EnQuest downgraded by Barclays despite rise in oil prices

Barclays cut its price target on Enquest shares, the UK’s largest independent oil producer in the North Sea, and downgraded them from 'equalweight' to 'underweight', on the expectation that the funding options open to the company would dilute owners of the stock.

The broker slashed its price target for the firm's shares by 23% to 34p.

The downgrade comes despite Brent oil futures having recovered from the multi-year lows of $27.88 per barrel plumbed on 20 January.

“The company’s need for additional capital if oil prices remain $45-55/bbl through 2017 lead us to the conclusion that equity investors may face further pain before the company is optimally positioned to gain any of the potential upside that a rising oil price outlook can offer the North Sea developer” said analyst at Barclays James Hosie.

Enquest's leveraged exposure to an eventual oil price recovery was undeniable, yet far from unique in the sector, Hosie added.

He estimated that EnQuest required around $200m in additional capital despite a successful reduction in costs per barrel in 2016 of 45% compared to 2014.

That, he said, was because the firm had “minimal headroom to allow for operational issues or a slower recovery of oil prices”.

The company had held discussions, now terminated, with possible buyers for a partial divestment of its Kraken development in order to bolster the balance sheet.

However, according to the analyst buyers' unwillingness to assume higher oil prices in asset valuations meant that any sale could be dilutive to his 46p per share estimate of the company's core net asset value.

Furthermore, any transaction that reduced the company's reserves significantly would need to approved by its lenders, Barclays said.

The analyst applied a 25% discount to his estimate of the shares' core net asset value (NAV) to arrive at his new target price, reflecting the potential dilution of the company’s funding options.

Hosie forecast Enquest's earnings per share would recover to 0.28p in 2016, after a loss of 0.98p in the prior year, but expected the company's EPS to fall back into the red in 2017 to reach -0.22p.

The share price fell by 3.04% to 26.18p at 0947 BST.