Canaccord cuts rating on Enquest to 'hold' from 'buy'

Canaccord Genuity cut its rating on Enquest to ‘hold’ from ‘buy’ and lowered its price target to 32p from 50p on Tuesday.

The oil and gas company on Monday said it is in talks to farm out a 20% working interest in the Kraken development to Delek Group.

The deal would reduce Enquest’s ownership of Kraken from 70.5% to 50.5%, and in exchange Delek will share the project capital expenditure from 1 January 2016.

“In terms of balance sheet management, we think this deal - if it completes - makes good sense,” said Canaccord.

“However, with no upfront entry costs for Delek, the terms have a negative impact on our asset valuation.”

Canaccord believes a deal could help reduce net debt. EnQuest has about $2.1bn total debt facilities.

The broker said without the farm-out it thinks the company would be “very close to exceeding its debt capacity, a risk that would naturally increase if the project were to suffer delays from the current mid 2017 target for first oil and/or oil prices were lower than our assumption”.

“Consequently, while the Delek transaction does not look to be an appealing value proposition for EnQuest, it does provide some much needed balance sheet buffer room in the short term.”

Canaccord sees a good chance that a deal will be completed given the differing attractions to both parties. “For now, pending more detail and announcement that the farm-out is binding, we reduce our target price to 32p/share (from 50p) and we reduce our rating to ‘hold’ from ‘buy’.”

Shares fell 0.86% to 28.75p at 0916 BST.