Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
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Stevo agreed. It is all a function of gearing which does as you point out favour Enquest with Brent at these levels. A $120m uplift for Enquest holders is around 30% non taxable return. A $120m dividend for Serica holders is 12% taxable return. I do not like taxes. I do not like dividends. I love share buybacks.
SEK
Fully agree that both Serica and Enquest are under valued. In fact on any normal metric all UK NS operators are undervalued but this reflects the fiscal uncertainty that remains and will continue until Labour finalise their position.
On comparison of FCF for 2024, I have Serica generating approx $80m more FCF than Enquest in 2024 if Gas remains at 80p per therm and oil at $90. Key difference in 2024 is Serica’s all in cash costs are $45n per barrel compared to $75 for Enquest. However due to lower gas prices ($50 per barrel equivalent) and poor oil hedges in Q1 and Q2, I have Serica's revenue per barrel $25 less than Enquest at $90 oil. Net effect is that I have Serica generating $5 per barrel higher cash flow in 2024. If oil drops to $80 per barrel, Serica generates $14 per barrel higher FCF per barrel.
The key difference in 2024 is that Serica will use its FCF to return approx $120m to shareholders and Enquest will repay debt. The debt repayment by Enquest of say $120m should result in a similar rise in Market Cap. So in theory, with Enquest we should see a higher % gain in share price than Serica with Serica’s shareholders receiving more of their return in cash via dividends.
Of course theory and reality often very different
Tigar
If you go to note 28 and look under the section headed liquidity risk. The table in this note breaks down the BP payments to be made in 2024, 2025, 2026-2028 and 2029 onwards. This is a very useful note as it discloses both the projected payments to BP but also they same detail on lease payments.
Stevo. Bressay clearly has a current value to Enquest in that 15% has just been sold with 15% of that rust bucket which is Enquest Producer for $58m of net of tax upfront cash. It is soon to produce gas which will save $30m a year. Once we ascribe a value of say $400m or so to these assets alone we have already exceeded our current market cap. You have suggested FCF of $180 -$200m for 2024 and $234m for 2025 at more or less current Brent with no further deals. I am wondering if you have made similar forecasts for Serica? I do like the latter and it is an obvious candidate for a merger.
Stevo12
I agree about 2C resources. But even if we were to assume that all your numbers are correct, the company is still very cheap. The stock price is a joke. Should have already been over approx. 30 GBX.
Stevo12
Thanks for info I couldn't find that info in accounts on note 28? I was looking at note 22 and they did say " At 31 December 2023, the contingent profit-sharing arrangement cap of $1.0 billion was forecast to be met in the present value calculations" I am afraid accounts written by accountants for accountants.
Looking forward to 9% bonds pay out May, and shares will come good at some point.
OilKing
Not trying to defend myself but my 2023 FCF forecast were based on management guidance provided in September and November which turned out to be materially incorrect but thankfully positively incorrect - I guess I am trying to defend myself.
In response to your points
1. Enquest tax losses are higher than Serica’s - approx $200m higher at 40% rate. These will be used over several years and annual impact is not material. What is more important is that Serica can currently only use its losses against Tailwind profits..
2. Magnus represents 45% of UKNS production and I have assumed they will also account for 45% of 2P reserves (as not disclosed) and accordingly BP’s share is 25m barrels.
3. I have not explained myself clearly enough re Malaysia. As you not PSC are common place in many countries and in Malaysia The government apply a royalty of 10)% of revenue, take 40-50% of operating profit under the PSC and then tax residual profits at 40%. What I was trying to say is that while Enquest is producing approx 8K BPD and has 2P reserves of a little under 30m barrels, approximately 1/2 of the profit earned form these 2P barrels is paid to Malaysian gov under the PSC and Royalties. My goal was to provide a more comparable basis with UK production.
On 2C reserves, the market is not attributing any value to these reserves due to EPL. As an example HArbour gave up its share of Bressay 2C for no consideration and Shell also passed its interest in Cambo to Ithaca for no consideration. I recall Enquest paid a couple of £m for Bentley pre EPL. Nice to have 2C reserves but no value currently ascribed by MR Market.
SEK
I fear that the negative working capital of approx $50m in Jan/feb was a reversal of an unusual timing issue at 31 December 23 as disclosed by management and may not reoccur in March/April.
We will see at next trading update.
Kraken
We pay to BP the FCF earned from 37.5% of Barrels sold from Magnus. This is effectively 37.5% of Magnus revenue-Magnus OPEX- Magnus CAPEX.
What I have tried to highlight is that Enquest retains 62.5% of Magnus FCF but the reported BPD production and 2P reserves is 100% of Magnus
Rom
In simple English, Enquest have $1.7b of tax losses which are deemed likely to be used as compared to Serica who holds approx $1.1b. Enquest also holds Bentley losses over over $1b and not sure if theses are purely ringfenced for Bentley taxable profits.
Serica’s losses can currently only be used against the Tailwind profits and so does not eliminate 100% of core UK tax.
Tigar
Unfortunately not quite. The amount still to pay BP for Magnus is $824.9m (see note 28 of 2023 financial statements). The $461m is the NPV of the future projected payments to BP for Magnus. Copmpany’s projections are that they will not pay the full $1b of contingent consideration but this is of course dependent on future volumes, oil price and OPEX.
Company forecast 2024 BP payment reducing to $46.5m due to high Magnus CAPEX. Should be approaching $100m a year thereafter.
I also keep wondering whether we will have a few years of Magnus being 100% ours. This must particularly be so if production does increase (as forecast) and we have Brent at around $90 of more. We could clear the outstanding consideration to BP quite quickly. But I am bored and I want a big deal to happen. A merger with Serica is my dream solution. They have the cash we have the tax losses.
Hi Stevo12
I had a bit of time and looked through accounts and hey-presto found it $461,271m this I assume is balance of $1bn gross of the original deferred liability which means as we paid BP $65m last year and used our tax credit to pay 40% of that.
BP may get their money?
Or to put it another way Enquest have paid BP $539m from 37.5% of Magnus so we have cleared $898m
Is my maths correct?
Great to see a free market of thought here .. Stevo offers clinical fact and like all good cfos paints scenarios but I fall more into sekfords camp but would add more !! AB has made some strategic moves with Steve baker joining to develop our BB assets and the significant creation of Veri! In USA as a start up Veri would likely have a valuation north of £200m on its ambition and project pipeline alone!! The repurposing of SVT is a key part of a Scottish / UK diversified green economy whilst serving both fossil and renewable energy sources! For those willing to wait SVT & Veri will become an exceptional asset !
He is right to point out that BP in effect retains 37.5% of the Crown jewels which is Magnus. But I prefer just to look at the profit payments to BP as a cost just like interest or opex or tax. What to me makes Enquest so exciting in terms of the potential future SP is the likely FCF which of course takes all these costs into account. It is the advent of $87 Brent which may be sustainable which enables us to project forward an extraordinary daily wall of money which is retained by the company and is being used (or should be) to smash expensive debt. Stevo has also made the point that in January and February 2024 we were negative FCF if you ignore the farm down payment. That will be to do with the timing of deliveries and sales. That should mean that March and April will have been two golden months and we will see large reductions in net debt which be reported at the shareholders meeting in May.
What I still can’t understand is why Steve uses barrels as payment to BP etc, we don’t pay the profit share in barrels, the costs of lifting the barrels is big part of EnQuest’s business (we earn from each barrel lifted).
For instance in my industry all jobs are given labour times against them with material costs on our system but if we complete those jobs in half the time that’s a bonus on our part we don’t pass that on and neither would Enquest to BP
Hi Stevo12
Thanks for your accounting knowledge to this BB
I understand your figures on the profit payments to BP on Magnus, do you have a handle on the balance of the net of tax $600m we agreed to pay ongoing, the increased production figures in recent times must be making this look achievable?
Thanks Stevo - I looked at Note 9D however it was written in Sanskrit but appreciate the google maps assistance. I seldom go that far. Very difficult to compare I know but it has explained things to me. The reserves answer will make me look more closely at reserves. There is often an overlap with total reserves of a field and what belongs to partners in the field. The likes of Uplift and juststopoil are very casual about this and the difference between 2P and 2C. We know that 2C is close to worthless on fields that haven't been given the go-ahead yet. Our Opex is similar to theirs if you average the 50/50 split they have with O&G.
Thanks again for help.
@Sekforde/Stevo : Thank you for making interesting valuation comparisons Enquest-Exxon-Serica....
How do you see the merger Ithaca/Eni's UK assets?
I'm sorry, but you have been consistently wrong. Your calculations have time and again shown completely wrong numbers.You are also wrong here.
1. I think Enquest has 100-200% more in tax credits. So you are wrong. This is also why Enquest pays less in taxes than Serica.
2. Regarding the reserves, I would say that only about 15 million barrels belong to BP. The rest belongs to Enquest. However, don't forget that the company also has approx. 400 million 2C resources.
Regarding Malasiya, you are completely wrong. Many oil companies in world have PSC and then you mean that all the oil companies have 50% less reserves than they claim they have. You are unfortunately wrong again.
Enquest will make approx. 550 million in both 2024 and 2025 together in free cash flow. Calculated for oil at about USD 90 per barrel.
Stevo it is true that EV of Serica and Enquest are similar. But what really matters for valuation purposes is prospective FCF. After all , that is money that is available for distribution to shareholders. Using your own figures carefully calculated assuming $86 Brent for 2024 and 2025, Enquest FCF is around $180m for this year and $270m for 2025. I would imagine that Serica will be similar. Moreover, I do not see this as a two year wonder. In the case of Enquest it is sustainable over 20 or 30 years from existing proven reserves, the development of Bressay and Bentley and of course Veri Energy. Although FCF could simply be paid over to shareholders, management is using it to pay down debt which of course will enhance FCF in the future. I do not see Serica as having anything that competes with Enquest's tax advantage, its ownership of two huge oil reserves and its potential for carbon capture and renewable energy. It is these assets that will enable FCF to rise over time.
Romeron
Regarding your questions.
1. Tax losses were acquired with Tailwind and $331m tax loss included as deferred tax asset - see note 9D of financial statements. Only usable against Tailwind profits initially and so still some core Uk tax to pay annually in addition to EPL.
2. On 2P reserves and production. Approx 4k BOPD of profit from Malaysian production is paid to Gov under production sharing agreement and gas lift. Also approx 6k+ BOPD of Magnus production is paid to BP. While Magnus is responsible for operating 43k BOPD of production, a little over 10k or 25% is for third parties and no benefit flows to Enquest.
3. On gas OPEX costs, I would be guessing but should be in the $10-15 range per barrel. The larger gas fields in Norway are $6-10 OPEX.
I hope for UK ECONOMY that Bressay does get developed but a lot of water to go under bridge and the initial phase to access 35m 2P is projected to cost $700m CAPEX.
Actually change that. Serica a BUY and EnQuest a STRONG BUY.
Where did you find reference to tax losses 11. I don't have your forensic skills but I never heard or saw them mentioned?
Hi Stevo - can you expand on 5. Is that because of Malaysia and Magnus?
9. What would be a wet finger guess at gas OPEX? in today's presentation David Latin said that their investment into oil compensated somewhat for lower returns on gas.
I like your comparison. Not apples to oranges but definitely Cox's to a Bramley. Serica dividend since 2020 has also played its part.
I have Serica as a hold and EnQuest a BUY purely because Bressay is such a beast and sentiment has changed with ESG now on the defence. If Bressay passes Go then Bentley starts to be discussed.
Summer is coming.
I forgot to add that Serica’s cash cost per barrel for 2024 is approx $45 per barrel compared to Enquest’s $75 per barrel. However need to reflect that 50% of Serica’s production is gas which is currently realising approx $50 per BOE - so much less profit on Gas BOE.