea operators: to realise the potential of its resources through the energy transition and the management of 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 had committed before the slowdown. As at October 2020 EnQuest’s net debt stood at $1,388m. In November the company voluntarily repaid $40 million of a scheduled $65m April 2021 amortisation, reducing its outstanding credit facility to $385m.
The company’s interim results to 30 June 2020 revealed the bruising impact of plummeting oil prices. Despite the company’s relative success in maintaining production through the pandemic, revenue was $450.7m compared with $858.2m for the same period in 2019. Crude oil sales came to $375.5m compared with $761.9m for the comparative period in 2019. Revenue from the sale of gas and condensate in the period was $27.6m, down from $79.9m. Cash generated from operations was $283.2m, down from $426.2m, and free cash flow down to $87.5m from $138.3m.
EnQuest’s economy drive reduced operating costs by $74.1m to $174.3m, average unit operating cost fell by 28.3pc to $14.4 boe. The company is also working to burnish its ESG credentials, an increasingly important consideration for all oil and gas operators seeking to retain affordable access to capital. Scope 1 and 2 emissions are expected to be around 15pc than the previous year, with the company working to deliver a reduction in emissions of around 10pc over the next three years.
The prospects for the North Sea – and EnQuest
The fortunes of established operators like EnQuest are perhaps more closely tied to the prospects for the wider industry than those of smaller companies, whose star can rise suddenly on news of a discovery, or rapidly fade from view if the resources they had hoped to uncover disappoint.
Last month we took a close look at the oil and gas sector’s tentative recovery, struggling for the light through repeated lockdowns, political uncertainties tied to the US election, competition with renewables for investor interest, and OPEC’s chronic volubility.
Despite the headwinds, the essential trend is upwards. A Wood Mackenzie report published on 15 January noted that demand for oil and gas is continuing to pick up strongly. Since last April’s low global demand has risen by 15 million barrels per day. Asia, which accounts for one-third of that demand, is almost back to its Q4 2019 peak, and demand in North America and Europe, though still well below 2019 Q4 levels, is also rising. The consultancy forecasts global demand to touch 100 barrels per day by the end of the year, just a million below the Q4 2019 peak. Saudi Arabia’s decision at the 5 January OPEC+ meeting to cut another million barrels from its own daily output for two months highlights its determination to hold the alliance together and stabilise the market. And with upstream investment at a 15-year low, oil supply pressures look set to push prices up: with companies prioritising balance sheet reparation over the opening of new prospects a significant tightening in the supply and demand balance could lift Brent above $70/bbl over the next few years.
Wood Mackenzie’s assessment chimes with that of the International Energy Forum, which notes total global investment into oil and gas exploration and production fell by 34pc last year to $261bn, the lowest since 2004. Annual investment will need to be 25pc higher over the next three years to stave off a supply crisis, much faster than the pace of recovery after the 2014 to 2016 slump, all of which augurs higher prices.
For those hopeful for the industry’s short to medium term prospects – to seek to peer further into the clouds would seem foolhardy – EnQuest is an investment worth considering. Relative to really quite recent history the company’s stock might be considered significantly undervalued. It was 25p just before the pandemic, and around 40p just two years ago: it is currently around 13p, with the company’s market cap down to £230m
EnQuest seems to have managed 2020 rather better than some of its peers. Should the North Sea industry pick up again the company’s shares might offer a reliable means of tracking the sector’s recovery.
