Small- to mid-cap exploration and production (E&P) companies are “out of the emergency room” after a tough 2016, but haven’t been discharged yet, an analyst said.
Rob Stevens from Westwood Global Energy Group (WGEG) said many firms are in better shape thanks to restructuring efforts, effective cost cutting and lower break-even Brent prices.
But Mr Stevens observed that, despite their lower cost bases, the 30 E&P companies which WGEG monitors were still valued some way below pre-downturn levels when normalized against the oil price – high debt levels and huge impairment charges have not helped sentiment.
He also said it was difficult for share prices to pick up once oil prices flatten, because “profit taking” tends to take precedence.
“E&P companies are out of the emergency room,” Mr Stevens said. “The situation is not as bad as in 2016, but they are not out of hospital yet.”
Niki Kouzmanov, oil and gas equity researcher at Jefferies, said E&P firms should be in a position to start focusing on cash flow generation and start paying back debt this year.
Mr Kouzmanov said the market leaders would be those who can bring projects onstream on time and on budget.
He said EnQuest stood out because of the Kraken development, which is on track for first oil in the North Sea this quarter, and its debt restructuring.
Premier Oil, another E&P company, expects to complete a long drawn-out refinancing process by the end of May.
“Some E&P firms will be coming from a position of strength so it will be interesting to see how they use their capital,” Mr Kouzmanov said.
“Premier Oil should be in a better position than last year with Catcher expected on-stream towards the end of 2017.
“Premier will be restricted in how they can manoeuvre, having agreed to give debtholders a say over new investments, but the company can now focus more on its own operational delivery than on the oil price.”
Mr Kouzmanov also flagged Faroe Petroleum as a company to watch this year.
“Faroe made the Brasse discovery in the Norway last year and is looking to appraise later this year,” he said. “It does not have to worry about high levels of debt and can look to progress developments in a more benign cost environment.”
Mr Stevens hailed Aker BP as one of the top performers in terms of share price, saying regular dividend payments had been a contributing factor.
Aker BP was established in September following the merger of Det norske oljeselskap and BP Norge.
Mr Stevens said the company was an interesting proposition, because most new players were private-equity backed, whereas Aker BP combines supermajor with a small specialist company.
Ithaca Energy shares also thrived in 2016 and Mr Stevens believes the firm’s shareholders should vote to accept a takeover offer from Israeli company Delek.
Compared with other deals which have been announced over the last six months, Mr Stevens said the £997million offer from Delek, if anything, “slightly overvalues” Ithaca.
Mr Stevens said WGEG was “cautious” on Hurricane Energy and its estimates for the Lancaster field in the North Sea.
Earlier this month, Hurricane upgraded its recoverable resource estimate in the P50 bracket for the Lancaster field to 593 million barrels from 200 million in a 2013 assessment.
Mr Stevens said the reservoir was very complex and that the recovery rate would depend on how well connected the fractured network is.
He said Genel’s experience with the Taq Taq oil field in Kurdistan should act as a “cautionary tale”.
Genel’s share price plunged in February 2016, and again in March 2017, after the firm twice wrote-down its reserve estimates at Taq Taq, which is also a fractured reservoir (albeit fractured carbonates, rather than fractured basement as at Lancaster).
But Mr Stevens said Hurricane was “doing the right thing” by using an early production system to get a better understanding of the reservoir.