As Trap Oil Group PLC collapses, is loss-making production threatening North Sea operators?

In any market crash, the first companies to suffer are the smallest, and those with unmanageable debt loads.

We’ve already seen the effects of ill-judged debt loads:

• Afren has been pushed to the brink and in my view shareholders are likely to be wiped out
• Premier Oil, Enquest and Gulf Keystone Petroleum appear to be struggling due to debt
• Tullow Oil — a FTSE 100 firm — suspended its dividend today

After watching oil rise by nearly 20% since the end of January, oil bulls might believe this is as bad as it’s going to get.

However, today’s news from AIM tiddler Trap Oil Group PLC (LON:TRAP) — and by proxy its much larger partner, Ithaca Energy Inc. (LON:IAE) — has convinced me there is almost certainly much worse to come.

Pumping cash down the drain

In case you missed it this morning, Trapoil admitted that although its sole producing asset, Athena, is now pumping oil again, it isn’t economic at $58 per barrel. Here’s what Trapoil had to say:

“… at the currently depressed oil price of approximately US$58/barrel the field is significantly loss making and the Company is currently incurring a cash outflow of approximately £380,000 per month after absorption of its share of the field’s operating costs.”

In other  words, the operating costs of this well are considerably higher than $58 per barrel. Trapoil had net cash of £7m at the end of 2014, but clearly this is fast disappearing down the drain — one year’s losses at $58 per barrel would be £4.6m.

In fact, based on Trapoil’s working interest production of 720bopd, my calculation suggest that the break-even price for this well could be as high as $85 per barrel.

Ouch. I had wondered whether Athena was profitable sub-$60, but I didn’t expect things to be this bad.

In my view, Trapoil is clearly toast: back in early December, I warned that the risks were high and suggested that I should already have sold. Subsequently, I did sell, and at the end of January, I replied to another investor on Twitter highlighting why:

@MullemanV Too risky for me — it’s an all-or-nothing shot in my view. Good luck tho

— Roland Head (@rolandhead) January 29, 2015

Who’s next?

Athena is operated by Ithaca, which is presumably losing money at the same rate as Trapoil. However, Ithaca also benefits from having around half of its production hedged at $102/bbl until the end of June 2016, which should help to offset these losses, assuming that all of Ithaca’s production isn’t losing money at a similar rate.

Ithaca is a much larger business, and Athena isn’t one of its biggest assets, but today’s news has sent Ithaca shares down by around 6%, and begs the question: how much more North Sea production is currently losing money?

In an interesting piece of timing, OPEC’s monthly oil market report for February, which was published yesterday, claimed that 15% of current UK North Sea production was uneconomic at current oil prices.

Today’s news has given that claim rather more credibility, in my view — there’s nothing like cold, hard figures to make reality hit home.

Alongside Ithaca, other mid-cap LSE-listed North Sea operators whose shares have slid by around 5% today include:

• Enquest
• Premier Oil
• The Parkmead Group
• Xcite Energy
• Cairn Energy

Interestingly, Faroe Petroleum — which is noted for its quality assets and mostly operates in the Norwegian North Sea, where the tax regime is more generous — did not lose ground today, closing broadly flat despite the 2% decline in Brent crude, which is now back down to $55/bbl for March delivery.

Are the firms above losing money on their North Sea production (or likely to when it starts up)? Are other operators, who I missed from the list, losing money?

Time permitting, I hope to take a more detailed look at London-listed North Sea operators later this week, to try and determine what their North Sea breakeven price might be, and who might be hemorrhaging cash at today’s prices.

Update 18/02/2015: I’ve not had a chance to take this further yet, but this article by experienced oil man Steve Brown on Share Prophets provides a detailed insight into the rough breakeven costs for a number of key North Sea fields, including Catcher (Premier Oil), Kraken (Enquest), and Clair Ridge (BP). Well worth a read (you can also see an updated version of the main chart on Steve’s website, here).

Disclaimer: This article is provided for information only and is not intended as investment advice. The author has no financial interest in any company mentioned. Do your own research or seek qualified professional advice before making any investment decisions.