- The company's debt overhang creates uncertainty ahead of new production
- The growing presence of the supermajors in the region supports the commercial case
What makes some investors baulk at the prospect of investing in oil and gas companies? Well, it could have something to do with the amount of debt they typically carry on their balance sheets.
Of course, debt is not inherently bad, but costs are front-loaded in the energy industry, so investors not only have to weigh up the likelihood of success for a given prospect, but also the magnitude of any prospective cash flows. An understanding of leverage ratios is doubly important if you’re considering investing in such a capital-intensive industry.
Recently in these pages, Robin Hardy asked whether the share prices of many financially weaker companies have been unduly inflated since the initial pandemic-linked sell-off last year. While he concedes that “servicing debt is more manageable than in the past”, he goes on to point out that “the problem with debt is not its cost but the constant need to replace, renew or extend it”.
One of the companies that he highlighted in terms of its debt profile was Energean (ENOG), an oil and gas exploration and production company focused on assets in the Mediterranean and UK North Sea, with production from the Abu Qir field in Egypt and fields in southern Europe.
The share price of the company is now roughly at the same level it was at the end of January 2020, yet operating losses increased by a third to $125m (£90m) through the year, while net debt as a proportion of shareholders’ funds stood at a lofty 104 per cent. It also raised a $2.5bn bond in March, as part of a debt reassignment with a relatively low cost of capital. On the positive side of the ledger, production has been steadily building in the early part of the year, with output 15 per cent in advance of mid-point guidance by the end of April. And the company has made progress in clawing back receivables linked to Egypt. Year-end net debt guidance has also been reduced to between $1.9bn and $2.0bn (from $2.0bn to $2.2bn). And capital expenditure should peak in 2022.
Yet a month after a largely positive operational update, the company’s chief financial officer, Panos Benos, offloaded £5.6m-worth of shares at 800p apiece – the price 125 per cent in advance of March 2020’s nadir.
Only time will tell whether the share sale will be deemed opportune, but there are clearly some positive assumptions baked into the share price, not least of which in relation to the Karish gas development project offshore Israel. The timetable for initial production has been pushed back to mid-2022 due to supply chain problems brought about by the reintroduction of enhanced Covid-19-related restrictions in Singapore, but you could certainly argue that it is potentially transformative in terms of scale. Last November, a competent person’s report produced by DeGolyer and MacNaughton gave a resource estimate of 317m barrels of equivalent 2P (proven and probable) oil reserves, including 1.41tn cubic feet of gas.
Largescale gas reserves discovered in the eastern Mediterranean over the past decade have turned Israel, a small market long-reliant on imported fuel, into an energy exporter. And Israeli demand for natural gas is only headed one way, perhaps doubling over the next decade. However, analysis from Wood Mackenzie shows that “the scale of the regional resource dwarfs local needs”. It represents another potential export boom for Israel’s economy, but there are other positives. The development of the offshore assets is helping to address some of the geopolitical challenges of the region, a process aided by the formation of the East Med Gas Forum.
There’s an element of risk for investors given the uncertainty around gas demand from the EU’s plan to be net-carbon-neutral by 2050, fanciful as it may seem. And we will have to wait and see whether the promise of the Karish field translates into a step up in cash flows for Energean. But the growing presence of the supermajors in the region suggests that confidence may not have been misplaced.
Buys | ||||
---|---|---|---|---|
Company | Director/PDMR | Date | Price (p) | Aggregate value (£) |
Coral Products | David Low | 22 Jun 21 | 14 | 20,625 |
Dr. Martens | Robyn Perriss | 21 Jun 21 | 420 | 83,964 |
Inspecs Group | Robin Totterman (ce) | 18 Jun 21 | 350 | 105,578 |
Inspecs Group | Chris Kay (cfo)* | 18 Jun 21 | 350 | 30,009 |
Medica Group | Kevin Terrins | 18 Jun 21 | 174 | 24,873 |
Melrose Industries | Heather Lawrence | 23 Jun 21 | 157 | 23,505 |
Speedy Hire | James Bunn | 21 Jun 21 | 69 | 25,000 |
Tesco | Bertrand Bodson | 22 Jun 21 | 226 | 99,496 |
Trackwise Designs | Mark Hodgkins (cfo) | 23 Jun 21 | 206 | 20,600 |
Universe Group | Andrew Blazye (ch) | 24 Jun 21 | 5 | 1,142,139 |
Sells | ||||
---|---|---|---|---|
Company | Director/PDMR | Date | Price (p) | Aggregate value (£) |
Energean | Panos Benos (cfo) | 18 Jun 21 | 800 | 5,600,000 |
JTC | Iain Johns (PDMR) | 21 Jun 21 | 620 | 1,395,000 |
Mission Group | David Morgan | 10 Jun 21 | 80 | 1,301,000 |
Mission Group | Robert Day | 10 Jun 21 | 80 | 1,099,000 |
TBC Bank | Nikoloz Kurdiani | 21 Jun 21 | 1,116 | 55,800 |
TBC Bank | Nikoloz Kurdiani | 23 Jun 21 | 1,116 | 32,922 |
TBC Bank | Tornike Gogichaishvili | 21 Jun 21 | 1,104 | 70,453 |
* Spouse/Close Associate |