Whither the oil price rally? The rush of excitement following Januarys $27 a barrel lowshas now abated, with crude slipping well below $50 again. As US oil inventories hold firm, consumption dips and disrupted supplies come back on-stream, some analysts are even forecasting that oil could fall to $40 again.
Troubled waters
The oil supply glut could take timeto clear and that spells bad news for explorersPremier Oil (LSE: PMO) and Tullow Oil (LSE: TLW). Both stocks were hit hard by the oil price meltdown, as they built up large piles of debt on the assumption that oil would trade at more thandouble todays lowly price, but recovered strongly when oil rallied. The rally has faltered and the longer the price stays low, the more onerousthose debts will become.
Premiers latest trading update shows net debt of $2.6bn, flat over the quarter but up from $2.2bn at the end of last year, leavingits gearing ratio (total debt/total capital) at a worrying 78.59%.Yet its under no immediate pressure to pay that debt and has positive news to report,producing61,000 barrels of oil equivalent per day, andfull-year output set forthe upper end of its guidance of 65,000 to 70,000 barrels. It hasachieved first oil from Solan, fully integrated itsE.ON acquisition and hitkey milestones on itsCatcher project.
Sterling investments
Premier has also taken nifty advantage of the pounds slump against the dollar tolock in 110m of forward expenditure at $1.31. A chunk of its debt is also in sterling, which helps, while it hascash and undrawn facilities of around $800m, and ithopes to bolster its balance sheet by generating free cash flow later this year. Premier looks solid for nowand markets appear unconcerned by the oil price dip as itsshare price holds firm at 70p, well above its January low of 19p.
Tullow Oils net gearing is only slightly less alarming at 68.89%, but thats up from 58% at the end of 2015. Its net debt has risenfrom $4.2bn to $4.7bn over the same period, offset byaround $1bn of unused debt capacity and free cash. Lower production atits Jubilee project in West Africa earlier this year hit production, which fell to 51,000 barrels a day,below guidance. But Jubilee was pumping a healthy90,000 barrels a day in June.
Holedbut not sunk
TullowsTEN Project is expected to deliver first oil within the next three-to-six weeks, after three years of work, but you have to offset this against the fact total half-year revenues are expected to be 37.5% lower year-on-year at $0.5bn, with gross profit down 33% to$0.2bn. Lower production is partly to blame but mostly its down to the bank that its getting $10 less a barrel, with an average selling price of $61, helped by hedging.
Tullow is supported by $1.35bn cash from operating activities and has of course enjoyedsuccess in drilling and exploration, the problem is that this will bedifficult to monetise if the oil prices hits the skids again. Like Premier, Tullows share price hasshrugged off the oilprice hiatusfor now, lets hope it doesnt sinkany further.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.
