Debt encumbered Premier Oil PLC (LON:PMO) and Tullow Oil PLC (LON:TLW) are coming under pressure after Monday’s crude price collapse and, according to analyst Zac Phillips, a number of growth projects may now be under threat across the industry.
Premier shares approximately halved in value on Monday, meanwhile, Tullow’s share price was dealt yet another blow to its price (now fallen as far as 17.9p after trading at 206p as recently as November).
Both Premier and Tullow are stuck on the debt-payment treadmill, each owing around US$2bn, and have in recent times been focussed on driving cash flow to expedite repayment – unfortunately, for them, the downturn in crude prices may be ill-timed.
“There’s a real concern that the debt piles are going to swamp the balance sheets again,” Proactive Research analyst Zac Phillips said in an interview.
“I think, in fact, we can go one step further and say that any company that has gearing anywhere north of 30% – in the 40 or 50% – are going to have significant issues in meeting their debt and those are going to be the company’s that are at risk.”
Phillips added: “Wherever you’ve got balance sheets that are under pressure, and the equity is one component of the balance sheet, then you’re going to have management teams that are going to have to cut their cloth to suit what they’re able to deliver.
“Undoubtedly, projects are going to come under risk.”
Growth projects at risk
Premier has already sanctioned the Tolmount gas project in the North Sea, where field development is presently underway and ‘first oil’ is due by late 2020, though a decision on a potential extension to that project has also been slated to take place later this year.
Perhaps, the Sea Lion field is more significant – especially for the swathes of private investors that’ve followed the Falkland oil story for many years – as a recent preliminary farm-out agreement has evidently unlocked a potential sanction decision in the relatively near future, though a binding final deal is not yet sealed.
It remains to be seen whether appetites for big offshore development projects can be maintained in light of much weaker crude prices, and, the duration of the downturn may well be decisive.
Similarly, there are challenges for Premier’s Mexican portfolio where it has been seeking to sell out of the Zama oil discovery, as this is now suddenly a much a tough market for asset vendors.
Tullow on the other hand has for many years been active with exploration and appraisal ventures and its portfolio is fairly deep with opportunities and joint ventures.
Even before this week’s shock Tullow had launched a full review of its business and its assets, to prioritise cash generation and debt repayment. Upcoming strategic choices may now take on even greater significance.
Oil tipped to (eventually) rebound to US$100 due to under-investment
Phillips, in the interview, also noted perceived structural imbalances which could result in oil prices actually being much higher in just a couple of years.
He highlighted that there’s a lack of investment across the oil industry, and, that there’s no investment in medium-or-long term growth projects “at all”.
”Structurally the oil market is still skewed towards the demand side which means any shortfall on the supply side will, in time, have an impact on the price and drive it up”.
”I think what we’re seeing is a temporary aberration and it will come through”.
Natural decline alone leads to a loss equal to about 8% of annual output yet prices may stay too low today that it prevents investment for projects that will be needed to satisfy demand in the future.
Companies that are able to be patient regardless of their debt burdens could be rewarded should crude prices recover and advance in the coming years – those squeezed by piles of debt will, however, have a tougher time.