Economists have been fretting for ages about North Sea oil running out. But although output is running at only a fraction of its 1990s peak, the surge in crude prices and the introduction of advanced technologies have encouraged a new wave of interest.
In September the government announced the introduction of a brown field allowance'. This promises to take up to £160m off the tax bill of operators developing mature fields. Enquest should be one of winners.
As Britain's biggest independent producer in the North Sea, the firm is an expert at eking out the very last drop of hydrocarbons from older fields. Output has doubled since 2008 and is set to jump further by 2014, even after the firm ceded 35% of its Alma/Galia field to the Kuwaiti National Offset Company in May in return for a $500m investment.
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Enquest owns a substantial oil base of around 110 million barrels of P2 (proven and probable) reserves, and a similar amount of contingent resources. The former alone is equivalent to more than 13 years production at current rates. I wouldn't be too surprised to see the P2 count move higher, as the tax breaks I mentioned should improve the commercial viability of its fields.
The new allowance will defer the point at which the company starts to pay tax and lengthen the life of its assets. Moreover, the fact that the firm's engineers are very good at increasing recovery rates could provide a huge fillip to reserves.
Enquest (LSE: ENQ), rated a BUY by Goldman Sachs
There are plenty of reasons to expect the share price to rise. For example, positive news is expected soon from drilling at Klidrummy, and its Kraken heavy oil field (the firm has a 60% interest) has a good chance of being reclassified as P2 in 2013. The company is also well positioned to pounce on and buy or merge with rivals, with net cash of $93m and another $900m credit line.
Despite the high crude price, increasing numbers of smaller wildcatters and explorers are running low on capital, as lenders withdraw vital bank facilities. This has led to some rich pickings, as many quality assets have been forced onto the market at low prices.
I value the stock at $11 per barrel for its 2P reserves and another $8 for its contingent resources. Adjusted for $181m of decommissioning costs and $93m in net cash, that gives an intrinsic worth of about 150p per share. Like its peers, the firm is exposed to the volatile crude price, plus currency swings and possible exploration setbacks. On the flipside, it operates in UK waters, which are far less risky than many other parts of the globe.
Goldman Sachs has a price target of 194p, with the next trading statement due out in mid November.
Rating: BUY at 120p
Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments. See www.moneyweek.com/PGI or phone 020-7633 3634 for more information.
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