Oil is on the slide again. Excitable analysts who thought crudewould press on after breaking the $50 a barrel mark have been proved wrong. Instead, $50 is starting to look like a ceiling, the level at which the new generation of technology-fuelled US shale drillers can turna dime and re-supply the market. The prospect of one or even two US rate hikes this year could also drive down the price.
Its the stockpiles, stupid
Latest US Energy Information Administration (CIA) figures showed a second week of stockpile increases, with an extra2.3m barrels, further hitting crude. Oversupply is an enduring problem,and the combination of a rising dollar and falling oil priceis bad news for stock markets.
Its also bad news for UK-listed oil explorers such as Premier Oil (LSE: PMO) and Tullow Oil (LSE: TWL), although youwouldnt know that looking at their recent share price performance, which has been robust, with their shareprices rising27% and 18% respectively over the last month (despite slipping inthe last week).
Both werehelped by positive notes from Barclays in late August. The brokeris overweight inPremier Oil with a 100p target against todays 67.5p, which would suggest a rather juicy 48% upside. Its also overweight onTullow Oil, with its 310p target a full 43% above todays 216p. Promising?
Premiers league
Premier has helped its own cause by hedging30% of oil production at $73.40 a barrel, almost 65% above todays crudeprice, this will only last until the end of the year. This is a worry for a company that flagged upnet debt of$2.635bn by 30 June, up from$2.24bn at year-end 2015.
Premieris currently renegotiating its covenants and is benefitting from monthly deferrals while talks continue. It has taken advantage of falling oil,snapping upEons North Sea assets at bargain prices, although they dont look such a bargainat todays crudelevel. Ithas been busily slashing costs and capex like everybody else in the industry. After a period of heavy investment management reckons it can generate free cash flow at $45 a barrel todays price.Thisis too close for comfort, especially if the oil price slips again.
Tullow to go
In July, Tullow Oil posted 30m first-half profit after tax and pre-tax operating cash flow of $256mandinvestors remain happy to renew and extend its debt facilities while the company looks to exploit its successful run of oil discoveries. Tullow has also hedged cleverly, with 38,500 dailybarrelsof second-half 2016 production hedged at an average of $74.
TEN Project remains on budget and is on schedule for first oil in early August, which should boostTullows group net production by around 60%, while the Jubilee fieldis now expected toaverage 85,000 barrels a day.Net debt hasnow climbed to$4.7bn, up from $4bn on30 December and $3.6bn ayear ago, dwarfing its current market cap of 1.96bn ($2.60bn).
Neither company is in serious trouble but investors have a right to feel edgy as oil heads south. Perhaps OPEC can save the day with a production freeze, in which case you can expect their share prices to rebound sharply. But an oil price dip would inflict further pain onboth companys prospects.
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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.
