Nobody will be surprised to see Ophir Energy Plc (LSE: OPHR) And Nighthawk Energy Plc (LSE: HAWK) suffering a tough start to the year. Just about every UK stock has been rattled by the shock waves emanating from China. Being energy companies, these two London-listed stocks are in the toughest sector of all as Chinese demand plunges and the oil price falls to 12-year lows.
The problem is that both companies are already in a tough spot, particularly Nighthawk, whose share price has collapsed from 7.1p to just 1.15p over the past 12 months. Ophir looks resilient by comparison, having fallen just 35% over the same period to around 85p. But recent events won’t make life easier for either of them.
Driller killer
These are tense times for anybody still holding onto their shares in penny dreadful Nighthawk. The US-focused oil development and production company saw risk pile upon risk in 2015, after starting the year reckoning it could make a reasonable rate of return even if oil fell to $50 a barrel. With oil now heading towards $30 these are dark times for Nighthawk, despite producing a net 499,000 barrels of oil in the year to 30 November.
Mixed drilling results last year only made matters worse, as Nighthawk had to plug and abandon its Monarch, Happy Jack and Northstar wells. Then in early December, it announced a breach in covenants under its reserve-based loans, and it’s now mired in negotiations with the Commonwealth Bank of Australia. Nighthawk has twice announced an extension waiver on its debt renegotiations, on 22 December and again on 4 January, as both parties battle to find a solution to its compliance problems. This week’s oil price collapse and market meltdown will only make finding a lasting solution harder.
Ophir and loathing
Ophir’s share price was buoyed by its speculation towards the end of last year, with informal takeover and merger interest from several parties, although there has been little news on this front since November. I never buy purely on bid speculation but I’m soothed by its net cash position of around $350m at the end of 2015. The Africa and Asia-focused explorer’s production averaged 13,400 BOE/D last year, although it will dip this year to between 10,500 and 11,500. Its Kerendan gas field forecast should start pumping in the second half of 2016.
Ophir has also been successfully cutting costs and refinancing debt to boost its balance sheet, and management predicts a relatively comfortable 2016 year-end cash position of between $575m and $625m, and net cash position of between $250m and $300m. The share price still fell 10% in the last week, but given current market troubles, you can’t read too much into that.
With no sign of oil hitting a price floor, any stock in this sector is a gamble, although Ophir looks far more solid than Nighthawk, and should tough out 2016. The question is: are you tough enough to buy it?