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Share Price: 16.80

Bid: 16.72

Ask: 16.94

Change: -0.12 (-0.71%)

Spread: 0.22 (1.32%)

Open: 16.60

High: 17.34

Low: 16.60

Yest. Close: 16.92

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Hi Londoner7,

First things first: let me go back to my numbers from yesterday.
You mention a new RCF of $750M. Well, when you add $275M to be paid for GE ($325M - $50M economic profit since 1 Jan) to the more than $200M balance of the RCF by the end of H1 and to the BP vendor loan of c. $80M(?) and you subtract $50M from the OO, out of the new $750M you are left with $245M max. But, yesterday I forgot that the Sculptor loan is going to be paid off with the new RCF funds. So, that is another $40M, which is my optimistic case for the balance of that loan at the end of H1. So, c. $200M is AB's bidding budget... I do not know BP's 2P reserves from its WI in the Andrews field. There might be enough money to make a bid or not...You would know better than me.

You come across as being very impressed by the CVs of the 4 individuals in the Technical & Resource Committee. They indeed have good CVs. But are they in there to collect their fees or because they do really believe in ENQ? For me evidence for the latter would be the chairman owning 1M shares, and each of the others half of that number...

I now understand what you meant: "full repayment alongside a renewed RCF and bonds adding up to c£1B". If ENQ's new RCF is for $750M, as discussed above gross debt at the start of H2_2021 would be c. $2050M. And if I understood correctly your projection is that by 15 October 2023 it would have been brought down to $1B, the amount of the 2023 issue of bonds and the 2023 RCF. FCF of $1050M in 27 months should be doable even if some minor stuff happens to the assets operated by ENQ.

I might take a punt in the odd highly leveraged business, but I do not make major investments in highly leveraged businesses. And that is why I would prefer that ENQ would never have more than $1B of gross debt given its size and assets. It really has sailed to close to the wind several times... But, as you know better than me, you are riding the right horse. Let us just hope this is not a rodeo horse...

You write you are very impressed by the CVs of the 4 individuals in the Technical & Resource Committee. They indeed have good CVs. But are they in there to collect their fees or because they do really believe in ENQ? For me evidence for the latter would be the chairman owning 1M shares, and each of the others half of that number... In a business where the CEO is the largest shareholder the board will do as they are told (Why did Laurie Fitch leave?). I do like businesses where the CEO has a large stake, but...

I would be happy to discuss the PMG and GENL topic further and/or provide more gory details of my ENQ numbers, but in this bb such discussion will only irritate people further, and I do not want to filter any additional posters... I am happy to discuss further via email, l3traderuk a gmail account.

ATB

L3Trader, thanks for this morning's additions, which answer my query from last night. But I'd like to comment on those before following up on your posts from yesterday.

Your use of derivatives surprised me - those must take some watching and of course there are stop loss tools. But good you see Enquest up there in your high leveraged oil company stakes - I wouldn't want to be on the wrong horse. ;-)

I restrict my direct holding investment horizon to UK listed companies. I use a mix of buy and forget funds to cover ex-UK, particularly tech, on which I commented on another board just this morning.

Yes, your choice of GENL does surprise me, but I don't know enough about the company to comment.

On the timing of the RCF repayment, I do expect it to be repaid before the bond due date Oct 2023. I believe JS said exactly that, but perhaps some debate around the detail on the bonds repayment - full repayment alongside a renewed RCF and bonds adding up to c£1B. I have the gist for my forecasts, and I'm not too bothered about the detail. But I suspect you've raised this because you question Enquest's ability to afford another asset. You might be right. This is an area of your post I found interesting. I'll check out your numbers and get back to you.

I saved the best till last. Luck, skill and Tom Cross (Dana/PMG). We are clearly alike in our interest in this area.

I've long believed that luck plays a big part in the oil sector, whether through exploration success or the timing of investment in long term projects in a volatile oil price environment. The question then, is how much weight to put on skill and experience?

I too followed Tom Cross into PMG with a small investment in 2014 (at a time of $100 oil) and an even smaller investment in 2018, just to maintain my interest. In total it represents <0.1% of my portfolio, so doesn't keep me awake at night. Was Tom just lucky first-time round? I think he's still sufficiently in the game to show he can do it a second time.

Of more relevance here is AB's attributes. Like many senior people in the oil industry, in founding Enquest, AB saw the chance to forge his own path in the industry. Low barriers to entry and a plentiful stock of oil in the ground have tempted thousands to do the same.

It doesn't now matter to me whether AB has the same level of skill as TC or not. In AB I see a man who has learnt some hard lessons through new developments like A/G and Kraken, and he has plenty of ‘skin in the game’. All indications are that he will not follow that path again. From now on I expect it to be acquisitions like Magnus and Golden Eagle, organic development and expansion of Malaysian opportunities.

Reading the latest AR I was further encouraged by the formation of a Technical & Resource Committee within Enquest, whose four members have impressive CVs.

A lower risk plan, and an experienced team in place.

Hi Londoner7,

I am sure AB would be delighted with that award, a 'Gold Star' from the OGA for NS operator of the year. The question is: does he deserve it? -:)

What I meant is that my criteria to decide which medium or small size oil firm to invest in has a major focus on the operational side of things. This brings me to the ever present question: was a company's past performance driven by luck or skill?
In the context of this industry luck is very much aligned with the oil price. I can play the oil price cycle by investing in derivatives which i have done repeatedly in the past.
But, let me answer your main question head on: I am not looking at any higher leveraged oil company play on the oil price than Enquest. There might be some out there. I do not know. I limit my search to looking at a few companies, as I spend most of time working.

Modestus and gkb47 have at some point kindly posted some suggestions of companies they saw as good investments. Some of the ones the former mentioned were Canadian companies.

Anyway, I am looking at starting or adding to my position in a variety of different companies that are not so leveraged as ENQ. One I first invested in a couple of years ago is GENL, and I might add to my holding. By now you already know me: yes, there are some questions I have about Genel... their most recent bond issue (9.25% interest)... governance... Kurdistan... But GENL has a net cash position (a plus for some people, a minus for others!), and is owed more than $100M by KRG, which I expect to be all repaid this year given the agreement in place and current oil prices. That cash will add to the revenue it will get from its 2021 production, which will be above last year's level. In addition, it meets Pelle's litmus test for being a candidate to one's portfolio. Am I expecting GENL's SP to double this year? I am not. But, I am not expecting ENQ's SP to do that either, even from current levels (although I would like to be wrong)...

Let me return to my question above, and bring in Therapist's question about PMG (to which my answer is the same as yours). I first took a small punt on PMG close to a decade ago. It was based on me coming to believe that its CEO had been the main driver of DANA's success, rather than him having just been lucky. That belief was actually much reinforced by several face to face conversations w/ a relevant shareholder of PMG. Yet, the evidence from PMG's performance so far is that its CEO's success at Dana was actually down to luck.

Let me go back to your point: I agree that FCF generation as the best measure of success. But when considering several companies in the same industry I put a lot of weight on the skills of management, because luck (i.e., industry cycle related
FCF generation) benefits all companies in the same way.

You write:"elatively clear outlook to the repayment of the bonds in Oct 2023". I assume you presume bonds would be repaid before the new RCF, correct?

AT

Hi Londoner7,

Yes, it seems I've been in ENQ longer than lots of people, lured by the promise that Alma/Galia was going to be fixed and that Kraken would bring the rewards for all those who came on board before me. I have only to pay a "dividend" to the company once, unlike others who have contributed already twice and are waiting to open their wallets once more. Third time lucky they say -:)

You ask what has been Enquest’s most profitable deal or project? You may be right that it might be Magnus. But, if you look at the figures the Acquisition case NPV_10 at 1.1.17 was $254M with POO at $75/bbl. But we know POO has not been $75/bbl since then. So, NPV will be much lower. Why do I pick the acquisition case? Because that has the production profile closer to the production data so far, which has been quite volatile and unreliable. (Note that the CPR case
NPV(10) on 1.7.18 at $60/bbl was $503M, but the production has been lower than that projection. You write you are the eternal optimist. My optimism about Magnus has faded away and that is why I use the Acquisition case until AB can show me the money (actually the oil). I suggest you go back and you read the TU/HY/EY RNSs since Magnus was purchased. For the most part it is a collection of the most diverse operational issues that happened and are then claimed to have been fixed by the time the RNS is issued. Of course, the reality is the opposite. To illustrate my point I could provide the average yearly variance of monthly production figures in the last few years and compare it with other oil fields that have been in operationfor a long time like Magnus. That would most likely show how good ENQ is when it comes to operational efficiency. As an aside, let me add that there is really no excuse for the production to have declined in 2020. There were two new wells. That should have kept production at or above 2019, even with the natural decline. Basically, BP got $400M for the asset and will collect 37.5% of whatever FCF comes out of Magnus (well below $1B in the most recent acounts, using POO at $60/bbl). Magnus is just a piece of the puzzle, but I note that several others out there (more recently Walter479) have expressed their disappointment with Magnus.

Let me answer your question: from an operational point of view Scolty/Crathes has been the more successful project. And Kraken might surprise us. I had ignored the reference to the EOR with polymers injection, but after your post looked at Ithaca and saw an extra 40MMboe at a CAPEX cost of $10M per MMboe. Not bad at all. But I wonder what extra 2P reserves would polymers injection bring...

Disclaimer: Needless to say all the above is not a view that ENQ's current SP is too high at the moment. Even w/ the production levels at the moment the SP might offer a good return in the short term. But, I would bet against Pelle getting his income cheque from ENQ in the post anytime soon.

ATB

Hi Londoner7,

Thank you for the Andrews field data.

Let me clarify my remarks. I did not suggest that ENQ should not bid for the Andrews field. What I meant is that I do not see a need for ENQ to be the winning bidder of any asset sales at the moment. And, so it must be with discipline rather than intent of winning the auction at any cost, if it wants to avoid the winner's curse, which by the way is not a certain outcome the winner is confronted with, but a probabilistic one, as was observed by petroleum engineers when looking at bidding data of leases in the US half century ago. This type of asset sales is now very well understood from a financial point of view.

We know that at the end of 2020, ENQ was desperate for a purchase, because it needed to combine that purchase with the refinancing of the RCF that was not going to be able to repay when it was due. So, my presumption is that in all assets for which it bid, its bids were more aggressive (higher) than it was expected given the POO at the time. It might be that the GE turns out to be a good one. But, unlike others, I measure success from an operational point of view, i.e., how much oil it can eventually produce, not the price at which it sells its oil. I know how to invest to play the latter w/out concentrated execution risk. I do not need to buy ENQ shares to play the oil price supercycle theme. There are other more attractive investments out there.

Since GE has been acquired there is no need to buy other assets, unless you get a good price for them.

You mention a new RCF of $750M. Well, when you add $275M to be paid for GE ($325M - $50M economic profit since 1 Jan) to the more than $200M balance of the RCF by the end of H1 and to the BP vendor loan of c. $80M(?) and you subtreact $50M from the OO, you are left with $245M max. I do not the 2P reserves of Andrews that correspond to BP's WI. There might be enough money to make a bid or not.

You expect AB to walk away if he does not get a good price. I am not so sure. He has shown to be a gambler by taking on very risky (in terms of POO required to BE and/or from an operational point of view) projects like Alma/Galia and Kraken, and by not hedging properly.

I wish he read your words of what ENQ should be: " Enquest business model I don’t see Olympians sprinting down the track for a sub 10 second time, I see the octogenarian competing in the 50-yard dash, usually alone – you know, often the final item in the news bulletin. Will he make to the line before something gives?".

Patience can bring huge rewards. Sometimes one has to wait years, many years, even decades, to buy some physical assets one would like to buy at a price that makes sense. And then suddenly, you can make a handful of such purchases in a couple of years. And the price that you pay is what really drives the returns from your purchases.

ATB

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