EnQuest has slashed the valuation of its North Sea portfolio by around £500 million as it prepares to implement deep spending cuts in response to the crude price plunge.
The valuation changes are focused on mature fields in the North Sea which EnQuest has decided are not commercially viable following the dramatic fall in the oil price triggered by the coronavirus and the start of a price war between Saudi Arabia and Russia.
EnQuest is focusing investment in the North Sea on assets which it reckons have long term potential, including the giant Kraken field off Shetland.
The retrenchment is likely to take a toll on jobs at the firm. EnQuest employs more than 1,000 people in its North Sea operation, including those working offshore and in Aberdeen.
The company’s move underlines the scale of the challenge facing the North Sea industry as companies brace for what could be a long period of low oil prices.
Brent crude fell to an 18-year low of less than $25 per barrel last month from $52/bbl at the start of March.
It has risen to around $33.50/bbl amid hopes that major producing nations will agree to curb production to support the market.
Energy ministers from member countries of the G20 club of wealthy countries are expected to meet today to try to finalise a deal.
Opec members and Russia are reported to have agreed to cut production by 10 million barrels daily in talks that ran into the early hours of this morning.
They want the US to follow suit.
Even if a deal sticks conditions are likely to remain much tougher than they were last year, during which Brent sold for an average $65/bbl.
EnQuest, one of the biggest independents operating in the North Sea, has made plans with the intention of ensuring it could break even in cash terms if the Brent price could averages $33/bbl this year and $27/bbl in 2021.
The company said it had recognised impairment charges on its oil and gas assets of $637.5m (£514m) mainly in respect of the Heather, Thistle and Dons fields in the North Sea.
EnQuest said last month that it had decided not to restart production from Heather and Thistle after rethinking its plans in response to the turmoil in the market.
The fields were shut in last year for remedial work. In November EnQuest said it was hoping to restart production from them during the first half of this year.
Production from the Dons fields lagged expectations last year following operational setbacks.
The decision to leave Heather and Thistle idle is expected to help EnQuest to achieve its cost saving targets.
Production from the Alma Galia development is expected to end in the second half of this year following a natural decline in output rates.
Announcing annual results yesterday EnQuest said it aimed to cut operating expenses by $190 million this year. The target has increased from $150m since last month.
The company said it planned to reduce spending on new assets by $110m compared with $80m previously.
It did not give any indication of how many jobs will be impacted.
Chief executive Amjad Bseisu said the cost reductions targeted would leave EnQuest well positioned to manage through a sustained low oil price environment.
He noted the company’s largest assets continue to generate meaningful operating cash flows, even at low oil prices, and, in the medium to long-term, offer low-cost development opportunities.
These include the Kraken heavy oil field that EnQuest developed East of Shetland and Magnus in the Northern North Sea which it acquired from BP in 2018. The company has bought a range of mature North Sea assets whose long term potential it felt was undervalued by their previous owners.
EnQuest lost $449m last year after accounting for the North Sea impairment charges, against $127m profit in the preceding year.
It cut net debt to $1.4bn last year, from $1.8bn.
EnQuest shares closed up 2.06p at 13.24p.
Source: The Herald
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