North Sea oil producer EnQuest (ENQ) surges 35% to 40.5p as it reassures the market on its financial position. The shares had been sold off heavily on fears the company would breach banking covenants due to the collapse in oil prices.
However it has agreed with its lenders to raise the net debt to EBITDA (earnings before interest, tax, depreciation and amortisation) covenant on its credit facilities to five times until mid-2017. As we have discussed a number of times Enquest is particularly exposed to movements in the European benchmark Brent – currently just below $50 per barrel – due to its significant borrowings and the high costs of operating in the North Sea. The company notes it has net debt of around $1 billion and a $1.2 billion committed credit facility remains in place with only $100 million of it drawn to date.
In common with its peers EnQuest has cut back its capital spend – reducing expenditure by around 40% (from the business plan prior to the decline in oil prices) to $600 million. The company also says operating cost per barrel will be reduced by at least 10%. Despite the cutbacks production growth is still expected as its Alma/Galia development comes on stream. Average output in 2015 is projected at between 33,000 and 36,000 barrels of oil equivalent compared with 28,627 boepd in 2014 (which itself represented a 17% year-on-year advance). And with around eight million barrels hedged at prices in the high $80s per barrel it says revenues for 2015 have 'limited exposure to oil price volatility'.
Westhouse Securities which upgraded the stock to buy in November reiterates its 120p price target and comments: 'This is a positive update. The risk of EnQuest breaching its covenants is now mitigated with covenants relaxed and capex cut without a delay to major development projects. Both production and net debt are in line with our estimates. The Alma/Galia project, which is expected to deliver material production growth in 2015 and 2016, remains on track for first oil in mid-2015.
'We remind that we upgraded EnQuest to a buy as it was oversold on concerns over debt levels and covenants. We maintain our buy rating given where it’s trading at the moment, and think EnQuest is a play on oil price recovery. Now that capex is cut to manageable levels and covenants are relaxed, it needs to focus on bringing the Alma/Galia development onstream without further delays in mid-2015.'