Regardless of the stock market’s welcoming of EnQuest’s latest numbers yesterday, the company’s shares, having jumped by 50 per cent in the past two months, were due to take a step or two back. And so they did as investors took some profits, cashing in on early euphoria after the oil company announced half-year pre-tax profit of $182.6 million after exceptional items, up on last year’s comparable of $49.1 million, on the back of revenue that rose 74 per cent to $838 million. Group net production averaged 49,726 barrels of oil equivalent per day, up from 46,187 in the same slice of 2021.
In common with most oil companies, EnQuest counts its cash in dollars, but in other respects it veers away from its peers. The product of a 2010 merger between the North Sea assets of Petrofac and Lundin Petroleum, of Sweden, EnQuest was conceived by Amjad Bseisu, its chief executive and leading shareholder, as a scavenger, feasting off the scraps of a declining North Sea oil industry. With big players deciding that many wells are uneconomic, they are happy to sell at knockdown prices and EnQuest has emerged, almost under the radar, as one of the area’s largest independent operators.
Chief among its prizes is the Sullom Voe terminal on Shetland, once a jewel in BP’s crown but offloaded to EnQuest five years ago. Tankers do not queue up in quite the way they did in the 1980s, but the new owners are transforming the 1,000-acre site into a decarbonisation and green hydrogen hub. Apart from the established access to oil and gas pipeline infrastructure and a deep-water port and jetties, a skilled workforce and local supply chain, the flat surrounding land gives it one of Europe’s highest potentials for wind farms. EnQuest is keeping the Shetland Islands’ council onside and in return the local worthies have given it exclusive rights to pursue new energy opportunities there.
The company has three main North Sea fields — Magnus, Kraken and the recently acquired Golden Eagle — and other operations off Malaysia. It also has a decommissioning programme, as it squeezes the last drops out of fields that have been thoroughly exploited.
While not exactly jumping for joy at Rishi Sunak’s Energy Profits Levy, Bseisu is making use of the accompanying tax reliefs to press on with decarbonisation and other investment plans. Financially, the priority is to bring debt down to half adjusted net profits. In the past six months, EnQuest has made a significant stride towards that goal, cutting debt by $342 million to 90 per cent of net profits. Until the 50 per cent target is reached, dividends are taking a back seat.
EnQuest has hedged the price of 3.4 million barrels at between $60 and $79 a barrel for the second half of 2022, compared with the present $94 oil price. And for the first half of 2023 it has hedged another 3.5 million barrels at between $57 and $77. For 2022, average net production is expected to keep upwith the latest pace, within a range from 44,000 to 51,000 barrels of oil equivalent per day.
Bseisu cut his teeth at Atlantic Richfield and was David Cameron’s British Business Ambassador for Energy from 2013 to 2015. He has said his goal is to turn EnQuest into a global company and then to sell it, but meanwhile there is plenty of scope from mopping up unwanted wells around Britain, as well as exploiting alternative sources of energy.
While, like any oil company, for the foreseeable future a large factor in the shares is the high price of the product, the attraction of EnQuest lies in the imagination and ability to deliver of its management. So far, so good and an enterprise value of £1.85 billion, three times the market capitalisation, gives a decent cushion against the constant threat of squalls.
ADVICE Buy
WHY An imaginatively managed and nimble operator that offers good value at the present share price
DS Smith
DS Smith’s share price has had a torrid 12 months, shedding nearly 200p to last night’s 272p. The reasons are not difficult to see, as energy costs soar, recession looms and the Russian invasion of Ukraine injects a still unquantifiable degree of uncertainty.
The company is one of the world’s biggest suppliers of packaging and, as few goods are sold unpackaged, its fortunes are tied to economic activity. Yet those headwinds have hardly hit the company’s results: revenue for the year to the end of April was up 26 per cent at £7.2 billion, pre-tax profits were 71 per cent higher at £378 million and corrugated box volumes were 5.4 per cent ahead, compared with 3.5 per cent growth in the previous year.
Investors have been understandably nervous about how well the group would weather the inevitable return of shopping in actual shops. The answer, so far, is not at all badly, partly because many of us still like deliveries.
Miles Roberts, Smith’s chief executive, told the annual shareholders’ meeting yesterday that the first four months of the present financial year had shown overall trading in line with expectations of strong growth and “continued price recovery”, or success in passing on higher costs.
The management’s emphasis has been on securing supplies of raw materials and hedging energy prices, and it expects a 2 per cent increase in volume sales this year.
As inflation takes off here, in Europe and in the United States, we can expect continued resistance to price rises and we have yet to see how far recession will eat into volume sales of the contents of Smith’s boxes. Investec expects the company’s earnings per share to rise from 29.8p to 39.6p in the next two years, taking the dividend from 13.5p to 16.3p. That would work out at a 6 per cent yield and 6.8 price-to-earnings ratio. At those rates the shares would be cheaper than those of Mondi and Smurfit Kappa, the company’s packaging sector rivals, which at the moment stand at a discount to Smith.
ADVICE Buy
WHY Company knows how to handle adverse conditions
