Next year will be a year of reckoning for the oil industry. Exploration and production companies such asEnquest (LSE: ENQ),Tullow Oil (LSE: TLW) andPremier Oil (LSE: PMO) could struggle to make it through the year as oil prices remain depressed and debt levels build.
Analysts at investment bankMerrill Lynch have gone so far as to say that 2016 could be the year of capital injections for the oil explorers. Capital markets are now closed to these companies leaving them with only one option, and thats to ask shareholders for additional cash.
Merrill Lynchs figures suggest that the sector could need as much as$3.6bn in new equity next year. Tullow, Premier, Enquest andGulf Keystone Petroleumall need to shore up their balance sheets.
Looking to boost cash flow
Enquest is taking drastic measures to increase liquidity. The company islooking to sell stakes in some of its producing assets, which should help fund the development of the groups other North Sea assets.
The company has launched a process to farm out a stake in the Heather/Broom field. Enquest currently owns 63% of the field. Its also been reported that Enquest was seeking to sell up to a quarter of its stake in the Kraken field, and a 10%-20% share ofthe Scolty/Crathes fields, in which it has a 50% interest. Enquesthas vowed to press ahead with the development of these two new North Sea oil fields next year and management is targeting a 33% year-on-year rise in production in 2016.
Worth zero
Shares in Premier Oilhave slumped by 75% this year amid concerns about the state of the companys balance sheet.
Indeed, at the beginning of November a group of City analysts warned that without a recovery in oil prices, Premiers shares were worth almost nothing, asthe value of the companys assets is currently insufficient topay off existing debt. Higher interest payments will absorb nearly all of Premiers free cash flow going forward, which means new developments are likely to be delayed. Even the start-up of Premierskey project, the $1.9bn Solan field off the west coast of Shetland, is unlikely to make a dent in the groups debt pile.
Even after selling a selection of Norwegian assets for $120m several weeks ago, Premiers debt is still greater than three times earnings before interest, tax, depreciation and amortisation.
Meanwhile, Tullows debts are getting out of control.For example, Tullow reported net debts of $3.6bn at the end of June, against net assets of $3.8bn. City analysts forecast net debts to rise to $4bn by the end of December, against pre-tax profits ofonly68m for full-year 2015 and 142m for full-year 2016. Its not clear how much longer the company can continue to live beyond its means.
It’s up to you
Overall, it looks as if Enquest, Premier and Tullow’s debts will hold them back for the foreseeable future.
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Rupert Hargreaves 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.
