The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
None of this is a surprise - I've been saying that this will happen for months. Market will digest this in the coming days - maybe oil gets marked down to mid 80s and with the last piece of bearish news out of the way, this sets Brent up to go to 100 bucks next month/April. Can we pin this post?
If you look past KO's minute by minute commentary on Enquest's share price or Brent, you'll know that the price setup for Brent/WTI is the bullish its been in years - and Saudi won't do anything to help alleviate pressure on Cushing stocks by pushing more oil towards the US, like they did a couple of years ago when they wanted to shaft shale.
The market is rewarding shalers who're conservative with their capex and the resulting lower production growth, and marking downwards stupid shalers like Continental Resources. That's very refreshing to see.
P - the key for Enquest is to first sort out production numbers properly and that's the first step in a process of sorting out the share price. If we're languishing at these lowly market cap numbers, blame no.1 would be on execution and the second blame would be of course on the ESG brigade. I'm with Chilting's view that when an oil company can't execute on at least the mid-point of their guidance, the distrust in that share in the current market setup (ESG pressures) is massively amplified.
I'e never doubted that AB was a good bloke, but that means zilch when viewed from an investment lens - I'd think that actions speak louder than words and that's what I'd like to see from AB and co. The opportunity is there in front of them, but I'd like to see them pivot to a more shareholder friendly view - the email to ZFG today was a good first step and it is just a first step. If in the results announcement next month, the production actuals for the first 2 months of 2022 look good, and you get a sense of them pivoting to a focus on shareholder results, then I'd be truly convinced.
If you objectively analyse UK listed oil companies' SP performance in the past 6 to 8 months, those that have lagged with beating production guidance have suffered - I'll put ENQ and HBR in that bracket, with TLW being middle of the road, whilst the likes of PTAL and AOI have kept up with oil price moves and have overperformed, largely because they have beaten production guidance.
This is why Enquest putting out solid production guidance next month is key, IMO. The real strap line for Enquest should be deliver it and the market may just listen.
Good luck !!
It's good that he took the time to respond to a shareholder's email.
I agree with your points below, MRC - It's just that the contractual terms aren't known to us, but it certainly clear that we do benefit from higher prices - 'other cost of sales' isn't going up linearly with sales amount. When I get some time, I'll check the Magnus prospectus and see if that gives us any additional detail.
That's an exercise of stock options and not a share purchase - it's not deemed a director purchase.
"I am guessing long term contract in 2017would have been around 60p per therm." the problem is that we don't know the duration of this LT contract or if the price moves up or down somewhat with spot prices. Enquest indicated in H1 that costs have moved up because of increase in gas prices - that tells me that it's not a fixed price long term contract.
Here are a couple of paragraphs from the H1 2021 report. Not all of Other Cost of Sales of $53 mill relates to Gas purchases - presumably we must be making some money. I'd hazard a guess of between $10 to $30 mill for H2, given how much gas prices jumped in H2 2021.
Revenue from the sale of condensate and gas in the period was $57.9 million (2020: $27.6 million), primarily reflecting higher market prices for condensate and gas. Gas revenue mainly relates to the onward sale of third-party gas purchases not required for injection activities at Magnus.
Other cost of sales for the six months ended 30 June 2021 of $53.3 million were 45.2% higher than the same period in 2020 ($36.7 million), reflecting the higher cost of Magnus-related third-party gas purchases following the increase in the market price for gas.
We did sell 1.3 mmboe of gas in H1 2021 and simple calculations shows revenue was circa $44.5 per boe. NPD would've averaged more than $100 per boe in H2. That's nice lift if the purchase price didn't move up in unison. We don't know what the 2022 story is though from a purchase price perspective.
Not sure why production increases or SPR releases will curb demand??
US Demand (Total products supplied) hit an ALL-TIME high per this week's report at circa 21.9 mmbbls/day. And Cushing inventories are down to 27.7 mmbbls from 30.5 last week. That is a real sign of tightness in the physical market. WTI and Brent will be back on their merry ways soon - even with Iran and Russian headwinds.
This whole debate about entitlement production amongst LTHs is emblematic of why there is a need for Enquest to put out FCF expectations at least a couple of times in a year - even one would do. Companies like Apache clearly call out in each quarterly report what their headline production number and what they're actually entitled to sell as per terms of their PSCs. You need to read page 23 of 2020 AR to get an understanding of the difference between reported and entitled production.
Hitman - "Think Enq quote net production entitlement on assets.. including Malaysia.. so think 50k is the correct number rather than 47.2k. FCF $550m is about right for 2022 imv if we achieve top end of guidance.". No, that's not correct and I've shown this in a post any months ago. The headline number quoted is always gross production and you need to deduct non-entitled production to finally land at Entitled/Saleable production.
Best
Jan - the fag packet calculations need a bit of updating. Assuming that Malaysia is back to producing 8 kboepd, Enquest's production entitlement is circa 65% of that number, i.e. 5200 bopd. That 50 kbopd (per your estimate) should be 47.2 kbopd. You then have the small matter of BP getting approximately $70 mill of Magnus 75% cashflows if Brent is at these levels and assuming a 13 bboepd production for 2022. If you make these 2 adjustments, FCF is closer to $500 mill and that's where I'm at with too.
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Jan - yes, indeed - I suppose much of the hedging here is Covenant driven and it is what it is. If we have take that loss we will, knowing that at 100+ Brent, FCF will be pretty good anyway. And lets not forget the upside surprise to production for this year even. In terms of debt reduction, I'm pretty confident that we'll pay off the $415 mill RBL this year - that removes all hedging covenant constraints. Gross notes oustanding will still be $1.1 billion as none of that has been called up yet for repayment and won't be till the RBL is paid down. They'll either refinance that debt this year or possibly call part of the retail bond ($263 mill) - calling some of the retail bond, that's the only way Gross debt will be below $1 billion.
MRC - it's not that 78 is the 'hedge' - that's just the ceiling. On the downside, we're protected at $63. But, as I said above, it is what it is and I wouldn't worry much about it.
Hey L3 , you wrote - "And, if I was never convinced that FCF could be as high as $700M as posted here by several people, I am now dead certain it will come under $500M in 2022.".
Ye of little faith - I assume you've taken a low average of $80/bbl to get to an under $500 mill number. To be fair to you, at an Average of $85 , with 8000 kboepd in Malaysia with a 67% entitlement, overall 2% company shrinkage, 18 kboepd from Kraken and a circa 60 to 40% split of FCF with BP on the 75% magnus, I land at circa $525 million. This is assuming a 50-50% hedged/unhedged ratio. If oil averages 100 bucks this year, then Enquest will lose out on $200 mill because of Hedging, but FCF will be over 600 million - we're now primarily a function of how oil prices will do this year, given the increase in Opex/Capex. Of course, if Kraken and Magnus surprise to the upside, then even better.
They probably low-balled the production projections, IMO. Therein lies the opportunity, but tempered by excess hedging. Getting that right needs serious clairvoyancy skills and plenty of luck, and I can't but agree with Chilting on that count. Enquest has been pretty unlucky with their hedging in the past 3 years.
Squid baby - I can almost feel your pain and frustration. Be assured that this isn't an Enquest only situation in the oil equities world - it's a pan European phenomena. Even dividend paying companies like HBR aren't beng spared. Do I think AB has done everything right - of course not. I have a list of things that I can say they need to get better at, but even if these were done by Enquest, I've come to the conclusion that it won't matter much in the near term. The UK market just doesn't care at this time.
You can sit and moan about AB all day, and ask him to go. Surely, you're sane enough to understand the futility of of your desires. If you have more than one share invested here, you can go to the AGM and make your voice heard. But you know it matters not. Now, since AB's not going anywhere, what's your investment endgame - that's what you need to focus on will be my unsolicited advise. Given the time we spent on this board, I suspect we still hold out hope that Enquest will one-day double from here (or more to get to the 60p magic number). That may yet happen, but Enquest and other UK/European oilers are so far behind the game vis-a-vis US/Canadian oilers, that we can't say with any degree of uncertainty when this sector turnaround may happen.
However, Enquest can prepare better for this 'anticipated' UK investor interest turnaround by presenting a more shareholder friendly face - though that's not been in their DNA thus far. We're left with numbers to do the talking for the company, and those just can't convince the market at this time.
Good luck chaps..
Brent is above 90, up nearly 3 bucks from the lows today - there's a fighting chance that the active contract closes above 90 for the first time in ages. If nothing, it'll at least help Enquest get rid of debt sooner, acknowledging that there's no market interest in UK oil equities at the moment - today's trading volume is an eye-opener.
Magnus back at normal ops - L3, surely you like the sound of that. Other key assets working well. $1222 mill net debt. Slightly higher than expected opex. No FCF guidance, but should be able to work out from the 44 kboepd to 51kboepd range. Steady update, but will be fab if we can hit the high end of the range.
More snippets to follow
In reality, communicating Ops update dates in advance isn't a stock market norm. Plenty of large US and Canadian put out updates without letting the market know in advance that it's coming - I have no problem with Enquest not telegraphing that in advance either.
What would be good first step for me is to provide is to provide a range of FCF numbers for a range of oil prices - that can't be too difficult based on projected production. That's not boastful, as MRC and Romaron characterised it. That's elementary market disclosure and almost every oil company that I own does it.
Anyway, what's far more important with the update is a positive note on how production is trending/will trend for 2022. We'll keep our fingers crossed.
400 kbopd increase recommended by JMMC. Oil bouncing as a consequence and maybe today is the day that we finally see the active (not the front month contract) brent contract close above 90 bucks.
You're right, Jan. However, now's a good time to guide on Free Cashflow as it has a direct knock-on effect on paying down the RCF/RBL and get those debt levels down - everyone else does it and so why not Enquest? Do I think they'll do it - I'd give them a 10% chance that they'll do this, but if they do it, it'll tell the market that they're not tone-deaf.