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All
I have updated my 2024 FCF forecasts for 24 and 25 reflecting the latest information contained in yesterday’s RNS. I have used $86 oil as opposed to $80 used by the company and all other 2024 numbers are as disclosed by management (not mine!)
In summary, FCF in 24 of $130m pre buybacks and including Bressay farmdown. Key assumptions used 43k BOPD and oil $86. The main drivers of reduced 24 FCF are cash costs increasing by $263m in 2024 compared to 2023, which includes $150m additional EPL, Increased OPEX ($68m), increased CAPEX ($48m), Lower interest ($28m), higher leases ($24m), lower Magnus ($10m), higher ABEX ($11m). These are all as disclosed by management.
The $263m cash cost increase is offset by $20m higher revenue and $108m receipt from Bressay farm down.
Good news is that 2025 looks much better with $234m of FCF as a result of cash costs reducing by $185m of which $90m is reduced lease costs and marginally higher production. More assumptions in 2025 re CAPEX etc
Thanks Stevo. Just had an email from Craig Baxter after I asked about the size of the EPL and whether he could give any guidance on 2025 production. He said the EPL on the core activities was estimated to be $125m but that included $15m payable in Malaysia. The balance relates to the 15% sale of Bressay/Enquest Producer as you have surmised. This means that the real EPL for 2023 was only (!) $110m. I am wondering what figure you have estimated for 2024 EPL (payable in October 2025). Craig Baxter also said he could not give any guidance on the 2025 production increase and mentioned a number of variables but said that the Board would not have given that general guidance if the increase was "insignificant". The more I think about it the more I think the board were right to start modestly on the buybacks. They have kept their promise to start returns in 2024 whilst maintaining the focus on debt reduction. Using your most recent figures we have FCF of $364m for 2024 and 2025. This is enough to completely smash the debt or invest in something really attractive with a quick payback.
Sek
I have used $175m EPL to be paid in Oct 2024 as disclosed in the RNS. I have broken this down as $125m underlying and $50m related to Bressay transaction. I can not see how EPL can be paid on Malaysian profits as relates solely to production in NS. I have reduced 2024 EPL to $100m (payable in oct 25) as a result of higher CAPEX in 2024.
Agreed with your conclusion on very healthy cash generation over next 24 months. However we need to recognise this is based on $86 oil and Oil markets have a nasty habit of surprising.
I’m waiting for to see if Jefferies will more positive or will they will stick to their last negative note of “no shareholder returns “ choosing to ignore the buybacks and the debt reduction ?
Stevo just to quote from Craig Baxter's email to me:
"The EPL estimate includes the charge payable on the Bressay/Enquest Producer farm down so is a significant increase versus our tax associated with "core" operations. Analysts consensus has our tax charge at around $125m which excludes the farm down but includes around $15m which is payable in Malaysia." I can assure you we are doing everything we can to reduce the charge" So I conclude the EPL is $110M on core operations in the UK. I do not think it is all that bold to use $86. Average could be lower or higher for 2024 and 2025 but prices of everything tends to rise over time with inflation. I like to take today's price and assume it will average the same. $86 not high in inflation adjusted terms by historical standards. Doing "everything we can to reduce" is I think a reference to the taking advantage of the very favourable capital allowances which labour may scrap next year.
God I hate the predictive text on this phone. Makes you look dyslexic or stupid.
Just heard back from IR (impressed they are working on bank holiday) and i only asked about EPL payable on Bressay transaction and IR confirmed EPL is $50m based on the gross proceeds ($141m) and that $108m had been received from Rockrose to date. Balance due from production cash flows.
The transaction is contingent on Bressay going into production and if it does n0t progress, then $108m is repayable to Rockrose.
I was scratching my head a little to understand why Rockrose would want to acquire a bunch of old pipes and pumps sitting in the back of the store room for $85m and then it struck me. This transaction is not about buying into potential of Bressay (or at least not wholly) it is about leveraging Enquest’s tax losses. Let me explain.
Rockrose will receive an investment allowances which will reduce its 2023 tax bill by $128m ($141*91%) and accordingly Rockrose will be cash positive by $20m after paying Enquest $108m. Enquest is only paying tax at 35% on the $141m sale proceeds due to the tax losses ($50m) and accordingly the transaction is $58m cash positive for Enquest. Accordingly the net effect of the transaction is $78m of net cash generated for Enquest and Rockrose, being the difference between Enquest’s tax rate at 35% and the 91% tax allowance available to Rockrose.
The transaction is contingent on Bressay progressing (which is highly unlikely if Labour remove investment allowances) and if it does not progress, then Enquest is required to buy back equipment and 15% share of FPSO/Field. For Rockrose they will pay tax of 75% on the $141m sale proceeds ($106m) which will be funded by the return of the $108m from Enquest. On buying back the assets, Enquest’s EPL liability will be reduced by $65m ($141m*.46%) which will leave $43m to fund, having received $58m in net cash in 2024.
So the net effect of this transaction is that Enquest receives a $58m interest free loan from HMRC and Rockrose $20m by using some of Enquest core tax losses and leveraging the investment allowance uplift.
Pretty smart by Enquest’s tax advisors and I was wondering why the deal was completed a couple of days before the year end, whereas if completed in early Jan 24 the $50m EPL would not be payable for 20 months. I think the reason is to enable Rockrose to claim investment allowance in 2023 in case early election and Labour remove allowance before end of 2024.
Nice to get one over Jeremy.
Stevo - Bressay gas is highly likely to happen. Kraken needs it.
MRC
Agree on Bressay gas but heavy oil extraction a whole different ball game. From the presentation earlier this week, it sounded like Bressay gas for Kraken was next 12-24 months.
Not sure how much gas is needed to power the kraken FPSO and what infrastructure is needed. Presumably not a major investment.
Stevo - great detective work and post - best bedtime story I have heard for years!
If all this true - street smarts to AB and his team.
Stevo, I second AIM’s comment, you really know your stuff. Excellent knowledge and analysis. Thanks. EnQuest’s tax credits “pot of gold” has been partially accessed/monitised.
It is encouraging to see such creativity. Also makes one assume further creative use of the tax credits is likely on the cards sooner rather than later (especially considering a likely incoming Labour government).
I second that, trouble is that I had to read through it 3 times to understand it !
Thanks stevo
Thoughts on this possible scenario:
-Continued “warnings” are issued by various parties of the consequences of removing the EPL investment allowances.
-Labour’s manifesto confirms they would remove the investment allowances.
-An election in November results in a Labour government with an absolute majority.
-EnQuest immediately does another deal/s similar to the one with Rockrose.
-A fiscal event is made with changes from start 2025, or thereabouts, and include negative changes or complete removal of the EPL investment allowances.
-EnQuest announce Bressay will not proceed (for heavy oil extraction).
Others make announcements stopping other fields being developed.
I am assuming the tax credits cannot be cancelled (just no way that could be done, all investors would shun the UK), and removal of the investment allowances would not be back-dated (not so sure on this one).
I also expect by November 24 that the size of EnQuest’s tax credits not already earmarked for use will be significantly less than now because there will have been some relevant M&A.
Stevo you posted on 29th March that you thought at $86 brent the FCF for 2025 would be $234m as a result of reduction in cash costs of $185m of which $90m was a reduction in lease costs. But do we not have the following savings over 2024? EPL $75m, ($175m - $100m) capex (say) $40m, lease $90m, interest on debt/bonds (say) $30m. We then are promised a "substantial" increase in production in 2025. Shall we say 2000 barrels a day net of BP's Magnus share? That would add $62.78m (2000 x 365 x 86). 2025 is beginning to look a lot like 2022 despite the EPL.
SEK
The main reduction in costs I have assumed in 2025 are Lease $90m, EPL $75m, CAPEX $70m, Interest $10m (main reduction in 24). Cost increases are Magnus $50m and OPEX $20m. The recent RNS highlighted (page 60) that Magnus payments would reduce to $46m in 2024 due to CAPEX programme and then increase to $95m in 2025.
I have added 1,000 barrels a day for 2025 to be conservative. I worry that 2025 growth may be Malaysian gas which is reported by Enquest as production but we only receive a modest lifting fee.
Reading the accounts in detail yesterday, I was struck by the poor reserve replacement. In 2023 Enquest spent $150m and for that we moved 4m barrels from 2C to 2p and added zero 2C. Similar story in 2022 with a lot of capex not adding any reserves. NS 2P reserves have reduced from 174m to 147m over the last 2 years and you can only defy gravity for so long.
Stevo I should have thought the average debt in 2025 as compared to 2024 may cause a saving in interest well above $10m. The Magnus payments do count for balance sheet purposes as a reduction in liabilities do they not? 1000 barrels a day does not seem "substantial". There will presumably be a big addition to 2 p reserves when Bressay gets going.
Stevo12, thanks for the IR communication confirming the treatment of EPL on the Bressay farm down.
Out of interest, do you know the workings to get a $50m EPL charge from the $141m total consideration?
All, please ignore my posts yesterday (12:11 & 14:59). I didn’t recognise the $86.6m transaction as an additional component to the agreement announced in December, which led me down a rabbit hole.
Londoner
As the tax base cost is zero, EPL is $141m*35%.
SEK
I have assumed that the bonds and term loans run to 2027 and the interest expense on these loans and bonds is pretty much locked in at approx $70m. I am also hoping in 2025 there will be dividends and buy backs which will use some of the cash generated. A $10m reduction in interest expense in 2025 requires net cash to increase by $200m at 5%.
In 2023 the interest income on cash deposits (which IR confirmed were attracting interest at 5%) was $6m which translates to an average cash balance across the year of approx $120m. This compares to the $300m plus cash reported by Enquest at various reporting periods which indicates a lot of cash window dressing and explains why RBL was not repaid earlier. We know a substantial portion of the cash sits in JV vehicles (and does not wholly belong to Enquest) and can only be used to fund JV related CAPEX, as opposed to repaying debt. Accordingly I can not see any of the bonds and term loans being repaid early in 2024 or 2025.
As you note, Magnus payments are a reduction in the contingent consideration liability but are a cash cost and impact FCF. How management got the Magnus accounting past their auditors amazes me, as in all reality BP have retained a 37.5% working interest and is paying for 37.5% of current and future CAPEX on Magnus and receives 37.5% of Magnus cash flows for rest of field life.
This only relates to the Dumbly post on 30 Mar 8:27
You should have numbered them to make it easier. You did ask for thoughts and I could easily get all 9 wrong. Here are mine.
1. No chance of EPL being tampered with until after the election.
2. We haven’t seen a ‘Labour Manifesto’ and at times the electorate have shorter memories than goldfish.
3. I think Labour will have an absolute majority but it won’t wipe away problems.
4. I think EnQuest are only looking at deals that work with high tax and a hostile government.
5. A fiscal event always possible as common sense and realism returns plus 'events' - Russia could escalate.
6. Tricky one about Bressay. If they announce it won’t proceed then it won’t because governments don’t pay ransoms (they usually act before via back channels). This is a massive game changer for the company and the UK if it happens. The activists really are a spent force because their threats of global collapse haven’t materialised and renewable prices are unaffordable and going higher. Occam’s razor says it will go ahead because of the chains of parsimony that Labour will creatively invent. I do believe Ed is on borrowed time.
7. No idea who the others are and would need government diktat.
8. Tax credits are ‘sanctified’ and would drive business away from the UK if removed.
9. M&A – no idea. We have plenty of wiggle room and possibly more of a before/after election decision. Before means likely to get a Labour blessing; after something to negotiate with as there is a chance Labour are creating a new narrative due to professional industry and economic analysis or more likely due to simple expediency.
Thanks, romaron. My further comments below. In capitals to make it easier to see my comments.
1. No chance of EPL being tampered with until after the election. MY POINT IS SIMPLY THAT WARNINGS OF THE CONSEQUENCES OF KEEPING THE EPL WILL CONTINUE, AND I AGREE THAT NOTHING WILL CHANGE.
2. We haven’t seen a ‘Labour Manifesto’ and at times the electorate have shorter memories than goldfish. I’M ASSUMING LABOUR WILL CONTINUE WITH THE STATED POLICY TO REMOVE THE ALLOWANCES
3. I think Labour will have an absolute majority but it won’t wipe away problems. AGREED.
4. I think EnQuest are only looking at deals that work with high tax and a hostile government. YES, AND ANOTHER DEAL AS WITH ROCKROSE, FOR THE REASONS EXPLAINED BY STEVO, COULD HAPPEN BEFORE THE ALLOWANCES ARE REMOVED.
5. A fiscal event always possible as common sense and realism returns plus 'events' - Russia could escalate. THIS FISCAL EVENT LATE 24 OR EARLY 25 WOULD PUT INTO LAW THE ANNOUNCED REMOVAL OF THE ALLOWANCES PROBABLY WITH IMMEDIATE EFFECT.
6. Tricky one about Bressay. If they announce it won’t proceed then it won’t because governments don’t pay ransoms (they usually act before via back channels). This is a massive game changer for the company and the UK if it happens. The activists really are a spent force because their threats of global collapse haven’t materialised and renewable prices are unaffordable and going higher. Occam’s razor says it will go ahead because of the chains of parsimony that Labour will creatively invent. I do believe Ed is on borrowed time. IF THE ALLOWANCES ARE REMOVED SEEMS HIGHLY UNLIKELY ENQUEST WOULD PROCEED WITH BRESSAY.
7. No idea who the others are and would need government diktat. I’M THINKING ANY OTHERS WITH FIELD DEVELOPMENT OPPORTUNITIES WOULD ALSO NOT PROCEED. COULD EVEN ROSEBANK DECISION BE REVERSED?
8. Tax credits are ‘sanctified’ and would drive business away from the UK if removed. AGREED. AND BACKDATING ALLOWANCE REMOVAL HAS, AS I UNDERSTAND, BEEN SHEVED.
9. M&A – no idea. We have plenty of wiggle room and possibly more of a before/after election decision. Before means likely to get a Labour blessing; after something to negotiate with as there is a chance Labour are creating a new narrative due to professional industry and economic analysis or more likely due to simple expediency. MORE A GUESS THAN ANYTHING, BUT SOME M&A BEFORE THE AUTUMN IS THAT GUESS.
Morning Stevo,
I would be dismayed if the company just sat on any cash balances when it it paying 13% interest on some of its debt. It either needs to pay down the debt or do cash generative deals.
Sek
Enquest has been reporting $300m+ cash for last couple of year ends and has not used this cash to fully repay RBL until Jan/Feb 24, using $108m proceeds from Bressay transaction.
The reality is that like most groups the working capital and cash balances fluctuate throughout each month as creditors are paid, oil deliveries settled etc. As I have noted previously the reported cash balance is far higher than average cash balance, with interest receivable on cash balances for 2023 totalling $6.5m. This indicates an average cash balance of $120-130m across 2023 and there are probably days during month when balance significantly lower.
Accordingly it is understandable that Enquest has not sought to repay bonds or retire RBL in 2023 as cash is need to fund working capital peaks during each month. In addition Enquest can not use the JV cash to repay debt.
I don’t think there will be any bond repayment during 2024 but possibly 2025 if no acquisition opportunities are identified. Also if Labour leave tax alone there will be a need to fund organic projects such as Bressay oil in 25/26. If labour follow through on their proper WFT narrative, then minimal investment and lots of cash generated in 2025 to potentially repay bonds early.
I think it is a big stretch assuming c. 5% deposit rate for 2023 (over the whole year). I was confirmed by Craig that their current deposit levels are c. 5% as of Feb 2024.
Cash and available facilities:
12/13/2022: $349m
06/30/2023: $385m
12/31/2023: $499m
Average ~$411m, c. 1.5% interest received: $6.5m. Of course fluctuations in the treasury over the year, but rather believe that they had a much lower deposit rate for most of 2023 (than the current c. 5%). For 2022 average ~$378m, c. 0.5% interest received: $1.7m.
Stevo yes I am sure you are right. But the company does have the recently paid off RBL to dip into to smooth out the peaks and the troughs so they could buy back some high yield bonds. The good news is that with Brent at $89 we should be generating far more cash than expected. You produced figures at $86 for 2024 and 2025 and those showed FCF greater than market cap over those two years. Roughly a dollar on Brent covers the cost of the announced buyback for this year.