Member Info for Fernan10

Hi KO.

I´ve already sent it to Victoria Mc Cullouch at RBC

Regards

Fernan

Good morning

After receiving comments/suggestions from the board, I made some adjustments to my financial model, and calculated the “break even” price for ENQ in 2019 (the Brent price at which free cash flow equals to cero (0)).

I run the model under the following assumptions:

Production
Core business: 52.000 bopd
75% of Magnus: 11.225 bopd (according to Magnus prospectus)
Total: 63.225 bopd (close to the low end of the production range recently announced by management)

OPEX:
Core business: US$ 24/b
Magnus: according to Magnus acquisition prospectus

CAPEX
Core business: US$ 180 million
Magnus: US$ 41 million (gross).

RESULTS
At the lower end of the production range, and Brent: US$ 65/b, we have:

EBITDA: US$ 855 million
Free cash flow: US$ 244 million
Net debt at the end of 2019: US$ 1.628 million

The Brent “break even” price (to get free cash flow=0) equals to US$ 49/b. Just for comparison, Premier Oil announced today that they break even at US$ 45/b.

As a note, the hedging programme secured by ENQ helps a lot in getting to that relatively low break even price. ENQ have a three way collar in place for 3 million barrels at a minimum price of US$ 70/b. That means that, at a Brent price of US$ 49/b, they get a financial gain from hedging of US$ 63 million (3 million barrels X (70-49)).

The analysts are getting something wrong in my opinion.

I can not upload the Excel file due to a virus threat. I can send it privately for those that want it.

Regards

Fernan

OK DD. No hard feelings.

Regards

Fernan

The analyst probably read what I sent to her yesterday.

did they modify the price target after confirming that there is no risk of a covenant breach?

Fernan

You´re welcomed, E121.

Your comments/critics are welcomed too

Regards

Fernan

I sent my Excel spreadsheet together with my explanations to the RBC analyst yesterday. Maybe she found it useful.

Regards

Fernan

Hi Romaron.

I think there are 2 issues that according to Mr Market don´t allow to make a direct value comparison between ENQ and Faroe;

- ENQ´s relatively high level of debt
- ENQ´s underperfomance in all most recent projects (Alma-Galia, Scotty and Kraken). Nobody likes it. It makes any promises/projections made by management difficult to believe.

As long as ENQ can reduce their debt, and starts accomplishing what they promised, I´m sure Mr market will recognize an Enterprise Value (EV) equal to a multible of EBITDA similar to Faroe.

I expect that the cash flow from the 75% of Magnus will go a long way in that regard.

Fernan

Hi Pelle.

I don´t think this number is important at the moment of valuing the company or their capacity to repay debt.

Regards

Fernan

Hi Krakenoil.

I sent to the RBC analyst basically the same info I posted here (Excel spreadsheet and comments).

Regards

Fernan

Hi Pelle.

I don´t understand your question.

Regards

Fernan

I sent my calculations to the analyst Victoria Mcculloch from RBC. I don´t expect any clarification/rectification soon, but maybe next time

Regards

Fernan

SUMMARY

Adding the 2 “business units”, ENQ will have for 2019:

EBITDA: US$ 804 million
Free cash flow: US$ 197 million

CALCULATION OF NET DEBT

Net debt informed by ENQ at Oct 31,2018: US$ 1.772 million

Payment to BP for the acquisition of 75% of Magnus: US$ 100 million

Net debt projected at Dec 31, 2018: US$ 1.872 million

Free cash flow in 2019: US$ 197 million

Net debt projected at Dec 31,2019: US$ 1.675 million

DEBT COVENANT COMPLIANCE

The ratio of Net financial indebtedness to EBITDA in 2019 should be lower than 1,50 (see page 281 of the Magnus prospectus).

Net financial indebtedness will exclude the bonds, due to their coupon structure (see page 230 of the prospectus for the debt restructuring in October 2016)

So, in order to accomplish that, and with an annual EBITDA of US$ 804 millon, net financial debt (excluding bonds) should be lower than US$ 1.206 million

I don´t expect any problem for ENQ to accomplish that at Brent=US$ 60/b

I think that the RBC analyst didn´t understand the way the distribution of cash flows from the 75% of Magnus works.

Regards

Fernan

Good evening

I calculated EBITDA, free cash flow, net debt and covenant ratios compliance for 2019.

I divided the calculation in 2 chapters: “core business” and “75% of Magnus” (see the Excel worksheet attached)

CORE BUSINESS

The first worksheet (Core business) is the financial projection for Enquest´s business, including the 25% of Magnus initially purchased from BP, but excluding the 75% of Magnus recently acquired.

The assumptions here are the following:
1. Average Brent price: US$ 60/b
2. Production: 54.000 bopd (idem to 2018)
3. OPEX: US$ 24/b
4. CAPEX: US$ 180 million

As a simplification, I considered that, even when average Brent price is less than US$ 65/b, the interest on the bonds is paid (from a Net debt calculation point of view, the fact that interest on debt is paid or added to the principal is not relevant)

Taking into account these assumptions, the projected results for the “core” business unit are:

EBITDA: US$ 615 million
Free cash flow: US$ 77 million

75% OF MAGNUS

In the second worksheet, I considered the projections for production, OPEX and CAPEX informed by GC&A (the third party consultant hired by ENQ to evaluate the project).

The average Brent price is the same as for the “core” business (US$ 60/b)

Regarding the distribution of the cash flow resulting from the 75% of Magnus, I followed the order of distribution informed by the company, that is:
-first, repayment of vendor loan
-second, reimbursement to ENQ of the US$ 100 million purchase price
- third, 50-50 share with BP

See my post on Oct 31, 2018

As Enquest consolidates 100% of the project in their balance sheet, the “reimbursement” of the purchase price is not really accounted for. In reality, it reduces the net amount to be distributed to BP as their 50% share of the project cash flows.

Taking into account these assumptions, the projected results for the “75% of Magnus” business unit are:
EBITDA: US$ 190 million
Free cash flow: US$138 million

https://anonfiles.com/1dbaX0p7bc/ENQ.L_2019_1_Free_cash_flow_projected_for_2019_xlsx

MO:

I learnt a lot from you, especially how to use tanker watching to calculate a particular field´s production.

And I think you are a nice person, that neved engaged in personal attacks when I presented my often contrary views on this stock (a common practice on this board).

I´m álso sure that ýou felt greatly dissapointed by the latest operational update, especially regarding projected production for Kraken for 2019, and that in turn influenced your decision to stop participating in this board.

I hope one day you will be compensated for all your efforts.

Regards

Fernan

2 things from today´s news release that dissapointed me:

1. I was expecting the first well to be an appraisal of the Hammerhead discovery instead of an exploration one. I´m sure the chances of success would be much higher in the case of an appraisal well. But I´m not an expert, I can not seriously questioned Tullow/Total/Eco´s decision on the subject

2. ECO had been talking of a drilling cost of around US$ 4,5 million per well (net to ECO) for a long time. Reading that the net cost will be US$ 7,6 million per well substantially reduces the running room for ECO. I hope subsequent wells will have a lower cost

Just my oppinion

Fernan

E121:

You wrote:

"Again, how's stating that Alba is producing in line with expectations irrelevant, when they're updating about the status of CNS assets?"

Of course it´s irrelevant, E121. Management have never told what their expectations were for this particular field. Then, having them saying now that the field is performing according to those previously undisclosed "expectations" means nothing for me.

Does it means that it´s producing 500, 1.000 or 1.500 bopd, net to Enquest? who knows.

And the same reasoning applies for the recently drilled Malaysian wells

Regards

Fernan

E121:

this is just another attempt by management in order to somehow hide the fact that debt is not going down significantly, in spite of very high oil prices.

I can list at least 2 previous attemps to show that the debt situation was not as worse as it really is:

1. in the 2017 Annual results presentation, they informed net debt "excluding PIK interest" (see page 4 of the presentation)

2. in last May operational update, they informed something as irrelevant as "The Group’s improving cash flow generation capacity is enabling the early cancellation of $50 million of the Group’s credit facility by the end of May, with the term facility reducing from $1,125 million to $1,075 million. Upon cancellation, the Group’s cash and available bank facilities will therefore reduce by $50 million"
That´s OK but... they didn´t informed the amount of the net debt at that time!!!!. have you ever thought why?

I don´t like tricks. Pure and simple.

I remember they did something similar in past presentations, trying to concele the fact that production in all North Sea producing units were going significantly down.

There are other items of info in today´s update that are totally irrelevant. For example:

"Output from Alba has been broadly in line with expectations"

Talking about Malaysian operations: "Production from the two wells drilled earlier this year remains broadly in line with the Group’s expectations." what expectaions are they talking about? they are drilling the wells using shareholders´s money, I understand. They should informed the results of the investment, I think.

But after reading all this lengthy update, the most important question remains unanswered:

what´s the problem with Kraken?

They informed about "a small number of system outages and equipment repairs continues to limit performance" as a seemingly temporary problem that is preventing production from being higher in 2018. But they didn´t provide any explanation in relation to the expected low performance for 2019, even after completing the drilling of DC4.

I can see people in this board still trying to guess the answer to that simple question, talking about configuration problems, water injection issues, etc. I even read one poster saying something like "I´m not worried about production profiles, because the reserves are stil there". How could he be sure of that? are you sure that the company is not going to lower the amount of reserves at Kraken in the next Annual report? If you don´t know the reason of the underperfomance, you can not be sure of anything, I think

Fernan

Fernan

For those that are happy with the net debt "reduction" figure, I think you need to read twice.

"At 31 October 2018, net debt including PIK and the net proceeds from the rights issue was $1,771.8 million; "
This supposed "reduction" happened because they took into account the US$ 127 million net proceeds from the right issue. As soon the money was transferred to BP (to pay for the acquisition of the 75% of Magnus) net debt will be up again.

Regards

Fernan

The projected financial debt reduction by more than US$ 200 million for the 2H 2018 calculated by Moody´s is inconsistent also with the RI and the need to access the OZ financing to repay the bank debt amortization in October.

Maybe Squif is right. Moody´s numbers should have included the US$ 100 milliion reduction in BP´vendor loan from the 75% of Magnus to start making some sense

Regards

Fernan

Taking into account all these items, a semiannual EBITDA of US$ 448 million in 2H 2018 (as projected by Moodys) will produce a free cash flow of around US$ 148 million during the same period.

Considering that debt reduction was almost cero (0) in 1H 2018, I can´t see how Moodys forecast an annual debt reduction of US$ 270 million for 2018.

Just my opinion

Fernan