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Enquest share price remains subdued despite soaring production (ENQ)

Tuesday saw Enquest (LSE:ENQ) announce it had achieved average production of 55,447 barrels of oil per day in (bopd) during 2018. The 48pc year-on-year increase is expected to be followed by a further 20pc increase this year, with the firm forecasting average production of between 63,000 boepd and 70,0000 boepd during 2019.

In the announcement EnQuest Chief Executive, Amjad Bseisu, said:

“The Group delivered on its operational targets for 2018, growing production by 48%. This performance and higher realised prices has facilitated accelerated repayments of the Group’s credit facility. Completing the acquisition of additional interests in assets from BP has delivered a set of assets with a strong strategic fit into our portfolio, with the Magnus asset in particular bringing a significant step change in the Group’s ability to generate positive cash flow.

We expect material production growth of around 20% in 2019. Our capital programme includes new wells at Magnus, Kraken and PM8/Seligi as well our pipeline projects at Thistle/Deveron and the Dons and Scolty/Crathes. The successful delivery of this programme will underpin production during 2019 and beyond. Our focus on cost control and capital discipline, combined with our improved cash generation capability enables further repayment of debt, which remains the priority for the Group.”

The share price rose around 3.5pc to 19.7p on the news but is still very much in the doldrums. As with most companies in the sector, Enquest endured a sharp decline in tandem with the oil price drop over the last quarter of 2018. But the stock has been slow to respond to what looks to be a turnaround in the spot prices for oil, still sitting a mere 10pc above its 18p low of January.

One likely reason for its sluggish move out of the blocks is that the company still has an enormous amount of debt, although the situation is gradually improving.  At year-end, net debt was $1.774bn, which of course seems much less of a mountain when oil spot prices are much higher. The company does have some wiggle room, reporting cash and available bank facilities of around $309m and it is comfortably within its covenant threshold requirements.

Enquest has been plagued by its reliance on the Kraken field which suffered delays before finally coming on stream in 2017. Production from Kraken in 2018 came in below expectations due to a combination of Floating Production Storage and Offloading unit (FPSO) and weather-related outages. However, Enquest reports strong performance elsewhere, particularly with its Magnus field producing above expectations – contributing 21,528 boepd in December. Last September, Enquest announced it had increased its ownership of Magnus to 100pc, buying the remaining 75pc from BP.

Continued recovery ahead?

A look at Enquest’s share price chart reveals the extent of its woes but it is showing signs of recovery.

Tuesday’s update has not proven enough to lift the stock out of its current downtrend since the beginning of the year, but the stock does appear to be consolidating above an established support line. In the event oil continues to recover and we see prices akin to last year’s then the current Enquest share price could be offering significant upside. While having large debt causes a huge drag on a stock for obvious reasons, this in turn can act as a multiplier effect when conditions substantially reduce risk.

Of course, the downside risk is still very much there, economic slowdown could cause a double whammy of equity and oil price declines. However, with OPEC seemingly prepared to do what it takes to firm up the oil price, and – at least for now – markets appearing to get their mojo back, oil stocks could be in for another good run. I believe there are three things to look for on the Enquest chart.

Firstly, the price needs to break out of the current trend channel (red). Second, the 50 Day Moving Average (DMA) is on its way down to meet price action and conquering this first key moving average is a bullish move.  Finally, I look to the Relative Strength Index for – you guessed it – signs of strength. It currently sits just below the halfway mark. Moving into the top half will be a positive move, with a subsequent move above 60 typically inciting a stronger upward move in stock price.

Enquest remains one of the riskier oil plays all the while it is heavily reliant on strong oil prices to make significant dents in its debt pile, particularly with the current twitchiness of global markets.

Although that debt is keeping it firmly anchored for now, the company has ramped up production and this looks set to continue. Should the oil price play ball, the Enquest share should reach a risk/reward tipping point, allowing it to break free from its shackles.

Author: Stuart Langelaan

Disclaimer: The author does not own shares in the company mentioned in this article

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