EnQuest drives free cash flow but remains in hock

You would imagine that investors will be taking a second look at oil and gas companies with North Sea portfolios now that Liz Truss is directing the nation’s energy policies. But the price of the underlying commodity remains the chief determinant of financial performance, regardless of any new incentives granted to drillers.

For EnQuest (ENQ), which also holds assets in Malaysia, a combination of high prices and increased production resulted in a net profit of $204mn (£176mn) against a loss of $56.4mn in HY 2021, while free cash flow surged to $332mn, more than double the rate last time around. The reasons are clear enough: EnQuest increased production by 8 per cent to 49,726 barrels of oil equivalent per day, with an average realised oil price of $89.90 per barrel set against a 2021 comparator of $62.80.  

Overall cost of sales was up during the period due to UK upstream developments, specifically the impact of the Golden Eagle acquisition and the higher cost of Magnus-related third-party gas purchases. But leaving aside any exceptional items, the gross margin increased by 230 basis points to 37.9 per cent.

The cash flow boost enabled the company to reduce net debt as a proportion of adjusted cash profits to 0.9 against a multiple of 1.6 at the end of 2021, although the figures look rather less flattering once $1.13bn in bonds is taken into consideration. Nevertheless, chief executive Amjad Bseisu struck a positive note, revealing that the company has “a significant work programme to deliver in the second half of the year but remains on track to deliver our operational targets in our core business”. The trading backdrop may well become more favourable for North Sea drillers, but the total debt overhang still dwarfs the market cap. Sell.  

Last IC View: Sell, 31p, 24 Mar 2022