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That title alone is enough to want you to slash your wrists but I believe we have something like that with the Retail Bond and HY Notes which are a lead weight to the equity rising. Everything is interconnected and to keep on about the debt without discussing the bonds is ingenuous. The bonds are larger than the equity in value and obviously get paid before we would in the case of failure. The RNS 13th Oct 2016 even mentions RCF which repeats the "everything is connected" of above. This part is most telling: "amend the maturity dates of the High Yield Notes and the Retail Notes to April 2022, with an option exercisable by the Company (at its absolute discretion) to extend the maturity date by one year and an automatic further extension of the maturity date to October 2023 if the Existing RCF is not fully repaid or refinanced by October 2020; and
o amend certain of the financial indebtedness baskets under the High Yield Notes, remove the financial covenants under the Retail Notes, add new cross default provisions and restrict the Company from paying any dividend or distribution on any class of its shares until it has repaid or redeemed all capitalised interest (if any) accruing on the Notes in cash at par, together with any accrued but unpaid interest thereon."
I've answered my own question earlier. The PMO RB is vanilla by comparison. The RNS uses 'scary' words like 'lock up agreement' and ' the Scheme is subject to the Company obtaining recognition of the Scheme under chapter 15 of Title 11 of the United States Code.' That is why the yield is so high. In a world where best paper has negative interest rates you can earn 16.5 per cent on the EnQuest RB if it is still there at maturity and you still run the risk of them extending another year.
What is worrying is that 2022 isn't really that far away and it gives you an idea of what rolling over debt would cost. Am I alarmed? No. My reasoning is that at our darkest hour we were acting out of desperation and the RB is a hangover from then. Maybe we could buy back some bonds or confirm there will be no extension? Even drop the $65 oil link? That would give a huge boost to the equity as everything is connected.
*I suppose you could also argue that PMO are worth more and closer to the golden FTSE 250 than EnQuest and that their CEO [PMO] probably knows more about bonds than he does oil. We are possibly the opposite. I'll stick with oil knowledge.
I suppose what I'm trying to say/suggest is that with the provisos attached to the bonds some will argue that the conditions that created them still exist. I'm pretty sure that the company are well aware of this fact and it is up to them to educate the market and the only surefire way to do this is to pay down the debt.
Hi Romaron,
Interesting about these bonds and your right how scary it sounds.
I will read your post again in evening.
I don’t see it scary and don’t understand how market can give it 16% rate.
The RCF can be paid back in 2020 with oil at 60 average. With 50 oil they need 2021 also.
And I doubt it can difficult re-finance bonds 1b given the size of Enq now.
AB is not worried about it and probably already have plans how to do with the bonds.
Only thing that scares me is a complete melt down in world economy and oil prices below 50 for longtime.
It could happen but very unlikely in my mind.
Hi romaron, now I understand your point. It wasn't immediately clear to me in your original reference to retail bonds.
Yes, a rerating from the credit companies would certainly boost the share price if ENQ are able to refinance their RCF and bonds on the back of it.
Many of the terms are onerous, such as the PIK discussed earlier. If Brent averages below $65 in the 6 month period, interest due at 7% is capitalised and then charged at 9%. Another $19m step up p.a. (if Brent <$65 lasts). This on top of the c165m interest currently being paid. To put it in perspective that 19m is equivalent to the savings due on a one year early repayment of $285m on the RCF. As you say, terms agreed in difficult times.
My reading of the credit agency assessments is that there are three key areas of focus, aside from the debt level itself.
1) The price of oil - ENQ can't control this (who mentioned hedges? ;-))
2) Costs - Opex and Capex. No doubt ENQ are working hard on these.
3) 2P reserves - it seems they like to see 10 years of reserves against current production. Which is roughly Enquest's current position.
At the end of the year, other things being equal, 2P reserves will equate to 9 years production. How are those 25Mboe replenished?
The two wells at Magnus adds c6m to 2P. Perhaps there will be revisions on existing production but they tend to be Brent price related. Revisions tend to come at the full year but perhaps Enquest will have news on this at the interims. Eagle, or Kraken infill?
A few of us keep in contact via a whatsapp group and one of the group pointed out that PMO have an extremely large percentage on loan (22.34 July Euroclear and 5.29 reported shorts 23 Aug 19). Whatsapp has its limitations which for me is the keys. I don't have Trump sized hands and struggle with small keys so prefer to answer here and also draw some fresh comment as I know a few follow/hold PMO (I don't). It doesn't make sense to me. The PMO Retail Bond, although for a shorter duration, is a wet finger comparison and if I started from the short position would expect to be similar to ENQ.
So we have a stock that is actively shorted more than us (ENQ has no reportable size shorts) yet has debt that is priced as though there is little to worry about.
I suppose you could argue that PMO is under no solvency threat but shorts are following POO. If there was any connection then you'd expect ENQ shorts to be rising ; they're not. I'm putting it down to the PIK/$65 link being an impediment to the stock rising and include the HY notes which have also had their conditions altered. Is it possible that our equity is rated higher than PMO (less shorts) but our debt structuring overpowers our ability to climb cancelling it out. PMO is the opposite with a better debt structure but concerns over the near future? The market in bonds is far bigger than the equity market and we should pay more attention to them as it follows that their research and analysis is as important if not greater. Another consideration is debt restructuring. If it was imminent the costs would be prohibitive judging by current rates but this will still impact on any new venture unless we can get a loan similar to BP/Magnus or the like. I don't like the recent direction of the RB (HY are more or less in lock-step) and afraid to say that we have to wait until their direction changes or recover before we will see the same in equity. In mitigation they are both almost lock-up paper and with no event to power them one way or t'other will follow the POO so perhaps they can be ignored to an extent as the maturities are still pretty distant. Maybe there'll be something in the 5 Sept update to get us moving?
Final thought. Our EV shows that debt is far bigger than equity as a percentage and we should be viewed through a debt lens rather than concentrating on the share price. Until the debt reaches a better percentage with EBITDA we will remain in these doldrums and avoided by the market.
I started to read the prospectus and soon got bored but came across this: "As of the date of this document, all of the Existing RCF Lenders and all of the Hedging Banks have entered into, or acceded to, the Lock-Up Agreement pursuant to which they have agreed to vote in favour of the Proposed RCF Amendments. Additionally, Existing High Yield Noteholders representing approximately 61 per cent. in value of the Existing High Yield Notes have entered into, or acceded to, the Lock-Up Agreement pursuant to which they have agreed to attend the Scheme Meeting in person or by proxy and to vote in favour of the Scheme."
What intrigued me was how granular this all becomes. I did't know exactly what the term "Hedging Banks" meant. This is the definition later. "the Existing RCF Lenders and their affiliates which have acceded to the Existing RCF as "Hedging Banks", which satisfy certain qualifications under the Existing RCF and which have entered into Hedging Agreements which are secured by the Existing RCF security package." I'm not really any the wiser so will not go off-piste again and leave it to those that can read this stuff or have experience at this level of detail.
I've got a headache.