Macquarie says there are ‘compelling opportunities’ in the E&P sector and reckons balance sheet strength will be key to ‘riding out the storm’.
The investment bank has ranked ten mid cap oil companies in three different groupings according to their financial position if oil prices remain below $70 per barrel through 2018.
Of the UK-listed firms in its universe Cairn (CNE) and Ophir (OPHR) are seen as being best placed, Genel Energy (GENL) and Tullow (TLW) are in the middle and Ithaca Energy (IAE:AIM), EnQuest (ENQ) and Premier Oil (PMO) sit in the bottom grouping.
It comments: ‘Premier and EnQuest fare the worst. Both companies’ debt is equivalent to the value of producing assets plus circa three quarters of the value of development assets. This high leverage position underpins the stocks’ high beta to the oil price (which, empirically speaking, appears to be the highest in our coverage universe).’
It thinks Premier will breach its covenants in mid-2016 and EnQuest in 2017, adding that market fears over Tullow’s financial position may be overdone with only a quarter of the value of its development assets needed to cover its borrowings.