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RBC takes back EnQuest debt warning but keeps heavy downgrade

Lower oil prices and downgraded performance sets EnQuest up for challenging period, according to RBC.
oil and gas operations
RBC's price target drops to 15p from 55p

EnQuest PLC (LON:ENQ) is actually not at risk of a covenant breach, RBC Capital Markets said in a note correcting itself.

RBC issued a heavy downgrade note on Monday though, whilst maintaining its new rating and target price, the bank issued a correction, setting the record straight on one aspect of its analysis.

READ: EnQuest sees 20% production growth in 2019 due to Magnus acquisition

“We published a note earlier incorrectly saying that there was a risk to the company's covenants, which we had wrongly identified to be 1.1x RCF/EBITDA,” analyst Victoria McCulloch said in the new second note.

“However, the two upcoming covenant tests (31 March, 30 June) require EnQuest to have a net RCF/ EBITDA of 1.5x or less, using a trailing 12-month EBITDA."

She added: “There is no risk of covenant breach under the updated RBC oil price deck.”

RBC’s downgrade sees EnQuest rated as ‘underperform’, previously ‘outperform’, and the bank’s price target moved to 15p, down from 55p (current price: 21.58p).

“System outages and equipment repairs on the Kraken FPSO continue to limit performance, which has led EnQuest to lower its production guidance for 2019,” the analyst said.

“Gross Kraken production is now expected to be 30-35,000b/d, which includes DC4 contributions but is well below the previous guidance for total field plateau production of 50,000b/d and our annualised expectation of 40,000b/d.

“Although well testing is now complete at all 11 producing wells, we believe that given the revised production profile there is a risk of a reserves downgrade alongside FY18 results on 21st March.”


-- Updated to reflect RBC's correction --

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