“Oil Price Slumps As OPEC Talks Fail!” screamed the headlines this morning, and I feared the worst for my investment in Premier Oil (LSE: PMO) as I rushed to check the prices.
And you know what? Nothing much has actually happened. Brent Crude is still selling above $40 per barrel, and at $41.20 as I write it’s really only lost the $3 to $4 it picked up in optimistic anticipation of a successful outcome at the oil-heads pow-wow. And, the truth is, very few of us expected any production-capping breakthrough anyway, not with Iran only just having been allowed to start selling again and not even having sent a delegate.
Down… a little
And the share prices? Premier is down 6% to 49.2p, but it’s still 22% up since 7 April. And shares in Tullow Oil (LSE: TLW) have only lost a very modest 1.4% to 210p. Since the start of the year, Premier is up 14% and Tullow is up 25%. In my book, this is not a time to be crying.
Clearly Premier Oil’s massive debts of more than $2.2bn mean it really does need to see oil prices rising. But the thing is, it doesn’t really need big rises and it doesn’t need them all that fast. Premier’s lenders are still being very flexible and have extended its covenants to mid-2017. On top of that, abut a third of Premier’s 2016 production still hedged at above $70, and its cash position is remaining pretty stable. Premier has pared its costs to the bone by ditching some non-core assets, and at the same time its acquisition of E.ON’s North Sea assets for $120m, which are immediately cash generative, seems like a masterpiece of bottom picking to me.
Plenty of cash
Meanwhile, Tullow’s hedging position looks even stronger, with half of this year’s production pegged at $75, while some of its assets are producing at as little as $10-15 per barrel. Tullow’s debt pile, at $4bn, makes Premier’s seem like small change. But there’s one crucial difference — at 31 December, Tullow enjoyed a combined free cash and lending headroom of $1.9bn, so the cash isn’t going to run out any time soon.
Tullow is also slashing its capital expenditure. Last year’s total of $1.7bn is forecast to drop to $1.1bn for 2016, but it could potentially drop as low as $0.9bn with a bit more work. In fact, should low oil prices continue into next year, Tullow says it should be able to get capex down to around $0.3bn per year from 2017 onwards.
On top of all that, both companies expect to increase their production over the next 12 months, as Premier’s North Sea Solan field has started flowing, and there’s all that E.ON production to add. For its part, Tullow should see more of the back stuff pumping from its operations in Ghana in the second half of this year.
The future looks good
Ultimately, oil production has to be cut and prices have to rise, as many of the world’s major producers are simply hurting too much to keep going at current prices levels indefinitely. The heads were talking of needing more time as they walked away from the OPEC meeting, and not just giving up — and I think they’ll ultimately be forced to take some action, even without Iran on board.
My take on the oil companies, then, is that those with sufficient cash resources to keep going for another year without any real problems should do well, and any price dips represent buying opportunities.