BofA Downgrades EnQuest, Prefers Kosmos and Tullow

Analysts from BofA Securities recently downgraded EnQuest to an “underperform” rating from “neutral.” This decision is driven by various factors, including the effects of UK windfall taxes, falling oil prices, and a high break-even oil price of around $70 per barrel.

Although EnQuest has made progress in reducing its debt by approximately $1.5 billion since the end of 2017, the company’s free cash flow generation is projected to face challenges due to lower oil prices, particularly within BofA’s base case scenario of $75 per barrel of Brent crude.

The downgrade highlights EnQuest’s relatively weaker position in the current market, especially given the persistent windfall taxes that continue to impact its cash flow. Despite achieving a target of less than 0.5 times net debt to EBITDA, analysts emphasize the difficulties EnQuest will encounter in discovering organic growth catalysts, especially in comparison to its competitors.

In contrast, Kosmos Energy receives a “buy” rating and a price target of $7. The company is praised for its robust growth trajectory, driven by production increases and lower capital expenditure requirements in the coming years. Analysts foresee a 30% uptick in production by 2025, largely due to the Tortue gas project, which is expected to be a significant contributor to the company’s prosperity. With a break-even oil price near $45 per barrel, Kosmos is well-positioned to generate meaningful free cash flow, even with dwindling oil prices.

Tullow Oil is also rated “buy” with a price target of £50, thanks to its strong potential for deleveraging and capital management, which contributes to a break-even price of around $45 per barrel. The company’s ongoing efforts to reduce debt are crucial to its positive outlook, predicting free cash flow yields exceeding 35% by 2025, even if Brent crude remains around $60 per barrel.

Harbour Energy has emerged as a strong player among European exploration and production companies, bolstered by a recent acquisition that has established it as the largest listed European E&P in terms of production, estimated to be around 500,000 barrels of oil equivalent per day. BofA highlights Harbour’s resilience, noting an 8% dividend yield that is sustainable even when Brent prices drop to $45 per barrel, making it a top pick for the firm due to its enhanced portfolio and effective navigation of lower oil prices.

Conversely, Capricorn Energy has been marked for underperformance, even after showing improved operational momentum in Egypt. BofA believes that Capricorn’s share price already reflects its positive trends, particularly given its high break-even point of approximately $60 per barrel. While the company has garnered positive attention for returning excess cash to shareholders through dividends and buybacks, its growth prospects seem limited by the current market environment.

Ithaca Energy holds a Neutral rating with a price target of £115. The recent merger with Eni has bolstered its near-term resilience, though this move is seen as a defensive tactic amid a challenging external landscape. Ithaca is expected to produce strong cash flow in the short term due to increased output following the merger, but its long-term outlook remains uncertain, especially with declining production and fiscal pressures from UK windfall taxes.