If it’s not good for anything else, the Premier Oil (LSE: PMO) share price chart seems to be a pretty good indicator of the oil price.
When the price of a barrel rose to $86 in the first week of October, Premier Oil shares hit their highest value so far this year. And while oil has since been slowly sliding back down, the shares have similarly been giving up their gains.
With a barrel now having slipped back as low as $72, Premier Oil shares have dropped to their lowest price since May. And I reckon they’ll fall further if oil continues its decline, as the firm’s debt problem is far from solved and investors are likely to get scared again.
Rocky ride
The same can certainly not be said for Enquest (LSE: ENQ) shares, whose 2018 chart is one of the spikiest I’ve seen all year. In the past 12 months, the Enquest share price has rattled between the 20p and 40p levels, perking up and crashing back every few months. It’s a fine example of what investors in an unprofitable oil exploration companies often have to face — you need steely nerves.
Enquest has been facing debt problems too, but cost-cutting and a recent rights issue have helped steady the ship, and analysts are expecting the bottom line to turn to profit this year. There’s a modest 6.7p EPS on the cards for December 2018, followed by a hike to 14.4p for next year.
That would put the shares on a super low P/E, but that’s perhaps understandable if we look at the debt situation. At the halfway point this year, net debt had reduced, but still stood at nearly $2bn — more than three times the company’s market cap.
Super cheap?
At the time, Enquest said it “continues to prioritise maximising cash flow to facilitate the reduction of net debt,” and I really can’t disagree with that strategy. We’ve seen how debt came close to wiping out Premier Oil and Tullow Oil, and we could be quickly back into crisis times should oil prices fall much further.
But if we do see that hoped-for profit this year, coupled with positive forward guidance and some further erosion of the debt mountain, I could see Enquest shares set for a strong 2019.
But back to Premier, and (admittedly as a shareholder) I do see the share price fall in response to weakening oil prices as overdone. I’ve always felt Premier would be fine with prices of around $70 per barrel, and I still think that — I’d need to see significant further price falls before I’d start getting worried again.
A good year ahead?
I don’t want to downplay the debt situation at Premier, and at the end of the first half the figure still stood at $2.65bn, which is higher then Enquest’s. But Premier’s market cap is almost twice Enquest’s, and Premier’s debt is also coming down. We’re also looking at strong profit forecasts for this year and next too.
I can’t help but see the two sets of valuations as too pessimistic now, and I can see a solid 2019 ahead for both companies.