London-listed oil and gas independents’ hedging strategies will help navigate 2020 turmoil

Source: press release, 18 June 2020

2020 production hedging for London-listed independent oil and gas companies (source: Globaldata)
2020 production hedging for London-listed independent oil and gas companies (source: Globaldata)

London-listed independent oil and gas companies such as Tullow Oil, Cairn Energy, Premier Oil, EnQuest and Genel Energy will continue to face hurdles in sourcing adequate financing for new developments and exploration activity as weak oil and gas prices dent their upstream businesses, according to GlobalData, a data and analytics company.

Dwindling returns for investors and market scepticism caused by yet another oil market downturn means private financing is becoming increasingly difficult to source, particularly for smaller companies with a poor cashflow outlook. With unattractive recent stock price performance and weakened balance sheets, capital raising will be increasingly challenging to these companies as many have large debt-to-equity ratios and their funding for upstream activities is heavily reliant upon private finance and through equity offerings.

Conor Ward, Oil & Gas Analyst at GlobalData, comments, “Both Tullow Oil and Premier Oil are expected to be highly impacted in the current oil price environment as reserve replacement ratio over the last couple of years has struggled. These two are also some of the most heavily reliant upon private financing and have seen debt to equity ratios rise in 2019.”

Ward continues, “Tullow Oil recently decided to sell off its assets in Kenya and Uganda in order to reduce debt. However, its upstream cash flow is highly sensitive to price fluctuations – though, the company has made the key strategic move of hedging the highest share of 2020 production among the peer group.”

“The ability to hedge a good proportion of 2020 production volumes at reasonably strong price levels will act as a safety net to the current environment, helping navigate through short-term shocks such as we have seen in the first half of the year,” adds Ward.