After the new funding deal, is Enquest plc a better buy than Premier Oil plc?

After months of speculation about the company’s financial position, last week North Sea oil producer Enquest (LSE: ENQ) revealed that it was proposing a refinancing deal to shareholders. 

The deal includes both a share placing to raise £82m and a capital restructuring worth about $300m. 61% of high-yield note holders have so far agreed to support the deal, as have some large retail bondholders. The key change to the company’s capital structure is an adjustment to the terms of the company’s bonds. Under the new terms, Enquest will only pay interest to bond holders if oil prices rise above $65 a barrel and the maturity of the bonds will be extended to 2022. 

Keeping the company afloat 

These changes to Enquest’s capital structure are designed to help keep the company afloat until its $2.6bn Kraken oilfield in the North Sea begins production next year. And when the field does being production, the outlook should significantly improve. The new field has projected peak production of 50,000 barrels a day, which is more than the total produced from the firm’s existing operations. 

Enquest’s debts amounted to $1.7bn at the end of the first quarter, the majority of which is related to the Kraken development. When the Kraken field is completed the company should be able to pay off these debts — barring any unforeseen circumstances — relatively quickly even if oil prices remain depressed. Indeed, the company has taken an axe to operating costs during the past few years, mitigating some of the impact of low oil prices. Operating expenses have fallen by 50% since 2014  

City analysts expect these efforts to pay off over the next few years with an estimated pre-tax profit of £37.9m for full-year 2016 and £39.2m for 2017 based on current oil price forecasts. That’s up from a loss of $1.3bn last year.

Lacking support? 

It seems Enquest’s lenders and shareholders are willing to support the company through a rough patch. It’s not yet clear if the same can be said for Premier Oil’s (LSE: PMO) stakeholders. 

Premier Oil has been in the process of negotiating with its lenders regarding debts for several months now and so far, they’e been happy to waive the financial covenant tests required while talks continue. 

There’s no other way of putting it – Premier’s debt is a problem. Alongside its interim results, the company reported that net debt was $2.6bn, up by $400m year-on-year and nearly five times what analysts think it will make before interest, tax, depreciation and amortisation this year. A net debt-to-EBITDA ratio of more than two is generally considered excessive. For the first half, the company reported a pre-tax profit of $110m. Underlying earnings fell from $447m last year to $182m. 

These figures are worrying and when compared to Enquest, Premier now looks as if it has become the underdog. 

This year Premier’s management is targeting production of around 70,000 barrels of oil per day. However, when Kraken comes on line next year, Enquest will have the capacity to produce nearly 100,000 barrels of oil per day. Moreover, the company will have a lower level of net debt with lower interest costs allowing debt to be paid off faster. Overall, Enquest now looks to be the better investment.