Year to date, the shares of Enquest, Afren and Ophir have declined 75%, 79% and 64% respectively. These declines have only accelerated during the past few weeks. In fact, these declines have wiped out five years worth of gains at Enquest and Afren. Since coming to market during July 2011, Ophirs shares have crashed by 52%.
With share prices andvaluations sinking like a stone, it seems as if investors have given up all hope for these oil minnows. But are they likely to disappear completely? Are Enquest, Afren and Ophir now at risk of going out of business and wiping out shareholders?
High cost production
The North Sea is one of the most costly regions in the world to produce oil nowadays. In fact, many international oil companies are now pulling out of the region, in search of more lucrative opportunities elsewhere.
With the price of oil collapsing, high production costs are bad news for Enquest. According to City analysts, the companysKraken heavy oilfield in the North Sea operates at a break even cost of $73 per barrel. As Brent is currently trading at around $60/bbl, its reasonable to assume that Enquest is losing around $13 for ever barrel of oil produced from the Kraken field at present.
To reduce risk, Enquest usually hedges its production from Kraken. But some analysts have speculated that the company has delayed its hedging program this year, leaving it exposed to slumping oil prices.
Still, the company received a boost from theChancellors announcement that he was extending thering fence on tax losses from six to tenyears for North Sea producers. Enquest has tax losses of around $1.5bn to carry forward.
Additionally, Enquests management has aggressively boosting their personal holdings of company stock over the past few weeks, which is a positive sign. In particular, since October, management has spent 1.5m on Enquest stock,around 2.1m shares, a huge vote of confidence in the companys outlook.For this reason alone, there seems to be no reason to suggest that Enquest is at risk of going bust anytime soon.
Meanwhile, Afren is still reeling from the departure of its CEO, COO and weak third-quarter production.The oil group reported a 35% fall in average net production for the nine months to September 30, revenues declined from $1.2bn to $800m and pre-tax profit slumped 61%.
Now, the company faces a period of uncertainty. Afren needs a new management team and strategy as soon as possible, but until then the companys future is uncertain.
Nevertheless, the company does have some attractive assets and many analysts now believe that the company is an acquisition target for larger peers. So if all else fails, Afren could be taken over.
Lastly, oil explorer Ophir is currently in the process of buying upSalamander Energy, an oil producerwith a portfolio of attractive assets, which will complement Ophirs existing asset base nicely.Salamander shareholders will receive 0.5719 of an Ophir share for each Salamander share. The all-share merger means that Ophir is not spending its coveted cash balance on acquiring Salamander.
For this reason, Ophir is unlikely to go out of business any time soon. At the end of June the company had $1.5bn in cash, enough to ride out any oil market volatility. The acquisition of Salamander should lead to increased cash generation.
The bottom line
All in all, neither Enquest nor Ophir look like theyll be going bust anytime soon. However, I think that Afrens future is uncertain, the company lacks direction and until a new management team is in place, the group will struggle to return to growth.
Even though Enquest, Ophir and Afren have suffered as the price of oil has collapsed, over the long-term the price of oil should recover as the supply/demand imbalance is restored. Until then the oil market is set for a period of turbulence.
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