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Hi romaron, no offence taken. If I thought you were being offensive I wouldn't trouble myself with replying.
Of course you're right about black swan events, but IMO many events fall into that category in terms of consequences. The outcome of Brexit. The impact of shale oil and geopolitical tensions on the oil price. But if the smart guys at the 'squid' are predicting $20 oil one day and $200 oil a short time later with neither level being achieved, what chance do I have on predicting outcomes. I don't fuss with such things. Since my last post I've walked around a large and beautiful loch next to my home (2.3 miles) and snatched a pint in my local. The sun still sets late in these parts. Oh dear, did I miss our PM's latest utterances on Brexit.
I limit myself to dealing with the outcomes.
Entrails! The figures are refreshed every month with data from the OAG and you may not be a believer but the tanker watchers keep me updated with hot off the press Kraken numbers - no, it isn't a black art to calculate them. That said, I've no doubt that all the latest production data including the keenly awaited Magnus June number are already in the market - no calculations required. Contacts, dear boy, contacts.
Hi Londoner - excellent post. I'm jealous of your ability with figures and I'm guessing that you realised I was joshing with you. The thing is that you are a relatively latecomer to this BB and we are at the end of analysing the entrails of the last production update and it does become torturous. That means the figures are due for a refresher with new information and yours will be one of the first posts I read after the announcement on 5th September. It is also true that all carefully constructed models will collapse if a black swan lands. I meant no offence and I hope you didn't take any.
Be Lucky
Hi romaron, I like to think that in attempting to analysis Enquest's finances I'm doing something more beneficial to my investment decision than polishing the handrail of the Titanic.
IR is a good source of information. I've approached them several times and always got a reply, but as I learnt with the query on Opex one has to be careful in interpreting the response. In hindsight I would have asked the question differently, but with the help of a couple of posters here I believe I've reached the right conclusion. But as you say IR aren't inclined to address commercially sensitive information. The trouble is that's the useful stuff - I had a recent reply to a query which was a polite no! I reviewed my question and in similar circumstance will present it differently in the future. Live and learn!
However the point to this query and analysis is to make good investment decisions. For several years I've steered clear of debt laden North Sea oil producers but earlier this year I took a closer look at Kraken following Cairn's write down of their interest. Indirectly this put a value on the Kraken asset which prompted me to look at Enquest. Given a following wind wrt oil price I see value here. The problems with Kraken added to the attraction because I felt they are fixable, but I see the upcoming maintenance window as key to raising the PE above 85%. That said, plateau production is short and I expect capex in 2020 to add the Western Flank with production by 2020/21. I trust that the 2018 accounts are true but in the absence of guidance from Enquest I need to estimate the numbers for 2020 and 2021 - that's roughly my investment window. A few months back I made a stab at 2019 cash flows. At the time I posted them I said they would have errors but I like to put a stake in the ground and build on it. I've learnt a lot since - today I've learnt that I can remove a $56m cash expense I had in for a finance lease. When the interims are presented on 5th Sept I like to think I will have a very good understanding of them and will react accordingly. In the meantime I've set myself an exercise in assessing the near to medium term benefits of the Magnus transaction - AB sees value in it so hopefully I will too, but I don't take it as a given. I've still a more handrail polishing ahead of me. ;-)
Remember when you all called my numbers "over-optimistic", "unrealistic"?
I do.
Best, HMH
Hi Londoner - you wrote "It may be that we (or at least I) are trying to be too clever in unravelling it." That may be true but all credit to you for delving into the accounting records. If this was a forum for classic cars you'd be a "petrol head" - I don't know what the equivalent is for fans of company accounting. Something similar was brought up at the AGM and swiftly and concisely answered. It obviously went over my head but as with the Titanic I doubt discussing the polish used on the handrail will matter in the long run. E121 was there and may remember the details. We have audited accounts and I am not particularly worried. Sometimes it's a bit like the London Umbrella Company investing in superior spring and fabric technology and a 6 month drought comes along. I'd expect opex/capex to be up and sales down with LUC. A lengthy low pressure period and I'd expect the opposite. The Directors at LUC had mixed results in forecasting rainfall according to my research.
*I once asked JS about decommissioning accounting at an AGM. He took time out to trawl through a huge computer runout to make sure his answer was correct. They aren't hiding anything imo and as long as it isn't sensitive commercial data you want then I wish more would approach IR.
Hi Squif, I think that splitting out the interest and principle elements of the lease payment is key. With this in mind and looking again at the responses I got from IR I now suspect that in providing Opex guidance of $600m for 2019 Enquest are attempting to provide a simple number for investors to use, which covers all operating costs including an element for the FSPO lease. It may be that we (or at least I) are trying to be too clever in unravelling it. I think we will get clarity on the 5th September and it will be positive for investors.
Hi Londoner - interesting pick-up. Hopefully JS will clarify on the 5th september.
I don't know where opex will end up but in their attempt to provide "clarity" by stating 600M I do think it opened up questions.
Just to be clear. When I say, 'At the interims Enquest will introduce IFRS 16. The impact on operating leases will result in an increase of approx. $82m in net debt.'
I mean the impact of IFRS 16 is to add $82m to the net debt number some of us have in mind for the current year.
Hi GBK
I think Magnus/Malaysia and new Northsea pipelines will come online around Q3.
I have also not factored any increases from it, just offset declines.
But we might get suprised about the pipelines:
Enq: At Scolty/Crathes, wax in the flow line continues to limit production. The replacement pipeline project is progressing as planned with pipeline fabrication complete and installation underway. Production is expected to improve significantly post project completion.
Hi L3,
I'll come back to you on the average production costs because I want to look into those in more detail. But on the PIK and FSPO lease costs I've drawn a line under these, in my mind at least.
I'm not an accountant so I'll try and offer my understanding of the finance lease costs in a way that makes sense to me.
Enquest , has entered into a contract with BUMI to lease the Kraken FPSO. There is a yearly cash payment and my understanding is that after several years there will be a terminal cash payment after which Enquest and its partner Cairn will own the asset. This defines the transaction as a financial lease rather than an operating lease. This obligation to make future payments is assessed as a present value liability of $709m (Dec 2018), note it was $798m in Dec 2017. However, accountants assign an interest charge to these obligations and treat the principle and interest as debt. In Dec 2018 this (lease) debt was $946.36m. In Dec 2017 this lease debt was $1,091.18m. The difference is $144.82m. You'll see this number in the cash flow statement listed as 'Repayment of obligations under finance leases'. IR confirmed to me that 'the total lease cash payment in a given year is c$115 m net to EnQuest'. This is reduced by credits due as a result of performance issues. In the accounts this payment to BUMI reduces lease obligations and is split, roughly 50/50 as a repayment of principle and a repayment of interest. The $144.82m is an accounting repayment towards debt, not a cash payment.
To clarify this consider why the IFRS 16 change, which treats operating and financial leases the same, has been introduced. Previously, company A may have purchased its office accommodation incurring a debt to do so. Company B might be contracted to rent office accommodation over several years, but the rent it pays is treated as an operating expense on a year by year basis. There's no debt or obligation associated with further year payments so it appears to be in a better financial position than company A. But that may not be the case. IFRS 16 has been introduced to bring the future rent obligations of company B onto the balance sheet so that it is easier to compare finances between the two companies. The change under IFRS 16 does not change the cash rent that company B pays to its landlord, but it does change the 'rent cost' assigned in the accounts.
At the interims Enquest will introduce IFRS 16. The impact on operating leases will result in an increase of approx. $82m in net debt. Interest and cash movements are not affected.
Hi GKB
19 mill equal 52k per day
So far I have following and estimates
Jan-April 70k
May 57k Oga+Malaysia.
June 73,5k
H1 average 68k
H2 estimate 72k includes maintenance
Should be possible if Kraken does good
GKB, if you come to 19 mill barrels it must be wrong. I get 25,5 mill at 70k
Magnus/Malaysia 2 wells each are for H2
Also new pipelines in North Sea H2 to resolve wax issues
I think if Kraken doing 40k after sept we could be hitting 75-80k in Oct-Dec
Hi Pelle,
Fully agreed. AB has the best insight and I think that he sees something that is not fully transparent for us now. I think he has invested £70M or thereabouts so he will not want to throw it away of course. Although he does not know where Brent is going I suspect that Kraken issues are under control and I agree he will probably buy more. But they need to reduce financial complexity.
Hi L3 and Londoner,
I came to those numbers and opex and this needs to be further followed up in the H1 report. I believe that PiK arises automatically if brent average is below $65 which I believe it will be.
My take on the 144 is that that is the NPV at 31/12/2018 of the 93 + 55.
Anyway, I was quite glad that I did the mathematics exercise last week. What I got from it was that we are at a critical point in time. I suspect that Enquest needs $59 brent to meet financial commitments this year with an average production of 70k a day - opex, capex, finance, lease and debt repayments. I do think this is achievable and I think that Enquest has got hold of Kraken issues and this has prompted AB to but more shares. I think that once Enquest gets through the next 18 months it is a completely different situation and that next year the average brent price needed is closer to $50.
Anyway, good to have a clean layer of conversation and been honest about the current situation.
L3,
No need to speculate about poor hedging done in May-Aug. Around last update May we had 70+ oil and June-July we seen 65 usd several times.
To me it looks like they extending hedges and volumes compared to last year.
You choose the pessimist view of it for some reason.
AB seems confident and I think he will continue buy after report in September
Hi Londoner7,
Many thanks for the info.
A couple of questions for you: So, at 70K boepd, you get yearly production of circa 25.5Mbbls. If total operating costs are as you describe ($600M+$100M), that gives OPEX per bll of circa $27.45/bbl. This is high! I must have a mistake somewhere! Why? because OPEX has been lower in previous years, and production, ie., the denominator is going up!
I thought that when the average POO was below the trigger point you could pay interest in cash unless you wanted to PIK. Apparently not.
Given what you wrote, I am now at a loss in terms of the annual report in relation to the FPSO lease.
Why the statement there?
"The FPSO finance lease liability is carried at $709.0 million as at 31 December 2018 (2017: $797.9 million), of which $93.2 million is classified as a current liability. Finance lease interest of $55.8 million (2017: $31.3 million) has been recognised within finance costs. The finance leases have an effective borrowing rate of 8.12%."
The report also says: Minimum payment Present value of payments
Due in less than one year 144,188 93,169
The $93.2M is indeed circa $100M because it is the present value of the $100M at 31/12/18. But, where does the difference b/w $144.2M and $93.2M come from? What else, if not the present value of the interest?
Any thoughts?
Pelle, You keep on harping on hedging not having been good enough. That is my role here :) Anyway, expect the hedger in chief at ENQ to have panicked from June until now and having hedged lots and lots of production with a floor price in the $50s. The question I have is: if she/he did not want to miss the upside when the POO was above $70, why do you want to miss it now when the POO is below $60? Answer: because the benefits of hedging are asymmetric, and she/he clearly does not understand this when the POO is high. Had hedging been done much better, and I would give you my FCF for next year, because we would know the minimum price at which production would be sold for. Anyway, I have lost hope on ENQ's hedging team. They are out of their depth. Fortunately, execution on production is much better. That is what is delivering the cash! Looking forward to offload#44.
Therapist, It is a pity others did not join in your contest to predict OGA's June production. BTW from my number remove 9Kbopd for Malaysia.
ATB
May Kraken fill up your pockets.
Some points were raised at the weekend that prompted me to contact IR.
Squif is correct in his assessment that total operating costs is the sum of the guided operating costs ($600m) plus the lease costs for the Kraken FSPO. I agree with Squif that the average operating costs per bbl are not clearly presented in publications.
On PIK - whether the threshold (Brent < $65) will be triggered in the current period is in balance, but if it is the PIK is enacted automatically.
I had a discussion with L3 on the FSPO lease interest charge. In cash terms the net cost to Enquest of the FSPO lease is about $100m in 2019, subject to any credits from the FSPO operator as a consequence of performance issues. The $57m (approx) shown under financial costs is an element of this cost reflected in the P&L account. This $57m is not an additional cash cost.