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https://m.moodys.com/research/Moodys-upgrades-EnQuests-rating-to-B3-and-high-yield-notes--PR_451518
Morning Pelle,
Was just reading it myself. Figures worked on avarage Brent price $55 . . pessimists.
GLAXXX
Part 1
London, 30 July 2021 -- Moody's Investors Service ("Moody's") has today upgraded EnQuest plc (EnQuest)'s corporate family rating to B3 from Caa1, the probability of default rating to B3-PD from Caa1-PD and the rating assigned to the guaranteed senior unsecured high yield notes due in 2023 to Caa1 from Caa2. The outlook on all the ratings is stable.
RATINGS RATIONALE
Today's upgrade reflects the company's improved liquidity following the refinancing of the bank debt with a new Reserve Based Lending Senior Secured Facility (RBL) as well as an improved outlook for free cash flow generation.
Last June, the company completed the refinancing of its bank debt with a $600 million RBL and in July 2021 it finalized a $50 million placing and open offer. The refinancing improves Enquest's liquidity profile given that the maturity of the bank facilities has been extended out to June 2023 from October 2021.
The significantly improved oil and gas prices, compared to last year, and the sizeable hedging book required under the terms of the RBL will support cash flow generation in 2021 and 2022. As a result, Moody's expects that the drawings under the RBL will be repaid early prior to its maturity in 2023, absent further acquisitions.
In 2021, Moody's expects EnQuest's production to decline to around 49 kboepd (excluding the production from the Golden Eagle fields), from 59 kboepd in 2020, as several mature assets ceased production.
Taking into account the group's current hedge book and assuming an average Brent price of $55/barrel and opex of $15/boe, Moody's estimates that EnQuest will generate a Moody's Adjusted EBITDA of $730 million and a Free Cash Flow of around $400 million in 2021 after (i) $130 million of capex and principal lease repayments and (ii) approximately $40 million of deferred and contingent consideration paid related to the Magnus acquisition. Our FCF expectation excludes $73 million of interest payments on the bonds that are paid-in-kind when the Brent price is below $65/bbl.
The cash flow generated will be primarily used to repay drawings under the RBL and to fund the Golden Eagle acquisition, leading to an estimated Moody's-adjusted gross leverage of around 3.0x at year-end 2021.
Moody's expects the acquisition of Golden Eagle to close by the end of the third quarter of this year leading to a full year pro-forma production of 59kboepd. The acquired assets will contribute to the moderate and ongoing shift of the business profile towards more mid-life fields compared to late-life ones. Following the cessation of production on several oil fields in the UK North Sea in 2020 and 2021, the company's production is concentrated on Magnus, Kraken, the Malaysian assets as well as Golden Eagle (when the acquisition closes).
Morning Therapist,
I see 49k full year, if H1 was 46k H2 should be 52k.
Yes, 55 oil and I would assume the broker upgrades also assume around 60 oil.
Hedge Hedge and stop assuming! Lol
Part 2
The B3 rating continues to reflect a relatively low 2P reserves life of approximately 9 years and thus Moody's highlights the need to continue to invest in order to replenish the reserves. In addition, the company will need to invest in order to convert its 2C resources into producing ones in order to sustain production in the years to come.
LIQUIDITY
EnQuest's liquidity profile is adequate. As of end of June 2021, Moody's estimates that the company had approximately $200 million of cash and $70 million availability under the recently signed RBL.
If the high yield notes are refinanced, the new RBL will be automatically extended to the earliest date between seven years from the day of signing or the point at which the remaining economic reserves for all borrowing base assets are projected to fall below 25% of the initial economic reserves forecast. If the bonds are not refinanced, the RBL will mature in June 2023.
The RBL has an amortization schedule of approximately $100 million per quarter starting from March 2022. The facility has a biannual redetermination of the reserve base and it contains a net leverage covenant set at 3.5x, under which the company has significant capacity. The RBL also has a cash sweep provision for any cash exceeding $75 million being applied towards debt repayment.
Despite the company's adequate liquidity over the next 12-18 months, Moody's notes that the company will face a maturity wall in October 2023 when the existing bonds come due.
Part 3
STRUCTURAL CONSIDERATIONS
The Caa1 rating on the senior notes is one notch below the B3 CFR reflecting the substantial amount of secured liabilities ranking ahead of the senior notes. The notes are senior unsecured guaranteed obligations and are subordinated in right of payment to all existing and future senior secured obligations of the guarantors, including their obligations under the RBL.
EnQuest's main borrowings, which include the $600 million RBL, $797 million high-yield bond and $249 million retail bond, are guaranteed by essentially all of its operating subsidiaries. The RBL is secured by share pledges and floating charges of the subsidiary guarantors. The guarantees and security pledges are subject to a priority of claim in accordance with their terms, ranking the facility most senior with the notes effectively subordinated.
RATINGS OUTLOOK
The stable outlook reflects Moody's expectation that EnQuest will continue to conservatively manage its balance sheet, securing a substantial part of its production with commodity hedges and keeping its leverage comfortably within the guidance for a B3 rating. Moody's also expects the company to continue to apply its free cash flow generation primarily to debt reduction, while maintaining a healthy liquidity profile.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
While an upgrade is unlikely, EnQuest's ratings could be upgraded should a continuous recovery in operating profitability boost FCF generation, leading to a strong liquidity profile and Moody's-adjusted gross leverage sustained below 3.0x. The refinancing of the high yield notes maturing in 2023 is also a required condition for a possible upgrade.
Conversely, the ratings could come under pressure if leverage trended above 5.0x or liquidity deteriorated most likely as a result of a decline in oil prices. Failure to address the 2023 maturities at least 12 months in advance could also lead to a downgrade.
Very good upgrade from the harshest of sceptics and a very hard one upgrade, especially when considering how far Brent fell in 2020 and the high level of debt over the last five years or so.
Nice upgrade. Suspected that something was on the way with the nice tick up in sp this week.
Thankful to bank who forced AB for hedging which caused the stability, otherwise he would have gambled on oil price again by not doing enough hedging as his eyes are bigger than his belly and always dreaming oil price above $80 or $90/bbl at the cost of shareholders money.
Still more hedging is required, specifically for 2022 & 2023.
Hi Pelle,
Well, write to AB and tell him to hedge, hedge.
"I see 49k full year, if H1 was 46k H2 should be 52k."
their assumptions are 46K Q1 to Q3 plus 58KQ4 (including GE of 10K in Q4, and improved production in the other assets) gives you 49K full year.
Their calculations: "Taking into account the group's current hedge book and assuming an average Brent price of $55/barrel and opex of $15/boe, Moody's estimates that EnQuest will generate a Moody's Adjusted EBITDA of $730 million and a Free Cash Flow of around $400 million in 2021 after (i) $130 million of capex and principal lease repayments and (ii) approximately $40 million of deferred and contingent consideration paid related to the Magnus acquisition. Our FCF expectation excludes $73 million of interest payments on the bonds." so, FCF of $400+$40-$36.5 (as the other half was paid in kind in Feb and April) = $396.5M full year. Note they use hedges in place, only use $55/bbl for the 4MMbbls not hedged for 2021. So, difference would not be more than another $60M. So, adjusting for that the figure would be $460M...
ATB
Hello Acchi,
I fully agree with you.
I suggest you write to IR and tell them that.
ATB
Acchi, L3 - what do you consider a suitable proportion to be hedged? The prospectus issued in June says ENQ is currently hedging 9.9MM bls this year (around 55% of total production this year if we ignore golden eagle) and 3.1MM bls next year. Personally I'm comfortable with the amount being hedged this year but need to increase the amount for next year. But how easy/expensive is it to hedge production so far in advance?
AB is of course a shareholder who wins or loses on his decisions, he obviously was taken aback at Covid lockdown which caused oil price crash in 2020 just as oil was about to boom and was light on hedges, hindsight is a wonderful thing, hedges are made by another party thinking they will make money out of them and next year many will hopefully be calling for AB's head because oil was $100 and we had hedges at $70 so have lost a fortune.
Hi Twalbyoff,
Have a look at the futures curve:
https://www.cmegroup.com/markets/energy/crude-oil/brent-crude-oil.quotes.html
It is in "steep" backwardation. E.g., difference b/w Oct 21 and Oct 22 contract is about $6/bbl.
So Oct 22 futures contract at $68.91.
RBL requires the put to be not 10% below this (well, it is a bit more intricate than this, but I will simplify). So, buy a put for Oct 22 w/ a strike price of $65, it would be c. $6.
https://www.barchart.com/futures/quotes/CBV22/options/oct-22?futuresOptionsTime=daily
(use daily not intradaly, and check Column "Last")
So, not cheap, if you buy a put with a strike price of $62 it would cost c. $5.15. You do not save much by lowering your call by $3/bbl. All down to the mechanics of how options are priced.
That is why they go for two-way collars... by sellng a call at a higher price. You can see the price at which they are trading as well. Basically, a call with a strike price of $72 trades c. $6/bbl.
ATB
Hi Tigar,
that is not quite like that.
Buy put at $65, sell call at $72 (the costs even out), and buy call at $80 (at around $3/bbl), You guarantee $65 - $3 = $62 if Brent is < $65/bbl, will get net of PRICE - $3 up to $72 (when Brent> =$65), $69/bbl for Brent up to $80/bbl, and for Brent> $80 you receive PRICE - $8 -$3 = PRICE - $11.
No hindsight is required... Yes, it is not free, but insurance always has a cost... So, the question is are you comfortble spending $3M now to hedge 1MMbbls of October 2022 production, and stop part of the assuming as Pelle writes, or find yourself selling those barrels at a price of $50/bbl if oil price tanks to that level.
I would be more than happy to hedge 2/3 of October 22 production in this way. But, we do not take such decisions.. AB&CFO do.
And they should read Moody's report with attention:
"Despite the company's adequate liquidity over the next 12-18 months, Moody's notes that the company will face a maturity wall in October 2023 when the existing bonds come due."
They can knock down the top of the wall now by hedging more of the 2022 production...
ATB
Thanks L3. Your knowledge of the options market is clearly far greater than my own. Interesting to hear you say 2/3 or production for 2022. Hypothetically, if today's oil prices were to remain what would you say would be a typical two-way collar that ENQ may be able to hedge at?
Personally, I would be happy to see:
1. 55k production in 2022 (which includes GE, allow for some depletion of current assets but with the view to further acquisitions or developing current fields in 2023)
2. break-even of around $30 (though am expecting lower)
3. realised price of $65, allowing for hedging
This would give around $700M of FCF.... not too shabby for a company with current MCAP of £453m.
GLA
Hi L3
With respect it is like that. Hedging companies do it to make a profit. We should have hedged more before the 2020 covid crash with hindsight. But the hedging companies are now lining up to make huge profits from oil without having to use a drill bit. Because they think oil is going higher? It's as you say Insurance. AB failed to call it right last year but was able to use that low oil price to pick up cheap replacement oil for the lost production because of not hedging. They have changed strategy it is plain to see and many think it is right. I am just saying hedging companies do it for the money at the expense of oil companies on average.
I
Maybe this was the trigger we needed.
Mrc you kicking yourself ?
L3,
To me this clearly says excluding GE.
In 2021, Moody's expects EnQuest's production to decline to around 49 kboepd (excluding the production from the Golden Eagle fields), from 59 kboepd in 2020, as several mature assets ceased production
Hi TWalbyoff,
Others can add more on hedging. The RBL has rules for hedging, so roughly speaking the strike price of the put has to be no less than 90% of the futures price, as I wrote earlier. As I wrote I would be keen on having 2/3 of net entitlement (i.e., subtracting BP's 37.5% stake in Magnus, and 1/3 of the Malaysia production) in 2021 hedged by the end of August. I have no idea how they are going to layer those hedges. There are lots of strategies.
Hi Tigar, yes, but the fair pricing of options is known under different sets of assumptions. Different assumptions different model. One key input of the models is a measure of volatility... higher volatility implies higher fair price for the option.
Agreed he got one very very wrong and hopefully got another very right. But, I want to know at the end of the year, with hopefully similar production as in 2020 what is the level of debt at that time... We have to remember GE will have 15MMbbls of 2P reserves left at the end of 2021 in the optimistic scenario put forward by the CPR people.
Anyway, Moody's will lift the SP next week, so the day traders can have their day.
Hi Pelle, Yes, I read through Moody's too fast. But they are clearly wrong there is no way ENQ's production w/out GE will average 49Kboepd in 2021. If it is that number or higher then you get to score again ...
Has Londoner7 liquidated his position? He has not even commented on the prospectus...
ATB
L3, In Sweden we would call H2 “ plattan i mattan”
Hi All,
L3 says Moodys are wrong. I guess they at least have access to the same data we have but probably more. If I add in GE at 10k for Q4 I am 49228 boepd 2021. So they are wrong or they know something we don't. Magnus maybe?
Also does their $55 Brent outside of hedging take account of any Kraken or Malysian premium on the unhedged production.
They're probably smarter than me but I have a fertile imagination.
By the way I have asked the CEO of Orcadian for more info on the Kraken premium he mentioned in their presentation. Nothing yet. Probably advised to keep shtum.
GLAXXX
Maybe Moody's have some info on the riser fix in Malaysia. Ie extra production in Q4 2021
L3 you wrote so, FCF of $400+$40-$36.5 (as the other half was paid in kind in Feb and April) = $396.5M full year. Note they use hedges in place, only use $55/bbl for the 4MMbbls not hedged for 2021. So, difference would not be more than another $60M. So, adjusting for that the figure would be $460M...
But surly they are assuming $55 oil. Our hedges have collars on them that allow for oil to be sold above that $55 and the non hedged oil can be sold at current spot price above $55 if oil sold for $55 then your assumption that -$36.5m would not take place as the next bond payment would be deferred also, so FCF would be at $55 oil $496.5m so if oil is $65 and our hedge collars are $65 then we get another $180m - £36.6m FCF to add to Moodys $496.5m
Look on the bright side -
Moody's have upgraded Enquest using low production numbers of 49 kboepd plus Golden Eagle and with Brent averaging $55.
Enquest are likely to produce more and Brent is likely to exceed $55.
If they update on mediocre expectations then in reality actual prospects are even better.