Investors in Tullow Oil (LSE: TLW) arebreathing a little more easily after the share price resurgence of recent days, which saw it leap almost 12% last Thursday and another 5% in early trading today. While the oil exploration and production company has been comfortably on course to meet its full-year production targets, the uncomfortable question facing investors is how it would manage its growing debt pile.
Borrowings suddenly become a problem when the price you customers payyour sole productplungeby a third. Last weekssix-monthly reserve-based lend redetermination process should have beena routine exercise but is far from routine in troubledtimes like these. Markets sawthe news that its available debt capacity remained unchanged at $3.7bn as a positive, allowing chief financial officer Ian Springett to talk upthe robustness of Tullows debt capital structure and its supportive relationships with banks.
Troubled Waters
The relief rally only serves to underline the just how worried investors were, but it still needs a significant rebound in the oil price to make the numbers work. On that front, price expectations are rising as Russian jets scream into the Syrian quagmire, bringing one of the worlds biggest energy producers into indirect conflict with Saudi Arabia and its allies in the Gulf.
This may tempt some investors who seetodays cheap oil price as a sweet buying opportunity, butthey should realise that sentiment swings wildly on very little, and the oil price could even fall if Saudi Arabia decides to ramp up production to increase the pressure on Russia.
Rally Round
Premier Oil (LSE: PMO) needs oilat$60 but it isnt getting it, with the price hovering around $48 instead. It has production problems too, unlike Tullow, with production down 7% to60,400 barrels of oil equivalent per day over the last year. It did recently stretch its debt covenants into 2016 and itsprincipal $2.5bn bank facility is gooduntil mid-2019. That partly explainsitsmini-recovery, rising 10% over the last week.
Premiers operating margins of -15% showwhat damage cheap oil is doing. A share price drop of 53% in the last three months alone gives contrarian investors good reason to situp and take notice, although consensusforecasts of a 36% drop in revenues and 155% drop in earnings per share are likely to make many of them sit down again just as quickly.
The good news is thatPremier does have some protection from its hedging programme and impressive 30% operating cost savings, while production should pick up as itsSolan field comes on-stream later this year and Catcher follows in 2017. Operating cash flow wassurprisingly strong in the first half at $513m, up from $499m last year.Net debt has fallen slightly toUS$2 billion.
With both stocks, the immediate pressure is off for now. Investors will be looking for further evidence that they can hang on until oil recovers, at which point both could fly. Tullow looks a little slicker than it was, but thatdebt pile still leaves it in a stickier situation than Premier.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has recommended Tullow Oil. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.