Due to the Covid-19 pandemic and resultant oil price crash, all companies in the oil and gas industry have been affected. An analysis of a group of London listed independent oil and gas companies suggests that past performance and current strategic moves position some better than others to handle the current volatility.
London listed independent oil and gas companies Cairn Energy Plc, EnQuest Plc, Genel Energy, Premier Oil and Tullow Oil were in a relatively strong position coming into 2020, seeing both revenues up and net debt down from the previous year. In 2019, the group saw an uptick in exploration spend from the previous year but has yet to translate into reserve replacement growth.
Due to their size and financial positions, seeking private investment to fund activities is necessary and for many, their debt to equity ratios have risen. In particular, the Africa-focused Tullow Oil saw their debt to equity ratio rise from 1.6 to 4.57 (2018-2019) in order to fund their activities in Kenya and Uganda, as well as their Jubilee and TEN fields in Ghana.
Market performance across the board for the group has been poor and their market values have taken a hit in the wake of low oil prices and reduced production, Premier Oil being the hardest hit in the group with year-to-date (YTD) stock returns of -73%. Even prior to the Covid-19 outbreak, the oil and gas sector has struggled to compete with other industries as an investment due to the business cyclicity and eroding returns for investors.
For Tullow Oil, there is cause for concern across the board with a low reserve life, poor reserve replacement ratio (RRR) performance, a highly sensitive upstream portfolio to low oil prices, as well as a very high debt to equity ratio. The company is rated as the lowest in the peer group, meaning that they are most exposed to the impact of depressed oil prices and Covid-19-related disruption.
Comparatively, Cairn Energy rates the highest on the impact scorecard due to the successful sanctioning of the Sangomar project in Senegal, which added much-needed reserves to the company’s portfolio. Cairn has also performed well in the peer group in regard to their debt-to-equity ratio and RRR performance over the past few years.
Covid-19 and industry volatility has forced companies to rethink their capital budgets for 2020 and will likely impact upon their future budgets also, forcing many of their projects to be delayed and, in some cases, discontinued completely. In light of recent developments, at the Thistle, Deveron and Heather fields production has been halted and the operator EnQuest Plc has decided not to restart production in the future.
Mid-cap independent exploration & production (E&P) companies such as the above mentioned are particularly exposed to commodity price fluctuations due to a lack of diversity in their portfolios, a particular focus on the upstream business and little to no exposure to downstream operations to fall back on.
High debt levels and lack of balance sheet depth make these companies particularly vulnerable under current conditions. Despite this, the majority of the group have successfully managed to hedge a reasonable amount of their 2020 production at stronger price levels, which provides a safety net to weakened oil prices, helping them to navigate through short-term market turbulence.