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At one point he said he had hedged all of 2020 production, but I think he made a mistake.
It's definitely q2,.... But perhaps he has the option to continue the variable hedge mechanism for 2H . He might be thinking oil prices will improve in Q3. Q2 is a write off, break even at best.
The US should reopen by 30 June 2020.
Thanks hitman. Then potentially kraken is evening out the rest so we are getting close to screen price
Hi Squif, what I think he said is as follows
They have hedged all of Q2 production. Not at a specific price like Q1, but a discount off the screen price. Ie if Brent is $32, they get say $25. Ie breakeven cashflow price. But if Brent moves up in Q2, to say $40, we get say $33. So slightly free cashflow positive. He wouldn't give the exact discount, it might be nearer $5, but it isn't as bad as the discounted prices on the open market which might be nearer $10 discount to screen price.
Kraken production receives better prices , ie bunker fuel qualities. Again, like above, it might be a floating variable hedge based on the screen price, rather than a specific price.
Hi hitman - missed ityesterdaybut did ab say anything about the discount? I think the hedges are covering us somewhat
Hi romaron - Thanks for your informative post. Our debt position is comfortable
Trump last night said he wanted prices at a level that supported energy jobs and the industry. He expected prices to rise in steps over time .For shale, that needs to be above WTI $50. I believe refiners are deciding to shut when utilisation hits 65% , so this will force US producers to shut in more quickly than they first envisaged. Again when demand picks up, refiners will be slow to restart given existing stocks and lack of storage. Perhaps it possible for prices to rise to $50, with refiners preventing US production increasing to where it was, and a global deal running all the way to 2022 supporting prices as well.
With $50, Enquest has a good margin to delever in 2021, with free cashflow at $27, but I am rather concerned about the non-Kraken discount today . Let's hope it's normalised by Q3 2020 and prices are near Brent $50, which gives us some opportunity to delever supporting a large rise in SP.
Most countries need oil prices at $50 or above to support the economy. G20 look like they see the problem too. Just a matter of time and seeing how Trump wants to play it out in terms of when he wants to restart the US economy. I assume it's when they have produced so many new ventilators that the benefits of restarting outweigh the costs of closure.
Notably that Venezuela has less than 90 ICU units for 32m people.
Another consideration is that we do not know the level that holders of the HYNs are in at. They don't appear to be playing with the equity (unlike ARCM with PMO). Initial buyers are probably long gone but there must be a few that are in at close to the 30 mark and are actually willing the company to do well and exit either at maturity or close to par. Most funds will have triggers that mean they bale out of debt when certain points are reached. They are far less risk tolerant and once they're gone you are left with the more aggressive institutions who thrive on picking out the weakest. We are a long way from that situation but that wasn't the case in 2016 when some would have become debt holders. They may have exited in the increase from 2016 so we may be going through a "rinse and repeat" sequence. I can't access the HYN but have had good success with the Retail Bond over the years. There are many equations for valuing a company's equity but the bond's are far easier; if solvent to maturity the bond should trade around par.
We don't know who is holding our debt. The company probably does. Like equity it can be passed on and after 2016 I imagine the original holders are few. It probably means that a significant percentage is in potentially less friendly hands but as the INEOS story tells us the world of debt is not your best friend in times of stress and is a mixture of the top banks and the greediest vulture funds.
I follow the debt and annoyingly the HYNs weren't updated yesterday and the last close was 8 April $33.048 (2 April $25.94) because the Retail Bond closed at 43.332.5 (8 April 34.50). I'm assuming the HYNs traded yesterday but you know what they say about assuming. When I next get a HYN price I expect it to be broadly in line with the RB. I'd imagine that a chunk of the HYNs are in the hands of those that deal in "junk bonds" and that doesn't augur well for refinancing if things aren't going well. These guys like to deal with a gun to the head of the borrower but we still have plenty of time on our side and these guys won't be the ones that we go to for refinancing.
The current cost of our debt isn't in anyway expensive and comfortably lower than the JB 10 per cent. I imagine there are time scales for renewing loans and other contracts and 1 year is commonly used but the world of bonds may be different but it is only when you breach covenants that you're really in trouble so we need to really only concern ourselves with the SFA for now which is dependent on a modest rise in the price of oil.
Debt wise we are more or less in control of our own future. The equity market acts as though we are in the grip of death spiral financiers. That is not the case and all credit to the EnQuest management team who don't need to be pushed around by capital markets at this difficult time. Headwinds are one thing but these are bleedin' cyclones!
Build it and they will come.
Hi squif - you're gonna regret asking my opinion on debt, waivers and covenants. I'm no expert but credit limits have been the bane of my life and in my City times you were never far from them. Forget buying back bonds. Where would the company get the money from and what restrictions are already in place?
The world is run by money and even Forex is dictated to by bank rates and Government borrowing. These boards almost always ignore the impact of debt and whilst I'm not an expert I know more than most (in the land of the blind the one eyed man is king).
Equity is subordinated always to debt which is why analysts love companies with low levels of debt. This conveniently misses the point that if you can make 20% profits and borrow at 7% then why not? As Jim Buckee said "debt is your friend, explore out of equity, develop out of debt". he also said make sure your cost of capital is less than 10 per cent.
Rather than pontificate I went back to a well documented instance of an even worse situation faced by INEOS in 2008. They were being held to ransom by a group of banks and hedge funds (15%) when they tried to refinance. Their bonds were quoted at 10 cents in the dollar. In 2008 oil had moved from $145 a barrel in July to $30 in December. They held large stocks of oil and suddenly had no market. INEOS wanted debt holders to temporarily suspend covenants and battle lines were drawn. Eventually INEOS prevailed but at some cost, Euro 800 million in additional fees and interest over the next 3/4 years. In July 2009 INEOS went back to the credit rating agencies with the new deal and asked them if they could rerate the company's debt as they had Euro 750 mio to repay within eighteen months. Credit markets improved and they sold a new bond and used the proceeds to pay down some of the bank debt. Today INEOS is covenant-lite after the gouging it received from the debt holders.
I mention this as background because I'll do another post and this time I am pontificating.
It always takes a day to digest the Enquest reports. I think on the whole this was a very good update, showing quick, decisive and bold decisions in the face of low oil prices. AB had an uncharacteristically determined tone in his voice - I think being able to read from a manuscript on a telephone is a lot more comfortable for him. Some of the questions left a lot to be desired and I think AB showed his frustration at their lack of understanding of both Enquest and for some the oil industry. I didnt hear that idiot from RBC but maybe he has been moved on to the post department. What a crock of s*** his analysis was. 1p target price. I think the writedowns were necessary but a heavy blow to the balance sheet but then again people were probably not valuing them anyway. It was good that AB made clear that thanks to a great Q1 Enquest has a cash break-even of $25 for the rest of the year and $27 next year. With my simple maths and a production of 57k a day for the remainder of the year and an average realised price of $35 (including Kraken premium which AB assured was very much in tact) we can generate positive cash flows of $150M. I can imagine that oilies will be under pressure during the majority of Q2 (have known for 6 months that this quarter would be tough due to oversupply) then Enquest will be setup for a good run at 60p next year. I speculate that maybe Enquest could try and refinance the debt after october 2020. There is mention made on page 17 that no refinancing of the SFA can be done prior to this date so as to ensure that the bonds can be extended to october 2023 which I am sure AB will do.
My question is therefore whether Enquest after october 2020 could refinance all debt and buy back the retail and high yield bonds at a significant discount on the nominal price (currently trading at a significant discount)? Romaron, Epip, L7 - any clues?