Member Info for epiphany121

Cheers, Mod. I was looking at CPG Vs VET when I was looking to see which one to pick to invest and I decided to go with VET because of their wider production exposure to global oil and gas markets. So Shell is divesting their Duvernay assets, presumably at a bargain price to CPG and that accounts for this large moev? And I'm also reading that Ovintiv has also divested their Duvernay assets to focus on the US shale patch. I suppose there are plenty of Canadian producers who's seeing a bargain in these divestments though. Good for them.

Hi L7,

I only focused on the oil component of Devon's production as that has the most correlation to our majority production commodity. In reality they produced 580 kboepd in Q4 - the differential 280kboepd being a combination of gas and NGLs. Their non-oil production realises about 15 bucks lower per BOEPD than oil. For Q4, Oil was $40 and non-oil was $25 - a circa $32.5 average, give or take. At a $60 WTI, it's fair to say that they'll probably realise $45/bbl for their 580 kboepd production (after accounting for discount to WTI + hedging losses) and with their LOE+SG&A+Int expenses being approx $15, the netback is circa $30/bbl. You're looking at a total netback of circa $6.3 bill on a capex of $1.8 bill, which is more like 28% of their cashflow from Ops. And the shalers need a lot more capex to keep production at a certain level than we do as a result of the much discussed treadmill effect, as the shale wellhead production drop-off rates are much larger than for conventional oil fields. If we apply the same 28% CF capex rate to sustain Enquest production with a $40 netback, we're at circa $240 mill, but in reality enquest won't need to spend that %, I'd wager. Would 15 - 20% be sufficient? Possibly and that leaves required capex at $120 to $160 mill. Of course, I/we could be off the mark here, but that's a way to look at sustenance capex.

Your point regarding shale restraint is indeed important and is one of bearish wildcards. Iran/Venezuela/OPEC+ additional production being other factors and to not forget, a mutated strain of Covid that is 'vaccine resistant' could land a killer blow to a post-Covid recovery thesis too. Shale's just come off a horrible year, but nearly all of them are still around. Shareholders were wiped out and bondholders have ended up owning these companies. They're pledging restraint so that they ostensinly can 'recover' their original loan investments in the form of higher equity prices + dividend payback. If this discipline can be sustained then this bodes well for higher prices for WTI/Brent in a post Covid world. All we can do is follow the signs and see what the shale producers do. Unlike conventional oil their drill to production cycles are quite short ( 3 to 6 months depending on the location) and the number of rigs in operation is a good leading indicator to where production will trend in the following quarters. 700 to 800 rigs may be needed to start boosting production numbers, and we're a long way from that now.

Best

Circa 20 mill shares traded with the UT and another 13 million after market close, presumably institutional activity that. Hold your horses.

P - many hedgies have taken on and lost their shirt on their Tesla shorts. All I'll say is that with more stimulus money incoming to the reddit crowd, don't be suprised to see this get over a 1000 bucks.

Mod, indeed. I have the likes of GTE, REI, CPE, CDEV in my portfolio and they've gone parabolic as you know. I've taken on VET recently and I think they'll bounce back too strongly - they have European gas drilling going on - who'd have thought a Canadian producer would. ;-)

I think the next few weeks will be the turn of UK oilers to shine. ENQ, TLW, PMO and loads more I don't track. I have some HUR and even with all the shenanigans around their reserves, they will shine with Brent at these levels. I wouldn't and don't invest in the European majors - there are plenty of high beta opportunities in the small/mid cap sector.

Morning R - It's the market catching up, eventually might I add, to the reality of Brent nearing the magic number of 65/bbl. The link to the oil price article that Mod posted is eye-opening and show how European oil equities have vastly underperformed their US counterparts just in the past 3 months. I can vouch for this just from the outsized/outlandish gains in the shale equities in my portfolio. However, I do take the point that this underperformance sets the scene for spectacular gains in the UK/European equities - the gamma should be fantastic in the coming days/weeks. This is probably is what is showing up in the price movements in the past few days, and should continue, IMO. I'd initially expected Brent 70 in May, but that could come in a lot sooner with the Freeze-outs in TX. It's mostly the pipe infrastructure that can't cope with the cold, unlike say in the Bakken in ND where these temperatures are common. Refineries will start cranking out distillates in the coming week to keep up with demand and we'll see more large draws - watch that space for the Brent 70.

There was a question from Mrc about Shale production outperforming and denting the oil rally. That could be a possible bearish factor, but in reality it may not be. We had 2 large shalers report yesterday - COntinental (CLR) and Devon (DVN). CLR did 160 kbopd (overall 300kboepd) in 2020, and they've set a capex budget of $1.4 bill just to keep production steady at 160 kbopd in 2021. At a $52 WTI, even with a large Bakken discount of 10 bucks on WTI, they expect to generate a FCF of $1 billion after capex. Ditto for DVN - 300kbopd in Q4 2020, and they're spending $1.8 bill in 2021 to keep production at 300 kbopd. They have an innovative 'variable' dividend distribution policy based on FCF generated each quarterand they're proposing to hand out to shareholders circa 50% of this 'excess FCF'. Great shareholder initiatives are happening in the US. They also project to have more than a billion FCF this year.

For now, they're showing restraint, spending well within Cash from Ops and not resorting to borrowing. All the talk on here of funding not available to shale - that's just fantasy. If they need funding, they 'can' get it - not the copious amounts that thet used to in the Numpty years, but they still can if they need it. Read up their Quarterly reports, and they all say one thing, live within your means, show restraint, reward shareholders and the market will reward you. And that's where they're going.

The vast majority of shale is solidly profitable with WTI at 50 and is a huge FCF machine with WTI at these levels. Therein lies the risk that they go off-piste and start spending again. There are lots of bullish factors converging for oil at this time and I'm not discounting the bearish factors too - Iran, OPEC + cranking it up, shale overspend. However, I believe that the bullish factors will win out here in 2021 - I'm firmly in the supercycle camp. ENQ will fly.

Hello P - Downside protection only when you get a chance to take on a 70 or so put option purchase is perfect - that's what you're suggesting and that's great. What we don't need in 2021 is a collar of any shape, when all it can do is save you a dollar per bbl, but can shaft you on the upside in a rising price environment like now. Not a good strategy.

No, I don't play in the oil commodities market, including options. However, I know a fine gentleman who's on this board who does and he's got a good call option buy at 61 strike price for next month expiry and he's having it good. I have a few call options on a couple of US shalers - the equity price performance in the shale patch firms in the past 3 months has been simply mind-blowing. They're promising restraint and sticking to funding drilling operations from cash from ops, and if that restraint holds up then thats a great sign for US production restraint and oil prices overall. This is yet another component of the overall Brent 80s equation this year.

Enquest was at 27p this time last year and we'll get there soon.

Evening P,

We know the approx. cost of buying a put from Hurricane hedging a good chunk of their H2 production last year and it was approx. $2 a barrel. They spent $3.4 mill for 1.8 mmbbls hedged. Enq should go with a put when Brent steps into the 70s and step back.

Oil may swing around these levels for a few weeks, but wait till May or so when the US inventories starting drawing down more and the ROW also opens up more, post vaccinations. All bets are off then. We have loads more fiscal stimulus arriving in the US in the near term. Stay patient and oil shares will take care of themselves.

Close GE asap and use our losses after completion date to save on taxes. A great move now in hindsight.

I do and Brent will be a lot higher. ;-) No panic hedging needed at these levels and if anything, Enquest should never put on collars. Buy a straight put when Brent hits 70s at least half of remaining production and ride out the upside. And that 70s will be a good time to complete the OO and complete GE Acq. All the stars are aligning rather nicely.

Stay safe and invested.

Mrc - That's even more bullish than my initial prognostication of $70 by May. Could it happen by March - of course it can. If it does, then 80 by late spring, with Covid in the rear view, is a done deal. And there's no dumb Donnie in the White House trying to put pressure on Saudi or some such. I said, probably 18 months ago and I still stand by this, that a Dem in the White House is the single biggest factor that can take oil, and Enquest by extension, to great heights. Throw in the additional spark of the biggest jump in money supply in history and with the pandemic behind us, I won't be surprised to see oil at 100 bucks in 2021.

I just hope that the hedgers at Enquest learn to read these signs better and play the game right.

GLA and stay safe. A strong bull run isn't too far away.

$60 average over 2020? Doh - can't you ask for the money now?

P - I said May for 70 Brent. You know it wants to get there sooner. Let the next US stimulus and the infrastructure bill pass and it's a given. You'll win your $65 bet with way too much ease..

That's spot on. That's exactly what I'd expect Enquest to do - layer on additional hedges when Brent hits the 70s and i see this happening no later than May and we may get there sooner. And we could then put on a 65 - 75 costless collar.

Hello H - They're financial instruments (a combination of a call and a put) and of course they can be closed out - one end or both ends of the trade. With the initial trades, Enq would've bought a put to give the $53 floor and sold a call at $62 to give the ceiling. In a rising price environment, it's the sold call that's the issue. Say Enquest took out these options when Brent was $55 or 56, and let's say that they received $0.75 premium for the sold call and paid $0.75 for the bought put, and these would've been applicable to the 4 mmbbls - that's the costless collar. Net net, no cashflow change and these bbls are stuck within a price range.

To get out of the collar in this scenario, you need to close out the sold call by buying it back. The problem would be that the premium on the $62 call option now is probably $3 a bbl because of the price upswing in Brent. Enquest will have to shell out $9 mill ($3-$0.75 * 4mmbbls) to close out the ceiling. The higher Brent goes from here, the higher the cost of the call premium closeout. Hope this clarfiies.

Instead of letting Shale lead and corner all the glory, what if Enquest did this to be a leader in the UK - aligning exec compensation to shareholder value, instead of our current production/debt targets? I can't see many, if at all any, of us complaining about this approach to force management to look at shareholder value as a key driver for their compensation?

https://finance.yahoo.com/news/oasis-petroleum-announces-executive-compensation-120000292.html

We all know that the current structure hasn't done much for the share price in the past few years and that's an obvious understatement.

MRC/Neil Hannon - whatever happened to your original NH avatar? I used to like that better. ;-) If my memory serves me well, remember you sold out just prior to the Covid and got back in a short while - I can't fault your timing though.

I can't figure out why we can't seem to move up now, but a move towards $65 Brent should do it. I can't argue with what you write about waiting a bit and minimise dilution, if the price moves up from here to the 20s. But, I suspect you'll be long out by the time we get close to the OO. Lol..

Chaps - this deal isn't that difficult to understand and is no different to the 75% Magnus deal closed in 2018. What L7 said is what I wrote yesterday - we are owners on the completion date, not on the economic date of 1/1/21. We can start including these bbls in production numbers on the closing date, not now. We will get an adjustment to the $325 mill acquisition price by dedeucting the post-tax (40% tax) cashflows that Suncor receives from 1/1/21 to closing date (when they cease to be owners).

@L7 - your calcs in an earlier post looks good to me.

It will be - after the new RBL pays off the BP vendor loan. Otherwise, it would've been 2023.

Hi L7, in the Magnus 75% acquisition Enquest had stated that they were trying to complete the deal ASAP as the cashflows are then 'protected' from tax because of the accumulated losses (just like now with GE). That is how I inferred what I wrote. Hitman's link to the GE acquisition article doesn't clarify what we're discussing. But sure, it will be good to get Ian Wood confirm either one of our lines of thinking. ;-) Please do let us know once you get some feedback.

Hi Hitman,

A couple of things to point out here. The $13mill/month that'll accrue to us after us utilising our carry-forward losses would only be from the closing date, and not from the economic date (1/1/21). Till the closing date, Suncor will get the post-tax cashflows and it's this post-tax cash flow figure between 1/1 and closing date that'll adjusted against the $325 mill purchase consideration. This is no different to what happened with the Magnus 75% acquisition. You'd need to take that into your FCF calculations.

And talking about Magnus, please note that the FCF from the 37.5% portion of Magnus stil goes to BP.

Irrespective of this, we could get a $65 overall FCF benefit on all barrels should Brent average in the low to mid 70s this year. It's not a complete fantasy, IMO. ;-)

Good luck.

Hello Jan,
My post was only to speculate about why we're the pariahs in the market vis-a-vis some of our peers. The hedge topic was from a viewpoint of using the additional cashflow to pay down debt as that is a very large factor is holding us down. All I was pointing out to Mod is that Debt isn't the only factor - although ultimately a positive hedge is directly correlated to dent paydown. ;0) I just can't put a finger on why the market undervalues Enquest all the time. In the past 3 or 4 years, the periods of time that Enquest did well was when Brent was comfortably in the 60s and that may be the panacea to the current SP blues. Brent will be in the 70s in late spring/summer and i'm actually betting on a 80s handle this year - all this means a lot of FCF to pay down debt and change the market psyche towards Enquest. If nothing else does it, FCF and debt paydown surely will. That's my bet.

Good luck.