Comment: EnQuest confirm’s North Sea’s long future

George Kerevan

George Kerevan

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NEWS of the giant £4 billion Kraken oil field development east of Shetland was not unexpected – indy oil producer EnQuest has been biting its corporate fingernails for months in anticipation of a go-ahead from the Department of Energy and Climate Change.

Nevertheless, the formal announcement yesterday triggers one of the UK’s biggest capital investment programmes and underlines the fact that the North Sea is far from dead as an oil gusher.

However, let’s not be seduced by the euphoric headlines – there are some hard lessons to be learned from this story. A good half of the £1.12 billion upfront capex that EnQuest will shell out to produce the first barrel of Kraken oil in 2016 is being spent in Asia.

The massive floating production and storage vessel required to tap the Kraken field is being built for EnQuest by the Malaysian shipbuilder, Bumi Armada.

Given last week’s row over BAE System’s Clydeside yards, we need to ask why Scotland seems incapable of building these high tech oil platforms? Note: EnQuest acquired operating licenses in Malaysia last year, which suggests the Bumi Armada order – Bumi has never built vessels for the difficult North Sea sector – has a political side. Surely two can play the same game?

Nevertheless, EnQuest (market cap circa £1bn) deserves brownie points for its business model. The corporate face of the oil and gas industry is changing fast, with the industry giants de-merging their divers prospecting, producing, refining and retailing businesses. With specialisation now the name of the game, EnQuest (created only in 2010) has carved out a niche in the North Sea, where it focuses on extending the life of mature oil fields, a relatively low-risk business in a politically safe region.

While other oil independents have concentrated on serial wildcatting – a high-risk, high-return business – EnQuest has quietly built up a solid portfolio of assets in the North Sea that should yield long-term returns. That makes it attractive to retail investors. The Kraken field increases EnQuests oil reserves by 50 per cent, and is expected to generate £9bn of revenues over 25 years.

EnQuest’s share price rose at the start of the year but has been lacklustre since the spring, even with the Kraken announcement. This probably reflects slightly disappointing half-year results, caused by lower oil prices and increased borrowing to fund acquisitions. But the company has a strong revenue stream (it’s an oil producer!), increased proven reserves (the Holt Grail of the sector) and comfortable credit lines.

The interesting question is whether EnQuest could eventually become a target for one of the bigger players, or one of the serial wildcatters? Edinburgh-based Cairn Energy owns 25 per cent of the Kraken field and is cash rich after the sale of its Indian assets. Might Cairn be tempted to secure more of the Kraken revenue stream?

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