EnQuest: Soared Revenue, Dipped Leverage10 Sep 2019 14:31
just sharing, dont know if you all have seen this today ?
EnQuest: Soared Revenue, Dipped Leverage
Sep. 10, 2019
Vasily Zyryanov
Vasily Zyryanov
Summary
1H19 output bolstered by Magnus oil field rose 27% to 68,548 boepd.
As cash flow improved, EnQuest continued to deleverage; for instance, net debt/adjusted EBITDA plunged to 1.8x from 2.5x in 2018.
The stock is deeply undervalued and offers ~128% levered FCF yield.
Anticipated revenue decline in the 2020s leads me to give the stock a neutral rating despite profound undervaluation.
In April 2019, I covered EnQuest (OTC:ENQUY, OTCPK:ENQUF), the London-listed upstream company, for the first time. In the article, I highlighted that its abnormally low valuation (e.g., a 98% 2018 FCF yield and 2.7x P/E) was only justified by immense leverage (and even a risk to break debt covenants) that provoked investor skepticism; I also pointed out that reduction of borrowings and shrinking of net debt/EBITDA is essential to restoring confidence of bulls and shoring up the expansion of multiples.
On September 5, the firm presented its 1H19 results. I suppose now it is worth revisiting the thesis and looking at the published data to figure out if executives are moving this deeply undervalued firm in the right direction to prop up investor confidence or not.
Stock performance YTD
The YTD performance of the stock has not been particularly inspiring, as investors still shun EnQuest's equity. The stock failed to outperform the FTSE 100 and FTSE 250, the UK market benchmarks, and its closest peer Cairn Energy (OTCPK:CRNCY).
Source: Yahoo FinanceEnQuest's YTD share performance on the LSE compared to indexes and Cairn Energy. Source: Yahoo Finance
Among the main culprits was Brent price volatility as traders have been fearful of the global slowdown caused by the consequences of the US-China trade confrontation. A sequence of rate cuts by central banks and growing amount of bonds with sub-zero yields also gave bears additional arguments that global economy is teetering on the brink of recession. Measures undertaken by OPEC+ to stave off oil glut temporarily soothed the market, but, still, generally failed to catalyze Brent upward movement.
ChartData by YCharts
Interestingly, the YTD return of EnQuest was nearly equal to the return of the US E&P industry benchmark (XOP).
At the same time, as the FTSE 100 and 250 rose ~12.43% and ~7.55%, I can't say that Brexit woes have taken a toll on EnQuest's market value.
The top line
EnQuest capitalizes on its vast asset base in the North Sea (e.g., Thistle/Deveron, Heather/Broom, the Dons area, Magnus, Kraken, etc.), while the Malaysian segment also contributes to the top line, but to a far lesser extent. 1H19 working interest production soared 27% backed by Magnus field and impressive production efficiency at the Kraken heavy oil field offshore the UK. Importantly, earlier this year, Kraken was a culprit of deteriorated investor sentiment
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