An inquest into EnQuest

They’ve certainly lost a lot over the past five years. Unlike majors, or recently acquired North Sea peer Faroe Petroleum (FPM), EnQuest's shares have never recovered from the fall since Brent crude dropped below $100 in 2014. A combination of huge debts, high costs and long project delays meant lenders, rather than equity holders, have been the true beneficiaries of the group’s cash generation to date. Even when oil crept towards $80 last summer, EnQuest's shares never rose above 39p a share, less than a third of where the stock sat four years previously.

The shares took a further nosedive in September, when the company announced a sharply discounted three-for-seven rights issue to raise $138m to help it acquire BP’s remaining stake in Magnus, the North Sea field that has been in production for nearly four decades. Chief executive Amjad Bseisu called the $300m deal "compelling", and stated that it would add $500m to EnQuest’s net present value. “Inevitable” might be a fairer description. That’s because Kraken, the source of the majority of group cash generation, has been serially hampered by performance issues.  

Those problems began within two months of Kraken’s start-up in June 2017, as issues with the field’s floating production storage and offloading vessel led to a reduction in guidance. Last year, despite hitting the targeted 50,000 barrels of oil per day (bopd), what the group described as “a small number of system outages and equipment repairs” meant average gross output was more than a third lower. As such, EnQuest has lowered its 2019 guidance to between 30,000 and 35,000 bopd, despite adding a new well at the end of this quarter.

In short, EnQuest needed Magnus to diversify cash flows, which are already struggling to keep pace with the de-leveraging task. On this count, analysts at Barclays aren’t too optimistic, and think that scheduled debt repayments will result in a $135m cash shortfall by the end of 2019, assuming an average crude price of $60. As such, the bank thinks net debt is likely to return to $2bn by the end of the year.

RBC, which forecasts Brent will average $64 a barrel this year, is not much more positive, forecasting that net debt will drop from $1.73bn to $1.66bn by the end of 2019. We have used the bank’s year-end 2018 forecasts for the net asset and debt figures in the table below to better reflect the funds raised last autumn.

Unlike the 2015-17 period, EnQuest isn’t currently at risk of breaching its covenants. But it’s not far off, and RBC calculates that by the end of 2018, cash profits fell to just 3.5 times group finance charges, below a four-to-one ratio. Elsewhere, the stress on a 1.5 times revolving credit facility to cash profit covenant was only relieved via a $175m loan from Oz Management, which effectively ringfences over 15 per cent of cash flows from Kraken over a five-year period. To top it off, the presence on Enquest’s balance sheet of ‘payment-in-kind’ notes – bonds that can be repaid by issuing more high-yield debt – should also be seen as a red flag.