Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
Let it float.
We're in a good financial position and hedges are generally for the ones that cannot take the downside.
Protection is extremely costly when the price moves north. Had Enq not hedged in 2018 this distress would not have happened. Buying outright put options is utterly stupid given the forward curve.
Hello romaron,
Had some splash-cash laying around so jumped on the Pelle trade. But I do own a substantial block of Enquest shares dwarfing the 60k I added today. I'm still 15-20% below break even and I thrive in this environment.
I've added shares in other non-dividend paying oil companies, Africa Oil being the second largest holding of the bounch of oilers. Late last March I shared that I had gone deep into oil companies, should be in my posting history.
Every now and then the market is whacked. And a few decisions and a couple of companies is the foundation of what I've built.
Did I beat the market on a regular basis? **** no. But I did have a few big winners 30 years ago and that's all it takes to be in the driver seat right now.
This is still the best thing I've ever seen, because it takes nothing more than current supressed oil prices to create a fortune for shareholders.
Best, HMH
You know, at $1.2-1.5bn Enquest would still look cheap at current oil price.
We don't carry the best assets but we could easily keep production above 55kboepd for the rest of the 2020s with sub $200m/year of capex.
I just hope Producer is bound for something nice. That could add some massive numbers as the FPSO can handle 80kboepd.
We're at 0 net debt in 24 months and we're producing way beyond that. Markets will come around, and I'm blessed to have been able to buy so many shares at lower than current prices.
Hello Pelle,
The Minis you can theoretically hold forever, but wouldn't make sense to hold at a 2-3% interest rate if they catch up to the underlying share at which point you can just sell the mini and buy the share. Usually a bank just buys alot of the underlying shares or long dated options and then let people gamble with a spread and the interest rate.
Certificates will decay as the big down days always come. However, the ones with low leverage (1.5-3x) can stick around for a long time. Because of the daily reset the 5-10x levered ones will experience a bad run at some point. The 10x is knocked if the market moves 10% down, so back in 2020 during the worst days of March, all of these were pretty much knocked.
And I even had a 4x knocked as the marken dove 25%.
To sum it up you can day trade certificates but hold on to the Mini futures for a long time. Just take it easy on the leverage - if you're knocked you won't recover a penny even if the underlying stock moves back up later.
Best, HMH
Pelle,
That's correct. Problem being the daily reset so let's assume 10x leverage and a daily move of 1% of oil.
Let's assume we start off at 100.
Day one we're down 10% -> price is 90
Reset
Day two we're up 10% -> price 99.
Reset
Day three we're down 10% -> price 89.1
Reset
Day four we're up 10% -> price 98.1
As you see, theoretically nothing has happened to the underlying asset - oil price is where it started but your down 2%.
On the other hand, if oil raises like it has done for a long time you get an exponential growth in the certificate.
Mini futures works differently. They errode at a 1-3% rate a year and the bank setting the spread makes some money when you buy and when you sell.
You got a Mini L Enquest on AVA trading at 0.92 sek. Enquest have to drop to 0.75 sek for this instrument to get knocked and 0.92+0.75=current share price. Implied leverage is 1.8x but it changes over time depending on the price of the underlying share price as it's always going to be 0.75 sek begins the share. So if Enquest moves to 100 this Mini L will move to 99.25 where you get basically no leverage.
Hope that helps
Best, HMH
Hello Pelle,
The mini futures you can hold but the certificates have daily resets meaning that they will decay over time. Wouldn't play around with that kind of leverage. The 5-7% up/down days are not a thing of the past, and we're likely to encounter some volatility some time between now and late summer.
2-3x is probably a safer place to be. Had some 4x oil Bull certs knocked when Saudi and Russia went into clinge early 2020.
Mini futures are knocked at a certain price. So buying ones that's knocked at $50 brent would imply a gain of 130% if oil is heading to $80 while not dropping below $50 from current levels.
If you want more leverage you'll have to accept at higher knock-out price, which equals higher risk.
Best, HMH
Market is getting into a distressed position. Been watching capital budgets and companies are not spending money this year while demand is set to return.
I think this squeeze is just getting started. Will need to see way higher prices in order for capex spending to increase in the short-term.
It's usually not a straight line, but we're heading into heavy demand season in a few months and nothing will change on the supply side. Chickens will come home to roast, and I dread that this supply gap will be the biggest one in the history of oil.
Hello romaron,
Whole western world will go to **** when inflation takes off. All our economies are built around massive housing bubbles and services.
UK GDP is 9% production and 70% services - when inflation comes knocking, raising prices of your production and selling it abroad is essential to keep the economy going. China can do that.
Having little production will make the trade balance explode as buying stuff from abroad is a claim on the same money that moves around in the service economy. Service economy deflates, massive unemployment and utter despair.
On the other hand you won't need as much energy, which will make some (Chiltling et al.) happy.
Best, HMH
How about this fact:
Global Coal consumption is lingering near all-time highs and is growing over the coming decades, Natural Gas at all-time highs and Oil was at all-time highs back before the covid debacle.
There's really only a small part of the rich world who rabidly pushes change through taxes and incentives. All they end up doing is ruining productivity and moving production to other parts of the world. Look at the UK - all you now do is moving money around and consuming more than you produce. As of now you own enough overseas capital but at some point the negativt balance of trade will end up ruining your currency and bankrupt your country.
L7,
As the transaction date is 1/1 2021, we get the revenue, and profit, and therefore the tax bill. We use our tax-credits to neutralize the earnings and we end up paying no taxes while retaining the full amount of free cash flow.
Beat, HMH
Don't you ******s (trying to sound like a brit, no offence) have anything better to do than to argue about pennies when the FCF will be greater than the balance when you've made your point and have come to a conclusion in this matter?
Also, taxes are paid the next year. So you've just wasted hours coming up with numbers that won't apply as Enquest will be the owner when the tax-bill for 2021 is determined.
Good job.
I don't see the issue. We're adding good production in a time prior to what we all hope to be a higher oil price environment. The dilution factor is TBD and not buying into it won't leave your shares worthless.
I like the acquisition and I hope there's more to come. The $50m is the commitment the banks demanded and getting all our debt under the same umbrella is great. The $50m can probably be transfered right back as the facility is backed by our assets and debt covenants will probably be a thing of the past. Maybe 50% of FCF at current level will go towards debt reduction from the closing, potentially leaving Pelle happy.
Beat, HMH
Hello Jan,
This is a good read: https://www.bunkerspot.com/features-all/item/crude-comparison
Kraken is essentially IMO compliant bunker fuel so the price will be near the price of VLSFO. It is heavier so it could fetch a premium as gasoil blendstock is cheaper - and the price of the end product will dictate the price of what's put in.
It's probably a little more complicated but we know an Australian grade similar to Kraken fetched an almost 10% premium to VLSFO back in December 2019.
I'd say we're currently in the $65-71/bbl range for Kraken crude for now.
Kraken settles in Scapa flow. Then traders will have to work out where it will be most profitable to ship it and then bid for the cargo. Rotterdam will for sure be cheapest place to ship it due to distance, and has the lowest VLSFO price due to better refining capabilities of near-by crude grades. Only cargos sold to there over the last year has been blended into other tankers before heading elsewhere.
Don't know the current day rate for a Suezmax, but the 6 week journey to Singapore is probably running in the $2-2.5/barrel of cargo so an oil trader could offer anything below Kraken sales price minus the shipping cost to make money.
Best, HMH
As romaron say, the price is just the price. At current production and oil price Enquest is adding ~$600m to the bank yearly at a market cap of <$300m.
Sure, some debt will have to be payed but reducing ones liabilities should add the same number to ones solidity. 9 month down the road Enquest should have trimmed both the RCF and the PIK notes to zero. Then we're just filling the bank with dollars every month at a rate of $50m/month at current numbers.
Companies that pays a dividend usually have a FCF-yield of 0.8-0.15, and paying half of that to shareholders translates into a dividend of 4-7.5%. Enquest is currently running at a FCF-yield of 2, so paying half as a dividend would mean a 100% dividend at current rate. And we all know that our assets still have legs to them and will keep on producing for many years.
It's just bonkers. We'll see what happens, but I wouldn't expect Enquest shares to keep on trading at a 100% dividend rate the day it is announced, and I sincerely believe a 50% FCF payout rate is reasonable. The industry average is way higher than that so somethings got to give.
I dread a buyout at some silly price, because before the end of this year AB will have the firepower to institute a very big, and very sustainable dividend unless we have another oil collapse.
Best, HMH
Hello romaron,
Yeah, the last part is probably squido-nomics. The working capital has nothing to do with net debt and the latter parts makes no sense whatsoever.
The first part is better, could be right. I got YE net debt at $1.295.
Best, HMH
Hello lads,
My read on this is that Bressay standing alone would require a massive FPSO with a great injection capacity to produce any significant number of barrels. I'm invested in Africa, and the Egina development ran at a cost of almost $16bn producing the biggest FPSO ever built with a capacity of more than 230kbopd.
I think you'd need something similar to produce meaningful volumes out of Bressay as oil at 12(?) API is like mustard out of the refrigerator. Armada Kraken is best in class but can only extract ~40kbopd at the 13 API that Kraken is graded at.
Meanwhile, if you don't need a massive yield, but rather a couple of thousand barrels out of every well and happen to have a heavy oil FPSO down the street, a tieback would make sense and possibly create a lot of value. We can drill a couple of wells a year and make that billion barrels last for a long time.
And to be clear, only an idiot would have sanctioned Kraken at oil sub $90. Now things worked out well in the end, but without the VLSFO-premium and some other rather big eventualities the company would have been in deep trouble. Had Armada Kraken for instance been on Bressay instead, the oil wouldn't have made the VLSFO cut and heavy sour is not really in favour at the moment. Picking it up with a tieback at $15-20/bbl makes it a lot more commercial.
But the FPSO that have me excited is the 80kboepd capacity one we have stacked in Nigg. That's a $3-500m farm-in option.
Best, HMH