Three popular oil and gas firms updated the market this morning, but the news was mixed.
Russia- and Ukraine-focused small cap JKX Oil & Gas (LSE: JKX) fell 20%, while Tullow Oil (LSE: TLW) also slipped lower. US firm Nighthawk Energy (LSE: HAWK) bucked the trend, climbing by 11%, but are any of these companies a buy in today’s market?
JKX: wrong place, wrong time
Shares in JKX fell by 20% to 15p when markets opened this morning, after the firm reported a 40% fall in revenue and a $7.3m operating loss for the first half of 2015.
Production fell by 15% to 8,611 barrels of oil equivalent per day (boepd) during the period, mainly as a result of gas sale restrictions and a punitive tax hike in Ukraine, which have forced the company to suspend development drilling.
JKX is fighting these restrictions, but it is not yet clear whether the Ukrainian government will honour a recent interim ruling ordering it to lower the tax rate on JKX’s gas sales to its previous level of 28%.
The group does have a cash balance of $22.4m and has slashed capital expenditure. JKX can afford to continue operating in the short term, but may struggle to return to profit unless the situation in Ukraine normalises fairly soon.
Tullow Oil
Tullow shares fell by 3% following today’s results, leaving them 31% lower than one month ago.
Today’s results were slightly better than expected, thanks mainly to an effective hedging programme that provided a $298m boost to first-half earnings. This limited Tullow’s pre-tax losses to £10m.
However, a technical problem with the firm’s flagship Jubilee field means that production guidance for the full year has been cut from 105,000 bopd to 100,000 bopd. The cut comes at a bad time for Tullow, which is currently investing heavily in the completion of its TEN project in Ghana, where first oil is due in 2016.
Although TEN is on budget, it’s worth noting that Tullow’s capital expenditure this year is expected to be $1.9bn. That’s more than total forecast revenue of $1.8bn. The shortfall will be funded by debt, which has already risen from $3.1bn at the end of 2014 to $3.6bn.
I remain concerned that when TEN production starts, the cash generated may not be enough to repay the firm’s debts and reward shareholders.
Can Nighthawk drill?
Like many US shale operators, Nighthawk has stopped drilling new wells and is relying on maximising output from existing wells to maintain production.
That seems to be working quite well at the moment. Net production in June was 1,491 bopd, compared to 1,638 bopd in April.
The question is whether Nighthawk can afford to drill. The firm said today that it has 55-65 potential drilling locations which have been qualified with seismic surveys. The problem is that in June’s AGM presentation, Nighthawk said that only 70% of its 2013-14 wells would be economic at $60 per barrel.
Given that WTI crude is currently below $50 per barrel, Nighthawk may not be able to persuade its lenders to fund new drilling in the current climate.
Today’s best buy?
All three of these companies are struggling with the low price of oil and gas, and I suspect all three could have further to fall.