Investors in oil explorersPremier Oil (LSE: PMO)andTullow Oil(LSE: TLW)finally enjoyed some respite at the end of last month, when their share prices rose sharply on a spike in the oil price. This was a reminder of just how closely their fortunes are tied to black gold.
Not that investors needed any reminding, given the havoc cheapoil has wreaked onPremier and Tullow, which are down 75% and 69% respectively over the past year. The oilprice spike proved a false dawn in any case, with Brent Crude dipping below $50 a barrel again, and Goldman Sachs suggesting it could fall as low as $20.
Shale And Hearty
One of the surprisefactors keeping the oil price down is the tremendous resilience shown by US shale players, according to Christof Ruhl, head of research at Abu Dhabis sovereign wealth fund. Ruhl suggests that OPEC made a rational decision in refusing to cut production in the face of falling prices, in a bid to hang onto market share. What they didnt foresee was that both US and Canadian production would suffer less than forecasters expected.
Once again, US innovation has blown away the competition. Technology advances have helped wildcat drillers drive down costs,and also given them the flexibility to ramp up production in response to changing oil prices. This flexibility could prove key keeping the oil price low, as they can quickly ramp up production as marginal fields become profitable again.
There are some concerns about shale. Wellscan deplete faster than conventional fields. Sub-$50 oil have forced some US drillers to restructure or declare bankruptcy. Many are failingto recover their capital costs. But they are still tougher than the Saudis gave them credit for. With a downbeatOPEC sayingthe oil price will rise by just $5a year, and probably wont hit $80 until 2020,Premier and Tullow could find the next few years uncomfortable.
PremierStruggler
Premier needs oilat$60 and beyond to ease its worries. According to OPECs numbers, it cant look forwardto that until 2017. Itcant even respond by ramping up production, which has fallen over the last year from 64,900 to60,400 barrels of oil equivalent per day, although that may reversewhen its Solan field comes into production later this year. Shame we have to wait until 2017 until its Catcher fieldstarts pumping.
Nervous investors should shut their eyes now. That way theywont read HSBCs recent gloomy prognosis. It said that with Premierscore net asset value some way below the share price the market is unlikely to de-risk its unsanctioned, logistically challenging, high cost Sea Lion project. Ouch.
Tullow Grave
Tullow has some oil price hedging protection but has been struggling to make ends meet atan average first half oil price of $71. Using OPECs projections, it will continued to get less thanfor several more years. That could prove a heavy burden, given its debt load of $3.6bn, even ifit has acted to reduce its cash burn.
At least HSBCs recent verdict on Tullow wasnt as X-rated. It did slashits target pricefrom 514p to310p (against 200p today) but continues to see significant upside, with its TEN project in Ghana more than 65% complete and on track for first oil mid-2016. But its all down to the oil price now.
Nobody really knows where the oil price will go next, so the outlook for both these companies is deeply uncertain.
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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.