Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
Spent some time thinking about the path for Enquest, and I believe we're in a good spot.
At this moment and oil price we produce somewhere around $700m of FCF/year. The only thing keeping the company from paying dividends are the RCF and the PIK-notes which can be payed in full and canceled.
The amount of the RCF stands at $385m and the PIKs at ~$175m for a total of $560m.
That sum has to be cleared in order to buy back shares or pay a dividend. PIKs currently run at a high interest rate (9% if I recall) and should therefore be refinanced as quickly as possible. As the market improves I suspect we are going to end up with one out of 2 scenarios:
1. We pay the RCF out of cash flow before- or in October and then refinancing the PIKs - leaving us with whatever cash that is left in the coffers and low amortizations until bond maturity late 2023. Whatever FCF we produce from then on will truly be "free" and the bond will be refinanced.
2. RCF and PIKs being refinanced in short order with another junior facility with a 5-7 year maturity which gives the company a great deal of financial flexibility right away, and going forward we're paying a small amount in amortizations yearly freeing up the cash flow.
Ceteris paribus, every dollar of FCF should translate into a dollar of shareholder value (adjusting for depletion and depreciations) and at a $300m MC that's a big deal.
What is certain is that alot of good things are about to happen in short order unless the oil market takes another dive. Current gearing ratio is fine at sub 1.5x at $55 brent because of EBITDA-margin jumping on the much lower operating expenses.
All this with no tax bill for many years to come!
VLSFO is doing great and the oil demand keeps on gaining, leaving us in a stellar position, and as Pelle mentioned earlier last year's CMD did show higher production numbers for Magnus and PM8 going into mid 2020s, and with Bressay and Western flank still to exploit we are not running out of cheap, near-field developments any time soon. We also OWN a good FPSO that can be deployed anywhere in the world and used as a farm-in option for Enquest.
What's the risk? A historically shi*ty year for oil producers left us with a positive FCF and a slimmer and stronger asset base, so I have no idea what could break us. A drunk captain with a VLCC ramming Kraken has always been my biggest concern...
On the other hand, oil prices could rally substantially giving the company great leverage to the upside.
I fail to recognize what risks the market is pricing in - but I am happy to keep on buying shares at current depressed levels. As explained above I'm fairly certain that this window of opportunity is going to close in the not so distant future.
Wish you all a great weekend.
Best, HMH
ZFG,
Hard to say. OPEC+ combined with US brings us down to ~92mbopd but the fallout from old fields being put in decommission and natural declines across the globe is an unknown number. I guess we're somewhere in the 85-89mbopd range for now but the decline from slashed 2020 capex will start showing up in the numbers this year.
We don't know how fast inventory is drawn - data comes with a 3 month lag and is unreliable. Oil market is way too big to measure but we know that no big projects have come on stream since Sverdrup late 2019 and that capex was cut by almost 40% last year.
There's nothing mayor in the pipeline to replace the global decline going forward so this is not going to be a swift event. Will take much higher prices and alot of investments in the industry to catch up to demand.
Hello Jan,
Biggest ever shortfall of supply was around -1.4mbopd during driving season 2011 if I recall it correctly.
OPEC spare capacity is limited, was about 1mbopd the last 5 years but now depletion have not been replaced because revenues have fallen sharply with the cuts/price and the low hanging fruit has been grabbed all over the industry.
I believe world supply to be a maximum of 95mbopd with OPEC going all in. That's a massive problem as stimulus is starting to show some mighty growth numbers in asia.
The problem is not that there's insufficient supply capabilities - the problem is that the world cannot grow production faster than 1.5-2mbopd/year at any given price in the short term due to bottlenecks in shipyards, drilling rig availability and lack of exploration over the last 15 years.
I'm seriously concerned that this could create some real issues. Wouldn't dare guessing what oil prices would be at a 4-6mbopd deficit, but the previous cycles have seen prices rise by several hundred percent and this time the downturn have been prolonged and deepened by Covid.
Gasoline rationing will be in the cards if what seem to be happening is truly happening.
Kind of nice owning oil companies that does well at $50 brent with the world slowly coming back from the pandemic. Enquest should see $60 or so for the full production by now which would translate into serious FCF.
Expecting an RNS in a couple of weeks outlining what to expect this year. We should achieve some kind of financial flexibility towards the end of the year given current oil prices, but refinancing of RCF and covenants could happen any time as gearing should be within the guided range at current oil prices and extending maturities would be a good move to enhance shareholder value.
Best, HMH
Funny how Chiltling sold at the bottom to buy into green hydrogen, and is now in the same bracket as Neilhannon and Ammu talking his own book. Didn't you call oil at $45 YE 2021 as late as October?
Your crystal ball seem to be quite opaque by now. The only one that doesn't seem to notice is clearly yourself.
Things are looking up.
H2 profit will be positively impacted by the reversal of impairment of tax losses and driving season around the corner with the whole global population planning some kind of car-bound vacation. Summer could easily bring brent >$80 and a squeeze is clearly in the books due to vaccin related recovery.
Oil market was in balance back in late 2019. Shale has lost 2.5m barrels and the rest of the world has probably lost another 4-6mbopd by now. With demand forcasted to return to 2019 levels as early as Q3 we need an additional Saudi Arabia to come on stream this year which is clearly a massive problem. Markets will come around to this realization and the forgotten industry will roar once again.
Looks like some assets being back on the market.
From memory it was something like 30kboepd and Premier was looking at $1bn of FCF from the assets til end of 2023, and using them to unlock the tax assets. Opex/barrel at $20 should probably make it interesting for Enquest as well and the final price Premier received seemed okay.
I know nothing about Andrew and Shearwater, so would be great if somebody could add some color to thia as Enquest could possibly aquire the assets at a bargain price.
https://mobile.reuters.com/article/amp/idUSKBN29C1Z1?__twitter_impression=true
Best, HMH
Hello Pelle,
Hope you're well too.
I like the banks but I dislike the western worlds lending standards, primarily the housing market is overextended and I believe the Swedish banking system are the bagholders due to regulations around swedish mortgage backed securities when **** hit the fan.
Om the other hand, I've held this view for 10 years and been wrong. But if the oil market takes off I'd expect some rather large inflation and therefore higher rates and increasing rates of mortgage defaults as the swedish housing borrowers are now paying like 1.5% interest and at 4-5% our economy is probably in the recession of a lifetime.
Old saying is that banks should only be bought when there's a crisis. But I have no opinion whatsoever in this matter. :-)
Best, HMH
Hello Wally,
Currently holding:
Petrobras
CNOOC
Total
Exxon
Lundin Energy
Enquest
Africa Oil Corp
And shares in a non-listed Texas based entity.
Enquest has the biggest upside potential while Africa Oil Corp will start distributing dividends in 2021 after hedging all 2020 Production above $60. Barrel opex <$5, FCF-yield of 1.5x and a couple of world class exploration assets probably worth multiples of current market cap alone.
Well worth taking a look at for the oil investor.
https://africaoilcorp.com/site/assets/files/1542/2020-10-29-cp-aoi.pdf
My single biggest holdings are two tobacco companies, Altria and BAT.
Would love to hear about your oil holdings!
Nothing above would be recommendations. Everyone should do their own DD and make their own desicions.
Best, HMH
Hello Therapist,
Current Kraken premium should top VLSFO by a couple of bucks as it's heavier as a blending component in the mix. Consensus on swedish forums stands at a conversion rate of VLSFO price per metric tonne divided by 6.8 or so to get the per barrel rate. Pricing it at 414/6.8 = $60.88/bbl currently.
Tapis has tracked brent pretty closely up til now. VLSFO market should tighten running up to the summer.
Best, HMH
Hello romaron,
I enjoy your posts too. Keep em coming.
As you say, the sector has been in the sink for the last 5 years. Few companies have seen a positive share price performance and the depressed prices we're able to buy at today is historically insane. Got a grand total of 8 Oil companies in the portfolio at this moment, and 5 have a 7%+ dividend yield with dividend cover at $25-40 brent.
I also hold 3 companies with no dividend, that are going to be issuing a dividend whenever things are looking better - and they all trade at less than half FCF at $60 brent. Enquest has the most insane valuation of them all, and likely the most out of whack multiples I've ever seen.
I mean, FCF here is $1.1bn/year+ at $80 realised oil price and we know Kraken is fetching a good premium, so that is like $70 brent which isn't a high oil price by no metric. And on top of that no taxes for several years when the prices reaches that level.
Company is progressing and is in a fantastic position for a higher oil price environment. The other oilies I own distribute about 60% of FCF so I'd expect something similar coming out of this beast within a year or so with higher prices.
All that has to be done is to pay down the RCF of 2021 and add a 4-7 year junior bank facility to clear the PIKs. Then we're all set for some rather large cash distributions.
Best, HMH
Hedging is a tough game. Many remember back in 2018 when Enquest locked in $60 and oil went to $80. The decision was a great one before the fact but turned out to be a disaster in the cash flow department which would have seen all the RCF payed off early last year rather than later this year.
Point being, you simply never know and you cannot base your decisions on the the outlier happening. 2020 was an outlier - we had Kraken Crude at $100+ back in December 2019 and thinga were looking great. Covering a small portion of the additional production was the correct call imo, and for 2021 I wouldn't hedge a single barrel as we're now in a strong position with the FCF-be of $27. That number was $40-42 when entering 2020 so we're much more resilient going forward.
Making a boatload of money at $50 should not be an oil companies target. Sticking around for the good years while be able to solider on in the bad years should.
Commodity markets are starting what I expect to be a pretty big move to the upside. We could see some crazy demand numbers as emerging markets are roaring back to life with the USD weakness and excessive stimulus hitting consumers as we speak.
Best, HMH
Company is in good shape at $50 brent. Total production is probably sold at close to $55 and the FCF-be of $27 is probably a reality already.
Enquest should stop hedging with this current asset base and the much lower operating costs. It's no longer needed and the oil market is in a recovery phase.
Now all that is required is time. FCF-numbers are great at this oil price and the company will solider on for the inevitable higher oil price environment we're entering post covid.
The $3bn+ of carried losses is greatly underestimated by the market. Enquest got 5+ years of no taxes if oil raises substantially which transfers into serious money in the bank.
In the oil market the past is no predictor of the future.
Best, HMH
Hi romaron,
A 4 year plan vs a 50- and a 200 year plan is an issue. US can never be a swing producer because they are adhering to market forces i.e prices.
Saudi and Russia sacrificed booth rooks trying to achieve some price stability, but the shale industry is now in checkmate by a simple move. Shale will be settled on the sidelines for the next tournament.
Best, HMH
Hello Pelle,
Russia is a black box. We simply don't know what kind of reserves they have but given the phase of 2015 production they're near their maximum and any major discoveries would have been bragged about. They can push the production alot further but the barrels are not the single-digit kind. The cost is big and transportation is an issue.
Saudi on the other hand, have Ghawar producing at 3mboepd and other major fields making up the rest of their production. Their reserve life is 53 years, so given a doubling of production they're still ahead of other majors by 10 years on reserve life.
Saudi could probably ramp up 3-4mboepd in 10 years alone.
The issue at this moment is not that there are insufficient reserves and available oil in the world
The problem is that there's 5 years+ til we can get it out of the ground and whatever happens in-between now and then will is what I dread.
Oil service companies have scrapped so many rigs, and oil producers have demanded so little drilling that what we're looking at is a damn cluster of bottlenecks to achieve whatever production that is needed to meet the demand when the covid era is over.
We don't have the rigs, we don't have the shipyards to build new rigs, we don't have the parts needed, staff is gone etc.
Combine this with the stimulus that will create alot of demand and the underinvestment over the last 5 year I'm looking at a perfect storm.
I might be wrong, but nobody have voiced a reasonable phat in any other direction from whatever point we're currently at.
I think we're in for something nasty that will really shake the world economy (and make oil investors alot of money...).
Best, HMH
Problem with shale currently is the lack of equipment to ramp up like 2016. Back then the drillers bought rigs att pennies on the dollar in bankruptcy-auctions from firms that had been investing like crazy in the 2011-2015 period.
This equipment is scrap by now, and you probably need to add 12-1400 rigs to push productions above earlier tops. I don't think financier's will come around this time as they all know OPEC+ can flip a switch and kill them all over again.
Another issue when drilling at levels that high is that wells get gassier earlier, flooding the natural gas market forcing prices to near zero. Well economics will turn for the worse because the gas is usually a big chunk of the production and surpasses liquids by 2:1 on a boepd basis. If shale producers won't get payed for the gas they lose all that revenue. This is why Bakken and Eagle Ford is now dieing. A gas surplus and too little oil.
Permian got some good prospects, but growing production at a 1+mboepd yearly are many hundreds of billions in equipment investments before it's ever possible.
There will be credit available, but as Pioneer's CEO said earlier this year: They're gonna grow within cash flow and return money to investors.
Shale will be a part of the mix, but covering the whole demand increase globally has ended with the wreckage created by OPEC+ earlier this year. Banks and companies now understand that they're under the mercy of an oil-cartel and there's no changing that.
Best, HMH
Wise words romaron.
Shale as a business model is officially dead with major players exiting taking massive write-downs.
There will be a supply/demand gap after the covid debacle. How big is the unknown, but i predict it could be upwards of 4-6mboepd with OPEC+ fully producing which is a scary thought. We do have a driving season incoming with pretty much every individual on the planet planning some kind of road-trip vacation combined with a massive push from fiscal and monetary stimulus starting to kick in as we speak.
For now I believe the only possible balancing of the oil market is through demand destruction due to the pricing mechanism. Otherwise we are running a deficit until some major projects will start producing 6-7 years down the road and that is simply not possible.
If there was ever a time for some really crazy things happening to the oil price and the oil market, it will be the comming years.
Hello Pelle,
Good to see you too buddy. I've been lurking but everything essential has been voiced already and repetition is just a waste of time.
As you say, container availability is an issue but so is the booking of space on container carriers. Rates have skyrocketed the last weeks and it's getting worse.
Transports have seen a bear market since 2015 or so and demand is returning with insufficient capacity. There are docked capacity that will return, that are going to translate into higher fuel demand.
I'm looking at a great recovery of fuel demand and oil is increasingly being in deficit. Looking at forward curves we're already in a tight market - and it's gonna get worse.
Patience is key my friends.
$50 oil is bull**** and cannot sustain investment in the business. We're moveing into a world of undersupply and a lack of investments and the macro-enviroment is about to go ballistic with all the stimulus in the system.
Wrote on the swedish forum that I've spoken to some contacts in the shipping industry, and getting a space on a container ship from China for Q2 is next to impossible. Asia is fairing well and China is already vaccinating their population.
We're in for a demand rally while supply is extremely tight. With OPEC on full production the balance is still not sufficient to meet demand at current levels. With 4-5 years to bring new barrels to market we're looking at a nightmare for the world economy and a spike in oil prices for the twenties.
Let's see how this play out. I've added to my already massive position in Enquest in the recent days. It's getting increasingly obvious that the world didn't end with covid and the comming period will require a lot of energy.
Best,
HMH
Hello romaron, hope you're well!
The topic is one of much complexity. A financial institute holding a bond which cannot be recovered from the assets of the underlying debtor will have to book the loss as an impairment/mark-to-market loss in their own financial reporting making this an event of some magnitude as the snowball keeps on rolling.
For Enquest the impairment is reversable at $65 oil. And if we start Thistle back up that impairment will be reverable as well, so on that front we're all set.
Putting Enquest to sleep is not the issue, it wont happen. But the company is not reporting to the shareholder - the report is for the stakeholders. At this point I dont know what kind of levers the bondholders and creditors could potentially be pulling, but I know the RCF and Sculptor is not loans taken under the best possible circumstances, and I'm not going to plow through the wording tonight.
We can meet our commitments going forward from our cash flow generation. But I've seen investors getting shafted in situations like this before so I'd be glad if somebody with deeper knowledge of the credit structure could enlighten us on potential landmines. I believe it will all be fine and I'm holding on to my shares...
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so. “
- Mark Twain
Best, HMH
Hitman,
Your OP-forecast has been the worst out of anyones' during the 2 years I've red this forum. You had $80 year end while at $60, and $25 year end when at $20. Thinking that we would need a $500m facility 2023 is ludicrous as 2 years of $60 brent would yield a FCF far north of current net debt. Conversely $40 for 2 years is an issue(for most oil companies).
I don't even think we heard the same conf call. Next years repayment was never a problem and people with some insight in finance never gave a damn about it, refinancing $2-400m with current production can be done whenever suitable and many have voiced that here. The issue at hand are the (potential) liabilities given the fact that Enquest currently have negative equity and a chunk of its assets being carried forward losses.
The business is not in trouble but currently we should fear the creditors as there's a real risk of dilution at unfavourable terms.