Penny stock EnQuest (LSE:ENQ) released an operations update today. Let’s take a closer look at the update and recent events. Could there be an opportunity to buy cheap shares in this growth stock for my holdings?
Oil prices on the up
EnQuest is an offshore oil production firm that operates in the UK North Sea, and Malaysia. Formed in 2010 through the combination of assets of Petrofac and Lundin Petroleum, it added its Malaysian assets in 2014.
Penny stocks are those that trade for less than £1. As I write, EnQuest shares are trading for 20p. At this time last year, the shares were trading for 12p, which is a 66% return over a 12-month period.
Oil prices are currently at seven-year highs. The pandemic in 2020 caused oil prices to plummet as demand fell and stock markets crashed. Prices have continued to climb as the world economy has attempted to kick start and demand has increased.
Penny stocks have risks
EnQuest is a small fish in a large pond with many players involved. This means it can often be out-muscled or outmanoeuvred in terms of production and be beaten to the best drilling assets. This can lead to performance being affected as well as any shareholder returns.
The oil market at the moment looks quite volatile. Supply chain and production issues have led to fears that demand is currently outstripping supply. Smaller firms, such as EnQuest, are those that suffer first due to their lack of cash, size, and operational ability.
Recent performance and outlook
EnQuest’s 2021 operations update and outlook released today was mixed, in my opinion. The firm’s average production of oil barrels stood at just over 44,000. This is significantly lower than 66,000 in 2020. Net cash came in at a handy $395m and net debt reduced too, both of which are positive.
In EnQuest’s last update, it mentioned production issues at two of its prominent sites, Kraken and Magnus. I believe these disruptions have contributed towards the overall fall of production.
Despite issues, EnQuest has taken steps to mitigate the production issues and its sites mentioned and recently acquired a new asset, Golden Eagle, to help boost performance and growth. This acquisition cost the company $325m. Any penny stock that is able to complete such large acquisitions warrants my attention.
The outlook ahead is bright despite recent issues, in my opinion. Rising oil prices will boost the bottom line and its new asset could provide a timely boost after a difficult 2021.
EnQuest shares are dirt cheap, but there is a lot of uncertainty involved and recent market issues, including supply chain constraints, coupled with EnQuest’s small slice of the market put me off investing my hard-earned cash. I believe there are better penny stocks out there that could offer me a superior return on my investment. I would not add the shares to my holdings at current levels, but I will keep an eye on developments.
Jabran Khan has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
