The breakdown of the latest OPEC talks in Doha hasn’t yet sent crude prices tumbling too far. However, if the nascent recovery in crude prices peters out, certain small producers could be in a heap of trouble.
Last week’s news that first oil had been tapped at Premier Oil’s (LSE: PMO) North Sea Solan field will be of great solace to the highly-indebted independent producer. The oil from Solan and the recently acquired North Sea assets of German utility E.ON will be critical to cash flow for the highly-indebted company. Year-end 2015 net debt stood at $2.2bn and there’s some worry that the company will fail to meet a late June test of its debt covenants, which could be devastating for the firm.
The CEO has said that if oil is at $35/bbl the firm will be unlikely to meet those commitments, which could necessitate further debt restructuring. While Premier’s opex costs are relatively low at $16/bbl, it desperately needs a strong rebound in crude prices due to an astounding 75% gearing ratio. Debt of this level and significant, and growing, operations in the relatively expensive North Sea mean Premier needs crude prices to rebound quickly and significantly.
Falling debt
West African producer Tullow Oil (LSE: TLW) also has a major new asset due to come on-line in 2016, the TEN Field off the coast of Ghana. Tullow is in a similar position as Premier, with high debt racked up for major new projects conceived when crude prices were much higher than they are now. Yet, Tullow is still in better shape than Premier with a gearing ratio of 56% and opex costs of $15.1/bbl in 2015.
This debt level is still high, but Tullow’s break-even prices of $30-$40/bbl for West African fields show why analysts are expecting the firm to eke out a small profit in 2016. Furthermore, the low-cost assets from the TEN Field will add significantly to the bottom line come 2017 as production plateaus quickly and capital spending falls swiftly. With shares trading at a relatively modest 14 times 2017 earnings and debt levels set to come down, Tullow looks like a more attractive proposition than Premier Oil to me.
Worth diving in?
Oil services provider Petrofac (LSE: PFC) may not exactly cheer the breakdown in OPEC talks, but with many of its main customers now determined to maximize production the firm’s order book has hit a record $20.7bn. Profits slumped from $581m to $9m in 2015 but this was largely due to branching out with the disastrously expensive lump sum Laggan-Tormore project the company has vowed never to try again.
Despite margins decreasing due to customers squeezing suppliers across the board, Petrofac still brought net debt down from $733m to $686m during 2015 for a gearing ratio of 56%. Freed from the anchor that was the Laggan-Tormore contract, analysts are expecting earnings to rebound significantly in 2016 and once again cover the 5.3% yielding dividend 1.85 times. With shares trading at a low 10 times forward earnings, decreasing debt levels and increasing revenue, Petrofac looks like a tempting way to gain exposure to the oil & gas industry at a low point in the cycle.