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That's not quite true is it, If I have invested a lot of labour and materials into a job but that job is not quite finished at the time of the balance sheet being completed then said job has to be part of the assets
HMHn,
if I after the weekend happen to have some pocket change over. So I go looking at buying a oilfield. I am not interested in either the CAPEX spent so far or what the owner say it is worth on the the balance sheet.
What you spent is a sunk cost and in theory the balance sheet should reflect the real value of an asset. In practice it seldom does.
Hi L3Trader, an interesting post. Your H2 Kraken WI cash flow number ($175m) caught my eye.
Assuming you have deducted the OZ 15% interest I get to a similar number. Here’s my maths:
38500 (bopd) x 184 (days) x 55.5% (WI) x $45 (Netback) = $177m (My biggest assumption is a continuation of current Kraken performance through Dec)
But why stop there? Taking your $1.49bn net CapEx number (does it include DC4?) and interest @ 8% for the half year leads to interest of $60m, 2019 CapEx $0, so FCF $115m. (Okay, maybe over simplified but ball-park) You’re right to highlight the production profile so we should be wary of extrapolating these numbers too far into the future. But as you say, ‘not bad’.
I don’t remember the detail of our earlier assessment of the OZ loan but (based on your number) the 15% WI cash flow covering their $175m loan plus 8% interest is ((175m/55.5%)*15*) = $47m in H2. This leaves some change for ENQ. It might come close to covering the H1 repayment deficit on the OZ loan.
Is that in accordance with your OZ workings?
Bananjoe,
Capex spending becomes assets on the balance sheet. You can sell assets, therefore Capex is not a sunk cost.
You could classify most Opex-items as sunk costs, as the money is not possible to recover.
Have a nice day.
Hi Therapist, I'm helping my daughter move to Peckham with the usual parental concerns whilst your daughter risks being pecked to death by a rabid penguin. No comparison. Tell her to wrap up warm.
Back to business. In the Sunday Times in a corporate bonds issue EnQuest got a mention. Top three retail bonds traded in 2019 (the other 2 were Burford Capital and Retail Charity Bonds):
"EnQuest: £878,278
The North Sea oil exploration firm was the most traded ORB London bond in 2019 thanks to improving financials and production levels, following its financial restructuring in 2016 which saw its bonds drop to below 30p at the time. It hit a peak of activity in April, amid growth in volatility in the price of oil on global markets and the spectre of sanctions against Iran being a boon for UK oil firms."
That's news to me. If EnQuest was most traded then the others must have be set in aspic. Interesting comment that High Yield (Junk) bonds outperformed the stock market over past 20 years. I'd like to see a promotion on the RB which (for me) is a sticking point on stock advancement. With the improved financials surely it is time for the financial advisors to step up to the plate in the same way the engineers have done.
Sunk cost and assets have zero connection.
And if you trust balance sheets I have a nice bridge to sell to you.
Banans,
Are you even aware of the definition of an asset?
HMHn, are you even aware of the meaning of sunk costs?
GKB,
Best ever.
AB hasn't a clue. I'm onto IR first thing in the morning.
Don't rule yourself out for a call up as we might be short of performers after Thursday.
Xxx
GKB,
I read your posts.
I am what some have referred to as a climbie but justify this sort of investment until a viable alternative comes around.
You and L3 aren't called for auditions but HMHn might be. He's a member anyway so no great shakes.
I have just opened an isa for my eldest who studies environmental science in Lund and is currently in Svalbard for a term. I'm not allowed to do anything unethical with her monies whilst I contr ol them . Must research a bit of carbon capture.
Glaxxx
Nice to see your weekly questionnaire L3. Didn't know you worked Saturdays.
About the sunk costs, come on? You even get the Capex-spending as a balance post on the active side of the balance sheet. Nice one.
It's funny how you have the whole case figured out, yet you have to ask the frequent posters about their opinion.
Hope you're payed handsomely. Well deserved.
Hi Squif,
Many, many thanks for the info. I 1st bought at the end of 11/2016, and did not follow the news until mid 2017, when I increased my position.
I would subtract the First oil $130M "gift" from 0.705 x $2.3B Capex, and would get $1.49B. So higher than your $1.4B. Next, I would apply the proportional rule. Thus, a 15% WI in Kraken corresponds to $317M CAPEX. I would then feed this through the rest of my calculations. The revised rate of return on investment of a sale of 15% of Kraken at $345M would now generate a total return of 28%, and a 7.3% annualized rate of return.
At any rate, CAPEX is a sunk cost. Future is what matters. W/out knowing the new predicted production profile it is hard to know what a good price would be. You can get a deal that is good for both ENQ and the buyer on the basis of different costs of capital and risk diversification for ENQ. I hope ENQ will anounce a revised production profile for Kraken in the CMD, so that we can express a more informed opinion.
Like you, I firmly believe that reducing gross debt is the priority, in order to renegotiate what is left and bring down the
weighted interest rate on borrowing below 6%. Gross debt w/ a servicing cost of $60M per year and production (after subtracting BP's 37.5% interest in Magnus) of 60Kboepd would be enough to guarantee the Pelle dividend every year.
As you are versed on CAPEX: Do you have any idea of the total CAPEX on Scolty/Crathes, pls? ENQ stated this project has reached break-even. But I do not see how that is the case, since only 3.7Mbbls has been produced so far, and MOL has a 50% WI.
Going back to your last weekend's query about Kraken, my projections ahead of H1 results were posted on 09 Aug 2019 16:50. If you read my post then I estimated a reduction of $11.81M, when in fact it came in at $13.5M. I only got close because Londoner7 brought a few points to my attention which helped me to sharpen my estimate. Many TA to him. I am sure the different expenses had different figures than the ones I estimated, but those deviations ended up cancelling each other ( => I am unbiased!).
I believe that in H2 ENQ's Kraken WI will generate $175M of operational cash flow (ie. before finance costs and CAPEX which I assume is $0M). Not bad I would say. I assume Kraken premium is $2.5/bbl.
Hi Gkb47: I like your post on carbon capture. Indeed in part (II) of my post 2015 CMD: Goals and Achievements I had planned to write about that as well. SVT and ENQ's interests in the North Sea could be a good staging point to bury carbon, assuming it is technically feasible. At any rate, since my 2015 CMD: Goals and Achievements: Part I generated no interest, I am not going to write Part (II). The overall message is that ENQ's record on embarking on new projects is mixed.
Hi Therapist: I am sorry but I cannot find any info on the pricing of the Malaysia oil. I know that the difference b/w $5 and a $10 premium means a difference of $15M in FCF.
GLA
I do not think selling is a good idea in the current market. You would struggle to get fair value, and most of the risk is now on the upside, and in 12 months the risk is being taken over below fair market value, if debt comes down too quickly. If Brent stays high and FCF is strong, I would suggest a small dividend is used to balance the forces of being hammered for having too much debt, vs. being taken over on th echeap with too little debt.
But if he buy's now he cant present any SP driving information or?
In Sweden its 30 days rule before report, now this is not report but still operational update + CMD.
I remember in spring he bought 1 week before operational update
Whats rules in UK?
Gkb - there are merits in both arguments but lets see what the cmd brings. Would have thought that ab would have topped up some more last week but maybe rns on monday.
A sale of a portion of kraken is not required debt will be below 1.4 billion and under a billion next year. Poo back
In the 60’s creating all that fcf, production soaring and the potential in 4 years or so to have zero debt.
Kraken asset value must be at least 2.5 billion and we own 70%. Once the debt is minuscule they need to get drilling with the likes of BP for the next 15-20 years of resources.
This market cap is beyond a joke now bring on the 21st the last update brought 22p and the picture has improved even further.
Hi L3 - I am going to have to pull you up there regarding capex of 15% of kraken. The thing is that Enquest took over 10.5% of Kraken from First Oil in April 2016 at no cost. The capex of 10.5% up until that point had been paid by First Oil. This equated to roughly 130 m usd. So up until April 2016 Enquest's 4.5% had cost approx. 40 m usd. Thereafter the 15% had cost roughly 130 m. In total Enquest has laid out 1.4 bn usd on Kraken. So the capex for this 15% stake is roughly 170 m usd . So the cost base is capex 170 m and finance 8% of 170 m = 47.6 m so the cost base is 217.6 m. If the sale brought in 345 m say that is a return of 127.4 m or 58.5% and when annualised is 12% (over 5 years). The important thing is to get net debt down and 350m would bring end of year debt down to 1.15 bn (or thereabouts) which would be fantastic. That would still leave Enquest with an annualised production next year of 70k boepd now that Kraken is producing close to 45k boepd. Of course Thistle is offline but Scolty makes up for that shortfall. That would make compelling economics ahead of next year.
A good idea?
Capex of 15% of Kraken was $345M (0.15x$2.3B). 15% of Kraken has already produced 3.75MMbbls (0.15 x 25MMbbls ). Assuming OPEX (including FPSO lease) and transportation costs of $25/bbl, and average selling POO of $65, cash flow from production so far of $150M. This excludes finance costs of borrowing of $345M CAPEX . Suppose finance costs were incurred in the last 3.5 years at a rate of 8% (Simplifying matters; correct requires apportioning CAPEX over the earlier years of the project ). Finance costs of $96.6M so far.
So a sale of 15% of Kraken at $345M would still generate a total return of 15.5%, which annualized is not so good, just 4.07%.
That would be the return we would get as shareholders.
So, a price of $345M might not be such a good deal.
However, this not the proper way to make such a decision. Past CAPEX is a sunk cost. Bygones are bygones. So, focus on the future!
Would anyone pay $345M for a 15% stake on a field that has according to the estimates 112Mbbbls of 2P reserves (assuming they have not been revised) that in the next 4 years are expected to produce X, Y, Z and W Kboepd per day, after which production is supposed to decline to below 20Kboepd?
The answer depends on what X, Y, Z and W are (and only ENQ and CNE have a good guess about it! They should have a better estimate now than when they wrote down the FDP).
We know that in the FDP the first 6 years of production were supposed to produce 12.5, 45, 54.9, 52.4, 39.7, 28.8 and 23.5Kboepd, respectively. But what are the figures not predicted for the next 4 years? Do they still give you an average of 36Kboepd (which would correspond to the 52.4, 39.7, 28.8, and 23.5 Kboepd figures in the FDP)? If that is the case and if the POO in the 4 years ahead were high enough, let us say $70 (including the Kraken premium), then that would lead to a decent return on a $345M investment. Investment would be paid back in 4 years, if you ignore finance costs. If you include finance costs at 8% in the 1st year and 6% in the following years you would still be out by $56M. But there would be production for perhaps another 5 years above 10Kboepd according to the FDP.
If it makes sense for someone else to pay $345M if you only consider expected returns, it makes sense for ENQ to not sell.
The rationale for a sale is risk diversification - the variance of production (stuff happens) might be large.
And so, risk diversification might justify selling the 15% even if expected returns are good. In addition, reducing net debt by $345M means ENQ might be able to renegotiate its gross (not net!) debt 1 year earlier than otherwise. If that lowers the cost of the borrowing by 2pp one year ahead => $25M of finance cost savings.
So, the "implicit" selling price would be $370M!
Conclusion: $345M might be a decent price for buyer and ENQ. But w/out having Kraken's revised estimated production profile it is impossible to argue one way or the other.
GLA