EnQuest generates free cash flow but remains in trouble

  • Production and realized prices up
  • Gross margin up sharply compared to H1 2021

You imagine investors will take a second look at oil and gas companies with North Sea portfolios now that Liz Truss is leading the country’s energy policies. But the price of the underlying commodity remains the main determinant of financial performance, regardless of new incentives for drillers.

For In Quest (ENQ), which also has assets in Malaysia, a combination of high prices and increased production drove net profit to $204m (£176m) from a loss of $56.4m in the first half 2021, while free cash flow jumped to $332 million, more than double the rate last seen. The reasons are pretty clear: EnQuest increased production by 8% to 49,726 barrels of oil equivalent per day, with an average realized oil price of $89.90 per barrel versus a 2021 comparator of 62.80. $.

Overall cost of sales increased over the period due to upstream developments in the UK, in particular the impact of the acquisition of Golden Eagle and the higher cost of third party gas purchases related to Magnus. But excluding exceptional items, the gross margin increased by 230 basis points to 37.9%.

Increased cash flow has allowed the company to reduce net debt as a proportion of adjusted cash earnings to 0.9 from a multiple of 1.6 at the end of 2021, although the numbers look rather less flattering after factoring in $1.13 billion of bonds. Nevertheless, Chief Executive Amjad Bseisu issued a positive note, revealing that the company has “a significant work program to deliver in the second half but remains on track to meet our operational targets in our core business.” The business backdrop may well become more favorable for North Sea drillers, but total over-leverage still eclipses market capitalization. Sale.

IC Last Seen: Sell, 31p, Mar 24, 2022

INQUIRY (INQ)
ORDER PRICE: 30p MARKET VALUE: £163 million
TO TOUCH: 29-30p TOP OF 12 MONTHS: 37p LOW: 17p
DIVIDEND YIELD: nil P/E RATIO: 1
NET ASSET VALUE: 133ȼ NET DEBT: 194%
Half-year to June 30 Revenue ($M) Profit before tax ($M) Earnings per share (ȼ) Dividend per share (ȼ)
2021 481 49.1 3.40 nil
2022 839 183 11.1 nil
% change +74 +272 +226
Ex div:
Payment:
£1 = $1.16

Robert D. Coleman