Two FTSE Listed Stocks Combatting the Disruption Caused by Coronavirus Outbreak: EnQuest PLC and Diageo PLC

During this unprecedented time, it is difficult for companies to forecast the utter impact of Covid-19 crisis. However, the inevitable aftermath of coronavirus pandemic has affected the businesses across the globe, directly or indirectly. Moreover, the oil price slump led by a price war between Russia and Saudi Arabia, weakening the profitability further. Hence, the businesses are forced to slash their operating cost and capital expenditures to preserve liquidity. Let’s discuss an oil and gas producer, EnQuest PLC, which has released its full-year results for the financial year 2019 today. Also, we will through light over the latest (released today) business update of a global alcoholic beverage company, Diageo PLC.

EnQuest PLC (LON:ENQ)

(Source: Company Website)

EnQuest PLC is a FTSE SmallCap listed, oil and gas production company, with operations in the UK North Sea and Malaysia. The Company was formed in 2010 when the Petrofac had merged its UK North Sea assets with Lundin Petroleum.

Strategic Vision to Acquire, Produce and Appraise

EnQuest operates with maturing and underdeveloped hydrocarbon assets in the UK North Sea and Malaysia, with focus on the following four aspects:

• Operational excellence: The group focusses on enhancing hydrocarbon recovery with paramount to safety and environment concerns.
• Value enhancement: It provides innovative structures in place to optimally utilize the assets with progressive growth in its value.
• Differential capability: It ensures a right mix of technical capabilities with cost-efficiency to realize the best possible value from underdeveloped and maturing assets, with a focus on future growth by maximizing economic recovery.
• Financial discipline: It focusses on positive cash flow generation by allocating the capital effectively while maintaining efficient capital structure and liquidity in place.

(Company Website)

Recent Accomplishments to Weather the Price War

9^th April 2020: EnQuest has slashed its operating costs by an additional $40 million to $335 million from the last guidance, while senior management has accepted a voluntary cut in pay by 20% to combat the oil price slump phase.

19^th March 2020: The group has announced the appointment of Howard Paver, as a Non-Executive Director, which came into effect from 31^st March 2020.

4^th December 2019: The group has received a production sharing contract (Block PM409) in partnership with PETRONAS Carigali Sdn Bhd, wherein EnQuest will hold the interest of 85%. Block PM409 is nearly 1,700 km2 in area and located in water depth of 70 to 100 metres in offshore Peninsular Malaysia.

Financial Highlights for FY19 – Growth of 24% in Production and Material Debt Reduction

• On 9^th April 2020, the company announced its results for the year ended 31^st December 2019. EnQuest’s average production surged by 23.7% to 68,606 Boepd, reflecting the production was towards the top end of the guidance range. Led by the increase in production and the favourable impact of the ENQ’s commodity hedge programme, the revenue for FY19 stood at $1,711.8 million, an increase of 42.5% from $1,201 million in FY18.
• EBITDA increased by 40.5% to $1,006.50 million in 2019 as compared with the previous year. As a result, cash generated by operations rose by 26.1% to $994.6 million as compared to 2018, with $368.5 million of free cash flow. Cash capital expenditure for 2019 stood at $237.5 million (FY18: $220.2 million).
• On 31^st December 2019, the cash and available bank facilities were $288.6 million, with a decrease in net debt of $1,413 million (2018: $1,774.5 million). In the same period, the net debt to EBITDA was reported at 1.4x.
• From the perspective of operations, the Year to date production performance stays decent with the company’s day-to-day operations ongoing without being substantially impacted by a coronavirus. On the end of February 2020, the outstanding credit facility of $425.0 million, cash and available facilities of $268.2 million, and net debt of $1,368.1 million.

2020 Outlook

Full-year production guidance stays in the range of 57,000-63,000 Boepd. For 2020, the expected free cash flow breakeven declined to $33 per Boe. The three largest assets include Magnus, Kraken and PM8/Seligi, continue to generate significant operating cash flows. As per the low oil price environment, the company is taking critical action to decrease operating and capital expenditure in the year 2020 and beyond. While these actions represent the reduction in the production anticipations, improvement in free cash flow and with no senior credit facility amortization due in 2020 and long-dated bond maturities.

Share Price Performance

Daily Chart as of April 9th, 2020, before the market close (Source: Thomson Reuters)

ENQ’s shares, at the time of writing before the market close (at 8:52 AM GMT) on 9th April 2020, were trading at GBX 13.27. Stock's 52 weeks High is GBX 30.00 and Low is GBX 7.07.

Diageo PLC (LON:DGE)

(Annual Report, Company Website)

Diageo PLC is an FTSE 100 listed multinational alcoholic beverage company, which is operating with over 200 brands and having a presence in more than 180 countries. The group manufactures its brands from over 150 sites globally and employ approximately 28,400 people.

The group holds a brand portfolio of diverse beverages including Vodka, Rum, Scotch Whisky, Liqueur, Beer, among others. Their brand consists of Johnnie Walker, Smirnoff, Captain Morgan, etc.

Strategy to Become the Sustainable Consumer Product Company

• Ensuring the availability of reserve brands in the major outlets by building the reparation with trendsetter bartenders and consumers.
• Driving the successful future by continuous innovation and creating the brand of tomorrow.
• Driving growth by investing in mainstream spirits having sizeable opportunities.
• Leveraging market insights to invest resources at the right place.
• A Cost-effective approach to fuel future growth.

Recent Developments to Combat the Covid-19 Challenges

• 24^th March 2020: Diageo had launched three bonds - €750 million bonds due 2027 (coupon rate 1.875%), £300 million bonds due 2029 (coupon rate 2.875%) and €1 billion bonds due 2032 (coupon rate 2.500%). The proceeds of these bonds will be used for general corporate purpose.
• 24^th March 2020: The group announced that Debra Crew would hold the position of President Diageo North America from 1 July 2020.
• 28^th February 2020: The group had acquired an additional 5,075,000 shares in United Spirits Limited (USL) which has taken their total stake to 55.9% in the USL.

Trading Update – Reflecting the Impact of COVID-19 Outbreak

• In March 2020, the widespread containment actions, including the closure of bars and restaurants, put in place by governments across the world. From this COVID-19 outbreak, there are having a significant impact on the performance of the business. The company is also working closely with the customers and suppliers to minimize business disruption. The group is donating alcohol for making over 8 million bottles of sanitizer.
• In the current trading environment, the management said that the social distancing measures had been introduced in several of the markets, including the closure of the on-trade channels. Due to the restaurants and bars have started to gradually re-open, the company is beginning to see a decent return of on-trade consumption in mainland China. In North America, most of the states have closed its bars and restaurants in March as well as closures of on-trade premises in Europe. In India, the company has closed its on and off-trade channels along with the production facilities, due to nationwide lockdown. Moreover, the on-trade channels have been impacted in the main markets in Africa as well as the group has closed its two production sites in Nigeria.
• During the short-term period, the company is reallocating resources across the group and reducing discretionary expenditure. The group has delivered a strong balance sheet, with 2.8 times of adjusted net debt to EBITDA ratio. As earlier announced, the group has completed the issuance of new sterling and euro bonds for a total consideration of around £1.9 billion.

(Annual Report, Company Website)

Share Price Performance

Daily Chart as of April 9th, 2020, before the market close (Source: Thomson Reuters)

DGE’s shares, at the time of writing before the market close (at 8:52 AM GMT) on 9th April 2020, were trading at GBX 2,600.10. Stock's 52 weeks High is GBX 3,633.50 and Low is GBX 2,050.60.

Outlook – Reflecting the Global Nature of the COVID-19 Pandemic

The company is withdrawing the guidance on group organic operating profit growth and organic net sales growth for the financial year 2020. During this challenging time, the topmost priority is to safeguard the health and well-being of the people while taking essential action to protect the business. Going forward, Diageo is expecting to generate decent organic net sales growth. The company expect that they will deliver the return to 4.5 billion pounds of capital to shareholders for the financial year 2020 to 2022.