Tullow, Harbour and Hurricane Energy are stocks to watch as surging crude promises Lazarus effect for oil producers
Oil prices in the range of US$80 to US$100 are a salve to a sector that’s been through difficult years.
Fast shifting public opinion put oil and other carbon-based energy investments on the naughty step through 2021, and, whilst the era of ESG is certainly still very much upon us, the value proposition is becoming harder to ignore.
It is easy to see BP PLC (LSE:BP.) and Shell Plc as London’s big winners, as they rake in billions in additional revenue without producing any extra barrels of oil that may ire the environmental brigade.
Nevertheless, oil prices holding in the US$80 to US$100 range could prove game-changing for a handful of London-listed shares that have (just about) survived a tough few years.
Tullow and Harbour
A mid-tier producer like Tullow Oil PLC (LSE:TLW) could improve its fate greatly if it can accelerate debt repayment whilst crude prices are so buoyant.
Then there’s Harbour Energy (LSE:HBR) Plc – the reboot of Premier Oil, which was crushed beneath by its debt pile in 2020 – it not only has the benefit of rising revenue but also has a catalogue of tax losses to cash in.
In the previous cycle of crude price rises they invested vast sums, borrowed from the debt markets, as they built out their oil fields. The sharp downturn put them such companies under intense pressure, and plunged management teams into negotiations with debt holders over covenants and terms.
Refinancing and rescue deals allowed the trio to survive but ambitions were stifled and the prospect of meaningful growth off the agenda.
Higher crude prices are can potentially be a difference maker.
Tullow, example, forecast it would US$100mln of free cash remaining in 2021 when it modelled based on US$60 crude with an extra US$50mln pencilled as upside if the price could average US$70 in the second half – with operating costs of around US$13 per barrel and output of around 60,000 barrels per day, a windfall of surplus cash could instead accelerate debt repayment to more quickly de-monkey the company’s back.
Harbour produces some 170,000 to 180,000 barrels per day, with operating costs of around US$15 to US$16 per barrel. At the end of June, it had around US$2.45bn of debt.
Soaring oil prices couldn’t be more timely for anybody other than Hurricane Energy.
The crestfallen small-cap has in the very recent past appeared doomed, seen by many as a dead cert backet case.
Lumbered with a seemingly insurmountable debt pile and unable to refinance the writing was on the wall for the group. Hurricane was able to cling on to a producing asset which, whilst diminished, still yields a material volume of oil and amid soaring oil prices could be a saving grace.
The Lancaster field – which is host to a comparatively small portion of the ‘billions of barrels’ estimated by the former executives – has been producing around 10,000 barrels per day.
The company is staring down a debt deadline, with convertible bonds due to mature in the first half of this year.
Its plan (or hope) was that it could produce and sell enough oil to either fully repay or at least bring under control its debts.
Only a few months ago this could perhaps be put firmly in the Lloyd Christmas (“so you’re telling me there’s a chance”) basket of trading ideas. Nevertheless, recent updates from the company have provided genuine rays of optimism.
Buoyed by stronger oil prices through the second half of 2021 Hurricane was able to repay US$151.5mln of bonds, leaving US$78.5mln of total debt at the end of December.
Investors will pin hopes on the company keeping its crude flowing and that prices will stay stronger as Hurricane races to repay the remaining funds.
This small-caps oiler pivoted to pick up oil producing assets in Canada, after North Sea venture failed to take off.
I3 is now producing around 20,000 boepd from its projects and in December the company greenlit a US$47mln programme to participate in seventeen new production wells.
Stockbroker WH Ireland this week repeated a 35p per share ‘fair value’ estimate for firm, as analyst Brendan Long updated commodity price assumptions in his model – the 35p is tied to US$80 oil.
The bullish view on the share, which is presently trading at 14.5p, comes as the stockbroker describes I3 as exposed to “a long-term structural bull market in energy commodities”.
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