Davy has forecast Brent oil will average $55/barrel in 2016 and said the revision would "adversely affect" the balance sheets of Premier Oil and Tullow Oil.
Davy updated its Premier Oil and Tullow Oil forecasts for its new Brent oil price assumptions on Friday.
It is now forecasting that Brent will average $55/barrel in 2016 (previously $70) and $70 in 2017 (previously $80). In a statement, it said this would “adversely impact” the balance sheet of both companies but to a greater extent at Premier Oil.
"Tullow should be over the hump in 2017, but oil price is important," it said. "Working in Tullow's favour is start-up of production from the TEN field offshore Ghana. "
Davy also said it expected Tullow to be "more proactive" on divestments in 2017. "At this stage, the TEN field will have ramped up and the border dispute between Ghana and Côte d'Ivoire should be settled; a final investment decision is also likely for East Africa, " it said.
“Our forecasts imply that Premier Oil will breach its financial covenants in 2016 and 2017.”
It said Premier could also sell assets to “help improve the balance sheet” and that management “has proven adept” at divesting non-core assets over the past two years. “But it needs bigger deals to have a meaningful impact on the group’s balance sheet,” it said.
Ultimately, according to Davy, the group will need to renegotiate financial covenants with its lenders, for which the commissioning of the Catcher oil field in 2017 will be “helpful”.
Davy’s valuation for Tullow is 438p per share (previously 542p) and for Premier is 130p per share (previously 250p). Its valuations assume an $80 per barrel long-run oil price and an exchange rate of $1.55 per £1.
