BofA downgrades EnQuest, favors Kosmos and Tullow

Investing.com -- Analysts from BofA Securities in a note dated Wednesday downgraded EnQuest (LON:ENQ ) to an “underperform” rating from “neutral”. 

This decision arises from a combination of factors, including the ongoing impact of UK windfall taxes, declining oil prices, and a high oil price break-even point of approximately $70 per barrel. 

Despite strides in reducing debt—about $1.5 billion since the end of 2017—EnQuest’s free cash flow generation is anticipated to face pressure from lower oil prices, within BofA's base case scenario of $75 per barrel of Brent crude .

The downgrade of EnQuest underscores its relatively weaker position in the current lower oil price environment. Although the company successfully achieved a target of less than 0.5x net debt to EBITDA, analysts noted the headwinds EnQuest faces, particularly from persistent windfall taxes that continue to diminish its cash flow potential. 

Absent mergers and acquisitions or a substantial shift in market conditions, EnQuest is forecasted to encounter challenges in finding organic catalysts for growth, particularly when compared to its peers.

Turning to other companies in the sector, Kosmos Energy (NYSE:KOS ) stands out with a “buy” rating and a price objective of $7. Kosmos is recognized for its strong growth outlook, driven by production ramp-ups and reduced capital expenditure requirements over the coming years. 

The note mentions an expected 30% increase in production by 2025, with the key Tortue gas project poised to provide a considerable boost. With a break-even oil price around $45 per barrel, Kosmos is positioned to generate substantial free cash flow even amid lower oil prices.

Tullow Oil (LON:TLW ) also earns a “buy” rating with a price objective of £50. The company showcases strong deleveraging potential, supported by lower capital expenditure, which contributes to a break-even price of approximately $45 per barrel. 

Tullow’s ongoing debt reduction trajectory is central to its positive outlook, as the company anticipates achieving free cash flow yields exceeding 35% in 2025, even if Brent crude hovers around $60 per barrel.

Harbour Energy is flagged as a standout among European exploration and production companies, bolstered by a recent acquisition that has positioned it as the largest listed European E&P by production, estimated at around 500,000 barrels of oil equivalent per day. 

BofA notes Harbour's resilience, with an 8% dividend yield that remains sustainable even at Brent prices of $45 per barrel. This combination of factors has made Harbour a top pick for BofA, thanks to its strengthened portfolio and ability to navigate lower oil prices effectively.

On the other hand, Capricorn Energy has been marked for underperformance, despite experiencing improved operational momentum in Egypt. 

BofA views Capricorn’s share price as already reflective of its positive trends, especially considering its high oil price break-even of approximately $60 per barrel. Although the company’s return of excess cash to shareholders through dividends and buybacks has been positively received, its future growth appears constrained by current market conditions.

Ithaca Energy (LON:ITH ) is currently rated Neutral, with a price objective of £115. The company’s merger with Eni has enhanced its near-term resilience, but this move is perceived as a defensive strategy in light of a challenging external environment. Ithaca is expected to generate strong cash flow in the short term due to increased production from the merger. 

However, its long-term outlook remains uncertain, especially in the context of declining production and fiscal challenges posed by UK windfall taxes.

Source: Investing.com