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Thanks to Therapist for his 23.32 post I found a link to another message board that I knew nothing about, Placera -https://www.avanza.se/placera/forum/start.html
It made a change to reading this board and I even found the transient visitor to our shores HMH who seems far more relaxed from his home base. I even looked up his longer name but it doesn't translate to well "he with the horn" but I kinda get the gist and it does explain some of his bouts of irascibility. Crossing the North Sea in an open boat and a horned helmet that might be too tight is enough to enrage even the mildest of us. But I digress.
It helps to get other's views and I like the way HMH simplifies things so that the likes of me can understand them. Like him I expect that as long as the building blocks are in place we'll be fine. I think it also signals the end our interest in end-of-life fields and we have moved on. The economics of those fields mean that even if they were to become economic again they would trigger the re-entry of shale speculators which would put a cap on any long term benefit and the risk is too high for most. In fact only those with strong balance sheets can wait that long and we are almost there. I do wonder about other buyers of EOL fields as this cheap way of building reserves is over imo. Like tobacco there is now a moat around oil companies and the decimation speeded up by Covid now means that those trying to raise funds on a shoe string stand no chance. A cull can be healthy and is more the Swedish way but it has helped EnQuest in the long run.
*for our Swedish friends - han med hornen translates to "he with the erection".
Hi romaron, you say, "I think it also signals the end our interest in end-of-life fields and we have moved on. The economics of those fields mean that even if they were to become economic again they would trigger the re-entry of shale speculators which would put a cap on any long term benefit and the risk is too high for most. In fact only those with strong balance sheets can wait that long and we are almost there. I do wonder about other buyers of EOL fields as this cheap way of building reserves is over imo. "
I had a look at the Swedish site but didn't find any comment in this area from HMH or anyone else, so missing the background, but your comments surprise me and are at odds with AB's, who closed his Chief Executive's report in the 2019 accounts with the following statement:
'the acquisition of suitable growth opportunities, which will be aligned with our proven differential capabilities in managing
maturing and underdeveloped hydrocarbon assets.'
If you don't trust AB's ability to manage Enquest via these 'growth opportunities' then where do you see Enquest going?
I invest in a number of oil companies and I included Enquest in the list because of the attraction of the Magnus deal and the fact that they were showing no desire to go down the exploration or new field development path. I invest in other companies to target those areas.
And I thought it was the devil..
Another Magnus deal would be welcome.
When Enq started at Magnus some years ago opex was 60 and now 15 usd.
BP must be very happy with the deal also.
Win-win
Many fans of smaller oil companies often post on these bonds that they have had the majors over. They are more quick witted and flexible than the majors etc.... That may be true but the winners here have been the majors who shifted the EOL fields to the second (or is it third) rung of companies that deal in used fields and are now more protected from the slump in the oil price. Covid is almost the equivalent of the tide rushing out and showing who went commando or is it that a rising tide lifts all boats? I haven't really got my head around Magnus as it seems to much bigger than other fields we have dealt in. It may just be that it flatters BP's balance sheet, is a strategy anyway and there are clever terms that avoid EnQuest getting a giant windfall. It does seem a good deal but I don't think BP is run by dopes either. I think Magnus may be difficult to replicate. Our tax situation was instrumental too imo.
I do wonder what our competition will do. I doubt that old fields with fast diminishing returns have any value at present. This is why (I think HMH posted something similar) I believe we are unloved but also unappreciated. I don't care. The world will soon be in recovery mode and we've already seen a tentative improvement in the bonds as the search for returns continues and we all know that the bond market is far more cautious than the equity market. I believe it is a waste of time to go on a charm offensive and AB's perfunctory (but polite) treatment of analysts is a result of them not understanding the oil cycle. The analysts are well paid but nowhere near what a top executive of an oil company can earn when they get it right. The analysts are trapped by the numbers and they are always OLD numbers. The risk for them is the price falling and like surveyor's are always thinking of accusations of over-valuing or worse being accused of professional negligence; it is a mentality which whilst not wrong really covers loss protection. There is (imo) an antipathy between the two and I'm with AB. Let the forward numbers do the talking.
At the moment the problem is Covid. Does it return with a vengeance in the Autumn? This may be the last chance of getting on the bus. Unlike some other companies we haven't exhausted all of our options. We can afford to wait for the better deals because that is what EnQuest have done, restructured the company for the next stage of development. I am convinced that AB is ambitious and driven. There will be new deals.
Nobody anticipated Covid but we are well placed to come out of it stronger.
L7 - I wasn't using specific quotes or posts. If I have misread the sentiment of others they'll soon put me right.
romaron, in response to your comments on EOL fields, I asked, " where do you see Enquest going", if not in the growth opportunities AB described in his latest report?
I might comment on Magnus later. Like Pelle, I see it as a win win for both Enquest and BP. I certainly don't view it as pulling one over on BP and I don't recall any such comment on this board, but I wasn't around at the time of the transaction.
You say, "There will be new deals."
Returning to the point, what sort of new deals would you like to see?
I didn't say it wasn't a win/win. In a perfect world all deals would be. It was more a criticism of parochial support by LTH's on most message boards. I was inferring that in the transferring of fields some companies will end up with a disproportionate amount of them. Could be Spirit or Chrysaor for all I know. INEOS ducked out of buying Conoco's assets after they'd put down a deposit in return for 3 months exclusivity in November 2018. INEOS aren't mugs.
EnQuest are extremely well positioned in my view but I'd despair if they bought any more end-of-life fields. I think the majors are close to giving them away so I struggle to see why anybody would buy them but if Magnus can be repeated???. It is a (seemingly) cheap bet on the future price of oil but with shale in the side wings not something I'd bet on. I'd like to see EnQuest buy or farm in on newer fields that don't have quite the scale or criteria required by the majors. Not every company can be a FTSE100 but why not aim for the top? AB and his team know their strengths and situations can change dramatically. There is no magic formula but I think 10 years still makes us a young company and we are now close to being fully fledged. It's a bit early on the debt front but I think there would be plenty of interest in any merger or take-over that EnQuest considered. The time is ripe.
*I also like our Malaysian interests but from a slightly different perspective. Most companies in the UK don't have an Islamic CEO. Malaysia is mainly a Muslim country and they put a lot of value on financial probity and charity where we score very highly.
Magnus very roughly numbers and simplified.
Assuming BP kept Magnus and 60 opex they might got zero FCF out of it last couple of years.
Now they got up until today.
100 mill vendor loan 25% paid of.
Maybe 200 mill more up to autumn 2018.
100 mill cash for the 75%
100 mill FCF
So in the range of 500 mill.
Enq invested 100 mill.
Got those 100 mill back within 9 months something. Plus around 100 mill more.
Now counting assuming 40 oil and 18k.
FCF equal 160 mill per year.
It will be split approx 50/50 because Enq still pay back 20 mill/year second vendor loan.
Very nice deal for both.
Hi romaron, thanks for your reply.
You say, "I'd like to see EnQuest buy or farm in on newer fields that don't have quite the scale or criteria required by the majors." And add the valuable reminder on Malaysia.
The man said, "'the acquisition of suitable growth opportunities, which will be aligned with our proven differential capabilities in managing maturing and underdeveloped hydrocarbon assets.
If there's a deal, I suspect your fears will be realised.
I invested in Enquest last May with three pillars of support. I felt the Kraken problems, were solvable, Magnus was a good deal (at least after the first year or two when most of the benefit accrued to BP - but it was their asset after all), and thirdly, I believed the spiel that Enquest were well placed and capable of benefiting from the big boy's cast offs in the North Sea.
I don't believe ENQ has the balance sheet to support a conventional growth route, without a capital raise, so I'm still hopeful they can pull off another Magnus.
My workings on the Magnus financials suggest the benefits really kick in this year - shame about the oil price, maybe next year. It seems fair enough that the early benefits accrue to BP.
I hope the 32nd licence round, due this H1, throws up an opportunity. Just hope it isn't another Alma / Galia.
Hi L7 - the man probably said something similar when he took on Alma Galia.
He probably did, but I'm hoping it will be a question of once bitten twice shy on that type of project. Was the 3rd or 4th re-entry?
I haven't a clue what might be on offer in the licence but I'm hoping for some sort of tie in to existing infrastructure, similar in type to Eagle but on a larger scale. for better margins. Eagle has been proposed and pulled so I guess it's marginal. And we still have Enquest Producer FPSO from Alma/Galia, fairly new and hardly used.
Hello lads,
Good to see you're looking elsewhere for information and that people still cannot agree on the simple stuff.
As you say L7, we've got a FPSO with a capacity of 60kbopd free from summer. This is a $500m investment if it's made for a new project, making it an ideal farm-in tool for Enquest.
I agree with romaron. Why look at junk when you can get the cherry? Project financing is still available and our debt level is low (confirmed by J.P Morgan analyst on the FY19 call).
We should do another Kraken project. The field was found in the 80s and has been idle til development due to heavy oil not being moveable. There are other fields. And there are field where a 60kbopd FPSO can do wonders with some modifications.
There are, however, not alot of Magnuses out there. In my view this was a unique deal, and perhaps we have not yet grasped the implications of carrying the additional assets that was part of the deal.
I also see you L7 and L3 talking Kraken premium. About 6 month ago I made a thread arguing that the premium was massive, the crude selling close to the price of VLSFO. This has been confirmed by Amjad, he said that Kraken was selling into the VLSFO market without refining which makes them perfect substitutes. If you don't understand that expression you should go back to your intermediate micro economics books and just look it up. They are the same.
Best, HMH
Hi HMHn, you say, “Why look at junk when you can get the cherry? Project financing is still available and our debt level is low (confirmed by J.P Morgan analyst on the FY19 call).”
Project finance may be available (I don’t know the market) but I don’t think ENQ debt is low. In fact I think it is high by most metrics. Remember ENQ lost c$425m of equity at the year end due to various write-downs. The market might allow us a cherry, but I believe it would be conditional on an equity raise.
My argument for looking at junk is that that is where AB has positioned Enquest and that is one of the reasons I’m invested here. I don’t see any record of Enquest successfully developing a cherry. Do you?
I invest in other oil companies for cherries.
You also say, “About 6 month ago I made a thread arguing that the premium was massive, the crude selling close to the price of VLSFO. This has been confirmed by Amjad, he said that Kraken was selling into the VLSFO market without refining which makes them perfect substitutes. If you don't understand that expression you should go back to your intermediate micro economics books and just look it up.”
I’m aware of the attractiveness of Kraken oil to bunker fuel market and as a result Kraken attracts a premium over Brent.
I remember your posts, and I think you pointed at a Kraken premium of c$30 over Brent based on VLSFO pricing. The challenge is finding the evidence in the ENQ published accounts.
I don’t dismiss your number, I just don’t see clear evidence for it.
In my previous post I produced a calculation which supported a c$13 premium and said, “I have a qualification”.
It occurred to me that the calculation represents the ‘additional premium’ for Kraken over that last quarter 2019, so if a premium existed prior to that period then it is additive to the $13.
CNE is an interesting case for comparison. Its production comprises Catcher (54%) and Kraken (46%), both premium grades but CNE has said that Kraken pricing last year was ahead of Catcher. If I apply the same methodology (caveat emptor) I see a $5.13 premium over Brent for the full year 2019. That’s significant and could point to a very good Kraken Q4 premium as you highlighted.
Just to close my last post on the Kraken premium.
I could work just the H2 numbers (ENQ or CNE) and narrow it down but I’m not going to. In providing neutral FCF guidance based around $33 Brent ENQ will have taken account of the Kraken premium over the remainder of the year. Whether it achieves a higher lower outcome than their expectation would be a variable.
A further clarification for anyone digging into this stuff.
I said, "CNE has said that Kraken pricing last year was ahead of Catcher. If I apply the same methodology (caveat emptor) I see a $5.13 premium over Brent for the full year 2019."
Two points:
1 - The $5.13 number for 2019 is in addition to any premium (or discount) during 2018.
2 - If you were to take the bare 2019 numbers for CNE you'd see a premium of only $1.34 over Brent. But remember the realised price is after 'shrinkage' (talk to your Therapist about this). I use the 2018 number in an attempt to average out this impact. There's still a lot of noise, perhaps we should just ask IR what the current premium is and HMHN could calibrate it to a VLSFO price. But I repeat, with the Enquest cash flow guidance provided its all academic. A bit of fun on a Sunday evening.
Hello L7,
The Thistle impairment will be reversed If the price of oil make Enquest reopen the platform again.
We are now in a different position with strong cashflow generation and solid production profile. I'd argue Kraken is a very good development, and that the company should engage in similar projects given the fact that going forward we're in a solid position.
I'd argue debt is low. I wouldn't compare it to the equity, but rather the FCF generation going forward in a higher oil price enviroment. That's the only thing that really matters.
Kraken trades in parity with VLSFO. That's basic economics.
If you can fill your ship up with either Kraken crude or VLSFO you will be indifferent to which you use. Therefore the auction for Kraken crude should see bids to the point where they trade on parity - because they are perfect substitutes.
At the moment VLSFO is trading at $39-40, Kraken Crude should sell at the same price. Therefor the current premium is $5.
Kraken crude is basically VLSFO, like they stated in the FY20 presentation.
Best, HMH
Hi HMH - glad to see you keep a weather eye on the horizon. I'm with you on the debt. Some investors confuse our debt with a residential mortgage with an aim (for most of people) to pay it off- go to zero basically. That isn't what a company in a growth phase does. When we took out the OZ loan we weren't in a happy place. The farm out of Kraken had failed and some might read the OZ loan as a "Barclays turned us down but Wonga were happy to lend". The rate wasn't usurous but the terms were imo but needs must. They effectively have first charge on Kraken oil. A kinda temporary farm-out for up to 5 years and quite clever and astute on the part of both parties. This could be an interesting and effective alliance going forward. The bonds aren't pressing at the moment whilst the FSA will be rolled over and as long as oil recovers isn't a problem. A healthy company doesn't fear debt. In fact it needs it for funding growth and financing new deals and projects. That is where it will get interesting in the next two years. Ignoring the majors sell-offs there are quite a few oil companies in trouble and if nothing else the M&A fraternity are creative and hungry. That is without the development of our existing assets and maybe exploration might be considered?
I don't follow our "peers" that closely but over the past year we have financially (restructuring) far outperformed TLW and PMO who are by no means out of the woods. HUR and RKH cannot survive alone imo whilst the remains of Xcite will stay in the ground. For Sound the party is over and UKOG has become a cult. Having said all that there will be value in some of their assets. It is imo a buyers market and the failure of the Spirit sale is an indicator whilst I wonder about Chrysaor as they seem to have possibly bought at the top. I put "peers" in inverted commas but I think it always dangerous to pigeon-hole oil companies. I think EnQuest is "peerless" in many ways and cannot think of another oil company in the UK with such a committed CEO in shareholding terms.
*I'm a bit confused about EnQuest Producer. When I read "taken to shore for recycling" I read it as being scrapped and so did a few others on this board. I like the idea that having an FPSO almost ready to go and with our experience in heavy oil could make a huge difference in the economics of a field. Existing or in development. What exactly does EnQuest mean by "recycling" the FPSO?
romaron
I think that "taken to shore for recycling" is a way of saying that the FPSO won't just be sold to the highest bidder and taken to Alang and dismantled in a highly unregulated environment.
Hello romaron,
The FPSO would have to be modified and repurposed for whatever field it would potentially end up on. I'm sure the company is working on this. There are smaller fields where the economics presently isn't good enough - unless you happen to have a FPSO in the garage.
Interesting times ahead.
Apologies in advance - I've just had a large negroni and I'm feeling rich at the moment because with the garden at its best and the sun out I don't need to be on a yacht in the Bahamas (not that I've got one). I daresay I'm happier than Philip Green and certainly more popular.
I may be attacked for this which is why I may use alcohol in my defence. What if there is a plan afoot to move the EnQuest Producer to another field? You cannot play fast and loose with the authorities and decommission on a whim but there are only 180 FPSO's in the world and I'd guess not many on the production line. They are something of a rarity.
Decision time - carry on with a marginal field or cut your losses and move your major asset to a field that's got good reserves but lacks finance and a FPSO.
Interesting times indeed!
I’ve never read anything good about the Enquest Producer , and gaffs .. reliant on higher oil prices to mask faults on board , let alone the massive gaff with the underwater pumps that needed replacements at say $50m , plus it was financed with a farm in from a third party that was given a money back guarantee on the loan , so sooner it’s gone the better . A bad decision made by AB and JS in the early days when they were wearing their Miami Vice suits walking down Regent Street and Enquest was probably worth near $1b . The old business plan of taking on older assets and assuming a higher oil price is dead . Best thing now is what they are doing ... focus on core assets only and sit on hands . Deleverage as fast as possible to save interest charges . Maybe the sp will rise quite a bit more than expected as Brent approaches $50 as we are no longer wasting money on bad assets .
Hello hitman,
Like you say, the bad parts was replaced on the FPSO and the third party was paid back. Now we've got a good FPSO on a bad field.
A good FPSO is a $500m+ investment, and the Producer are on out books at 0 value as it's part of the Alma/Galia asset.
Put it on a good field with the current crew, and it will work wonders and increase the companies assets significantly while generating meaningful cashflow over an extended period.
Best, HMH
I've emailed IR. I think it's a fair enough question. Is the FPSO destined for the scrapyard or can it be used on another field after the requisite engineering? I'll report back if i get a reply.
The chances are that it is headed for the knackers yard and that is in the price. However, if it can be re-used then that is a bonus. I haven't come across anything that suggests it will be re-used. Aircraft carriers seem to have a life of 30-40 years but they probably don't take the pounding that a FPSO gets.
Therapist can probably elaborate on the "pounding",
But I've seen FPSOs with an expected lifetime of 40-50 years. They're primarily in Africa and South America, but 20 years is nothing and Kraken should push that number.
Basically, we've got a 4 year old oil rig (ship is old but installations are new) ready for some action. There are 10 more good years in the haul easily.
Best, HMH
There appears to be a divergence between AB and the direction he outlines for Enquest, and an alternative direction many posters here would like him to take. Junk v Cherry
Should AB change tack or should some posters here look for other investments more suited to their position?
The current debate on ENQ growth opportunities revolves around develop a cherry or take on junk. I think the term ‘junk’ in relation to say Magnus is a bit harsh. I prefer ‘cash in the attic’. To infer that Kraken falls into the cherry camp is well, taking the biscuit.
In reviewing two paths ENQ has taken I took some time to review the numbers associated with Kraken and Magnus. I went into some detail but I’ll only post the headlines here. I’m happy to re-examine or expand on any component if asked.
The Kraken Cherry
Headline cost, $2.1B (gross) reduced from $3.3B at sanction. 70.5% working interest.
Adding Kraken CapEx (ENQ) 2013 – 2019 comes to $1,616m. Equivalent to $2,030m (end 2019) with 7% interest on the staged payments.
I calculated FCF and interest charges from first oil to Feb 2020. Current cash account cost of Kraken 2030-495-69-485-34 = $947m.
We know that today's oil price isn’t helping but to make an ‘if only’ assessment I’ve used a forward oil price of $65 and applied the forecast Kraken production profile (CMD 2015), delayed by one year (first oil one year behind schedule) so -24% in 2021. Applying FCF to reducing debt with 7% interest on the net debt, the returns are:
After another 6 years the account debt is paid off with a $78m surplus.
In 2027, 15 years after sanction, ENQ has Kraken (without debt) producing 5.2 Kbopd (net) and generating $101m FCF in 2027. The decline rate is c10%.
The North Sea cherry represents “a model in which producers rely heavily on borrowed money while delivering meagre returns causing investor patience to wear thin.” – borrowed from today’s FT.
I produced a list of caveats, but that’s the gist of it. The cherry has developed a very sour taste for an investor in from the start – 20% Kraken acquired 9/1/12 with ENQ shares priced @ 92p. Since then, management have received good salaries and bonus’, workers had well paid careers, a supply sector flourished and even the bond holders have their heads above water. Equity holders have been crushed. Enquest has no form in the successful development of cherries. Very few North Sea companies do, but occasionally one gets lucky.
Investors buying into Kraken today are buying yesterday's crushed cherry, funded by ENQ investors in 2012 at 92p. It now sits in the 'cash in the attic' camp alongside Magus. A good pair of assets, for today's ENQ investor.
Please, no more cherries.