It would appear the big thaw has begun. According to the Financial Times, this year oil companies are expected to increase their capital spending budgets for the first time since 2014 as confidence returns to the sector.
A combination of OPEC’s output cut and efficiency gains achieved by oil producers since 2014 means that the oil industry is now ready to start investing again. It looks as if oil prices have stabilised and cost cuts have helped reduce project break-even points to levels that are appealing in the current environment. As a result, Barclays expects total E&P capital spending to rise 7% this year with offshore production capacity of around 15bn expected to be sanctioned.
Time to revisit the sector?
The decision by oil companies to start investing again is a signal to investors that it might be time to revisit the oil sector again.Â
And two companies that could generate huge returns for investors this year as confidence returns are Premier Oil (LSE: PMO) and Rockhopper Exploration (LSE: RKH).
Red flagÂ
The biggest red flag currently preventing investors from regaining confidence in Premier is the company’s ongoing refinancing. For more than a year now management has been trying to negotiate favourable terms for the company’s debt refinancing. Â
As of yet, little news on the deal has been released to the market. However, yesterday the company announced that it would finalise the agreement with creditors within weeks. But once again, management held back from revealing any key details. With this being the case, the prospect of the upcoming refinancing will hold shares in Premier back during the near term.Â
Once a debt agreement is in place, Premier’s shares have the potential to spring back to 200p. Total production last year from Premier’s assets reached a record 71,400 barrels of oil equivalent a day, up nearly a quarter year-on-year the group is guiding towards production of 75,000 barrels a day during 2017.Â
Assuming everything goes to plan in the next two years, City analysts expect Premier to report earnings per share of 29p for the year ending 31 December 2018. Based on this forecast, shares in the company are currently trading at a forward P/E 3, and any guidance that the company is indeed on track to hit this target would likely send the shares shooting higher this year. Â
Joined at the hip
Any good news from Premier is also good news for Rockhopper. The two oil producers are partners on the Sea Lion field in the South Atlantic, the development of which has been put on hold thanks to the oil price crash. Premier’s refinancing should be the first stage of getting the development of this project back on track.Â
Premier is looking for a buyer for part of its stake, which is unlikely to emerge until the company’s refinancing is complete. With a buyer in place, the £1.2bn Sea Lion project may finally start to move ahead. When the project gets the go-ahead, City analysts believe shares in Rockhopper could be worth as much as 123p, although a more conservative estimate of 80p per share is also in place. As soon as Premier gives the green light on Sea Lion, it’s probable this target will be hit pretty quickly.