The next focusIR Investor Webinar takes places on 14th May with guest speakers from Blue Whale Growth Fund, Taseko Mines, Kavango Resources and CQS Natural Resources fund. Please register here.
Hi Jan,
We still have to cope with the ~100m/q depretiations, so getting back into positive equity will depend highly on POO increasing as we're probably going deeper negative at current oil prices.
This is an issue - not one that has to be addressed promptly but current oil price is unsustainable if we're here 12 months down the road. I don't think this will be an issue, but at current phase a higher than expected decline from one of our assets will trigger further impairments.
I think one need to take a deep dive into the bonds and credit facilities. Running with negative equity could a be a real issue as lenders have nothing to recover in case of default.
Didn't expect as big of an impairment. And the statement that AB wanted to get the impairments out of the way is just bs. It's a result of discounting the future cash flows at a lower oil price than previously.
Impairments can be reversed, NAV will increase but I dread there's something in the fine print that has been overlooked.
Where's the report? Cannot find it on the website.
I believe everything is fine and when oil prices rise we will be very profitable with our lower operating costs. But I would't rule out an equity raise to cope with the short term.
Best, HMH
Hello Pelle,
The improved FCF break-even is great. I among others have voiced that a consolidation to the bigger assets would be preferable. I believe AB agree as this is now the case.
Company is in the clear, and refinancing the bond without covenants will attract alot of lenders given the current interest rate enviroment when it is due. It will be cheap.
I worry about drunk sailors ramming Kraken or Magnus, but other than that this company has a great future. I wish they could use the $3bn of losses better. A decent farm in (Clair field..) would do the job.
L7,
ConocoPhillips held a sizable stake in the field initially. Now they hold 7.5% from my understanding (Chevron 19% and Shell 28% BP 45% ish).
I don't believe we've got the same yard stick. Enquest is in a spot where they could lever up and acquire sizable stakes in fields like this. 60-55kboepd with FCF break even at $33 is fantastic and the company need to take advantage of this enviroment.
$290m cash is there for a reason. No debt is repayed til next autumn and oil above $33 keep building our cash position.
Best, HMH
Hello lads,
Clair Ridge is ramping up and is expected to reach peak near 2030. As we all know oil fields tend to get bigger when drilling is conducted, and the 120kboepd number is just a projection.
I see ConocoPhillips having a 7.5% stake in this. That would be a good target for Enquest as CP is deriving close to half a million barrels from shale. They're a strong company, but imparements in the shale portfolio is a Q2 event which is still to be announced and they mat be extensive as the bigger part of this production is Bakken which took the biggest hit in the downturn.
A piece of Clair would be a amazing. BP could probably be in talks to divest part of its 40%+ share as well.
Best, HMH
Hi Chiltling,
I certainly hope Opec floods the market in H2. But I don't believe the governments of the countries engaged in the deal will survive. If they would, producers will fail everywhere and supply will drop significantly.
Nobody controls the oil price in the medium to long term. If oil traded at $200/bbl Russia could probably pump 40mbopd and Saudi the same.
It's all about the economics, and this is what creates the boom/bust cycles. At $33/bbl FCF break-even Enquest is among the the 50-60mbopd that is economic at this oil price. The rest will fail over time as producing something at negative cost won't work.
I dont know what is the price of the marginal barrel at the moment, but I'd expect the latter 20mbopd to be above $60/bopd making them uneconomical.
Best HMH
Dear Chiltling,
Oil has little to do with politics. Trump will never dictate oil prices, nor will Saudi Arabia.
You swallowed the narrative, like many others. "Storage full", "Peak oil demand" etc.
Short term volatility is part of the oil market. It has been for 50 years and will continue beyond our lifetime.
Do you really think China would consume less oil if the relationship deteriorated? China got 3x the population of US, and relative poverty is nearly 900 million. What about the rest of the world? Should we just at a blank, stop consuming goods?
This question is the same as the one for demand for oil. Our cars come from Asia, our TV, shirt, linen. Everything is Asian. If we cut this channel, what will happen to our standard of living?
China is 50 years ahead of us all. They got the whole world as a playing field, and they will once again rise and be the super power. Their timeline is not the same as ours - they think 100s of years ahead while the mandate for European leaders lasts for 4-6 years before reelection.
Basic economics is a good ruler for the oil markets. Supply/Demand will never fail you in the long run.
Best, HMH
OPEC are likely to try to balance the market in the $45-55 range by gradually reducing the cuts as the economy recovers. No point in causing a supply crisis before they are able to be back at full capacity with weaker producers (read shale) having been dealt a mortal blow. Should start seeing some good demand numbers in the comming weeks and throughout summer.
Honestly, nobody knows what the situation will be like in 10 days from now. Speculating about the year end price of oil is a fool's game - I see many posters here arguing that it will be $50, 55, 60, 65, 70 etc. If demand returns quicker than expected (look at china...) we're in for an oil crisis within 6-9 month and stimulus should start kicking in H2 which will add to the demand side of the equation.
Anecdotal observation: Played golf with the owner of a car dealership yesterday and business was booming. People was primarily spending their vacation money to get new rides and I suppose there will be alot of miles travelled this summer as people will have no alternative to travel by car.
Also, PMI was not positive today. The sentiment is based on the last reading. Anything below 50 means that it's worse than the month before.
Best, HMH
Hello L7,
There are many assumptions in your calculations, and there was also the assumption of $90 oil when Kraken was sanctioned.
Sure, investors got crushed. Buying into an oil company with weak production and massive costs at the end of a commodity cycle is unlucky, and the company not going bankrupt is an achievement in itself.
I'd argue that we're in a different place right now on the macro level - comming up on the next commodity cycle. We also got a solid production profile with very large cash generation going forward, and we still need to grow.
One might think that there are alot of Magnuses and PM8/Seligis out there. Looking at the North Sea and Malaysia I'd argue that there are not. Enquest is not the only company looking for bargains, and in order to add anything significant to our 65kboepd old scrap don't cut it. I dont necessarily want the company to open up new fields assuming all the risk - but borrowing $1bn and taking a smaller non-operated stake in a great asset is another way to go in order to capitalize on this oil market situation and adding production instantly.
We didn't have a lot of options looking back, but with our current portfolio we have a backdrop and one need to bet big when the cards are stacked in your favour. Now is the time to lever up.
Best, HMH
Therapist can probably elaborate on the "pounding",
But I've seen FPSOs with an expected lifetime of 40-50 years. They're primarily in Africa and South America, but 20 years is nothing and Kraken should push that number.
Basically, we've got a 4 year old oil rig (ship is old but installations are new) ready for some action. There are 10 more good years in the haul easily.
Best, HMH
Hello hitman,
Like you say, the bad parts was replaced on the FPSO and the third party was paid back. Now we've got a good FPSO on a bad field.
A good FPSO is a $500m+ investment, and the Producer are on out books at 0 value as it's part of the Alma/Galia asset.
Put it on a good field with the current crew, and it will work wonders and increase the companies assets significantly while generating meaningful cashflow over an extended period.
Best, HMH
Hello romaron,
The FPSO would have to be modified and repurposed for whatever field it would potentially end up on. I'm sure the company is working on this. There are smaller fields where the economics presently isn't good enough - unless you happen to have a FPSO in the garage.
Interesting times ahead.
Hello L7,
The Thistle impairment will be reversed If the price of oil make Enquest reopen the platform again.
We are now in a different position with strong cashflow generation and solid production profile. I'd argue Kraken is a very good development, and that the company should engage in similar projects given the fact that going forward we're in a solid position.
I'd argue debt is low. I wouldn't compare it to the equity, but rather the FCF generation going forward in a higher oil price enviroment. That's the only thing that really matters.
Kraken trades in parity with VLSFO. That's basic economics.
If you can fill your ship up with either Kraken crude or VLSFO you will be indifferent to which you use. Therefore the auction for Kraken crude should see bids to the point where they trade on parity - because they are perfect substitutes.
At the moment VLSFO is trading at $39-40, Kraken Crude should sell at the same price. Therefor the current premium is $5.
Kraken crude is basically VLSFO, like they stated in the FY20 presentation.
Best, HMH
Hello lads,
Good to see you're looking elsewhere for information and that people still cannot agree on the simple stuff.
As you say L7, we've got a FPSO with a capacity of 60kbopd free from summer. This is a $500m investment if it's made for a new project, making it an ideal farm-in tool for Enquest.
I agree with romaron. Why look at junk when you can get the cherry? Project financing is still available and our debt level is low (confirmed by J.P Morgan analyst on the FY19 call).
We should do another Kraken project. The field was found in the 80s and has been idle til development due to heavy oil not being moveable. There are other fields. And there are field where a 60kbopd FPSO can do wonders with some modifications.
There are, however, not alot of Magnuses out there. In my view this was a unique deal, and perhaps we have not yet grasped the implications of carrying the additional assets that was part of the deal.
I also see you L7 and L3 talking Kraken premium. About 6 month ago I made a thread arguing that the premium was massive, the crude selling close to the price of VLSFO. This has been confirmed by Amjad, he said that Kraken was selling into the VLSFO market without refining which makes them perfect substitutes. If you don't understand that expression you should go back to your intermediate micro economics books and just look it up. They are the same.
Best, HMH
The Corona-hit came at a rather unfortunate time, but with all the amortizations for 2020 complete Enquest is in sound financial shape.
I created a simple illustrative free cashflow model for the rest of the year with a couple of different scenarios. I base the FCF break-even on the comment from the company of $33 for the year and have included the hedging programme for the first 3 month. The production is set to mid guidance - 60kboepd.
http://www.bilddump.se/bilder/20200511082413-83.254.41.126.png
As presented, even at $20 for the rest of the year Enquest will see the cash balance at the same level as year end 2019. Further, a modest recovery of $3/month going forward should leave us in the clear for all of next years' amortizations by year end.
At $27/bbl FCF break-even next year and production at 60kboepd, realized price at $66 average will yield a staggering FCF of $856m, at $85, $1.273bn and at $100, $1.6bn.
This compared to our market cap of $240m is laughable.
Point being, when we steer clear from this Corona-mess and the market recovers, this company will print cash at rather low oil prices. Current assets is set to increase production according to the CMD-slides into the mid 2020s.
We have yet to receive numbers on new Magnus wells, and Stena Don should be finishing the 90 day drilling contract any day now. The Kraken wells could potentially add some rather large numbers and we know the oil is sold as VLSFO (currently trading at $35), pushing our realized price higher than dated brent for our total production.
OPEC cuts are now in place, numbers comming out of Morgan Stanley on global storage implied that the world oil demand was down only ~15mbopd in April.
World is opening up, and the oil market recovery may be as swift as the collapse. With demand for VLSFO remaining strong throughout the crisis according to Petrobras, the premium valuation of Kraken crude may return to the November/December highs, when it changed hands at $30-40 above dated Brent.
Enquest is no longer an oil company.
We're a premium shipping fuel supplier.
Best, HMH
Hello lads,
Pretty sure AB slipped in the Q&A and actually said that Kraken crude was sold as VLSFO rather than "into the bunker market" - the way they always try to phrase it.
Gonna go back and re-listen, but that would explain the massive cash-flow back in Novermber/December when VLSFO traded at almost $100 and cement the thesis many of us had about the differentials.
Now we're at around $34-35 for Kraken. As the world moves back into "normal" we should expect the pricing to remain strong. Scrubbers have been put on hold, massive stimulus will bring on some pretty impressive growth numbers and if the dollar starts falling we will see the biggest Emerging Market rally of our generation.
Monetary policy should bring on some inflationary pressure down the road and possibly push the price of money upward, commodity prices are near the bottom of a super-cycle as underinvestments have brought this supply-rally to an abrupt end.
We're in for massive disruptions in due time. The world will be back to normal demand in less than 18 months according to most of the forecasting houses while supply will be off by an unknown number with no new production in sight - most companies will not even invest enough to keep production flat this year and only a couple of Saudi projects in the pipeline of big projects for the foreseeable future.
Return of "Peak oil Supply" headlines in the comming years.
Hello Ramaron,
Pretty sure I saw something crossing the screen on Martin Houston taking som MIGHTY large margin calls a couple of months back in his Tellurian holding.
I'm not sure, but somebody with google-skills could probably look it up. Was "go into lock-down with 10 cases of Jack Daniels for a year" numbers if I recall it correctly.
Best, HMH
Hello lads,
This is a perfect time to consolidate and get rid of costs. PM8/Seligi, Kraken, Magnus is all we need. Kittiwake got the Scolty/Crathes development, and could also house Eagle field going forward which would be okay. But being a realist, our main assets should be the new base of Enquest, and farm-ins in existing fields and operatorship in new fields is the future of this company.
We've got an FPSO with a 60kbopd capacity. Let's find a field and have somebody else pay for the infrastructure.
Now is the time to take on the large investments and borrow some hefty sums.
Banks extend credit and have to hold backup liquidity and review the portfolio of loans on an ongoing basis.
Due to regulations you have to write down loans to whatever value they are expected to fetch which will inquire credit losses that in turn reduces the shareholders equity and therefore the solidity of banks.
If a company cannot meet its obligations, which most of the 10-20mbopd that I spoke of will have trouble doing, it will default on their debt causing big write-downs in the banks credit portfolios and therefore losses in equity. Banks will then put the companies into bankruptcy and the assets will be auctioned off to the highest bidder to recover as much of the money as possible.
This will of course hurt the banks, making them reluctant to extend credit to other oil companies and credit facilities may not be renewed.
Therefore companies must, and will fail in this debacle, and barrels will move off the market as cutting uneconomical production is the first thing companies can do to stop bleeding money.
Central banks can extend credit to the banking system at 0% interest rates but the banks will not lend this money to failing businesses as they are left with all the risk in the event of a default.
How are governments supposed to help failing oil companies? Of course countries where the state revenue consists of the sale of oil the state may help out by increasing the fiscal deficit (by issuing bonds), but in capitalist systems the government don't inject liquidity into failing companies or guarantee their debt if they were not economical in the first place.
Please tell me how you see the people of countries (via taxes) having to bail out a non-needed sector of the economy for an unknown period of time? This while the sector lose money every day because they for some unknown reason keep on pumping oil that is not even covering the cost of getting it out of the ground with already existing infrastructure? And also paying the interest and amortization, and guaranteeing the sectors debt in order for the banking system to keep the credit lines open and not taking massive credit losses that would require them to have the companies file for bankruptcy?
Failure and bankruptcy is an essential part of capitalism. I don't see the world socialising the oil supply just because the price dropped, and nobody really knows where the current demand figures are sitting.
Supply CANNOT stay at 100mbopd at prices sub $50. It's essentially a free market even with the OPEC cartel presence.
Hello Chiltling,
You look at demand yet miss the supply side of the equation.
As we speak WSC is trading at $7.51, Canadian Oil Sands are about to shut down production. Every grade of shale is trading between $2-20, with whole Bakken, Eagle Ford and parts of Permian about to go belly up.
Urals is trading sub $20, Heavy Sour grades globally is changing hands below $10. The list goes on, and global capex is about to drop by ~50% YoY.
Within 3 months 10-20mbopd will be off the market as costs will be higher than price received per barrel at this level. That's more than most trading houses and forecasting services expect the demand to drop during Q2. They also forecast YoY growth in oil demand in Q3 and Q4.
Saudi and Russia don't have to cut, market will rebalance as the price cannot stay here. That said, we might not be heading back to $65 in the short term, but $40-45 brent looks like a balancing point within a few months from an economic standpoint when taking both supply and demand into consideration.
Long term this will fuel a big rally in oil, as supply will lag demand when things return to normal.
This is not a financial crisis. The banking system isn't frozen and massive stimulus packages have been put in place that will yield a bull market as soon as people head back to work.
Comming May things will have to return to normal. One cannot crush the economy to save some lives, as the cost of a depression is much higher than the cost of losing a small proportion of the population.
A life has an economic value, and the further down the road you've come, the more your price has depreciated. You won't be able to get a life insurance policy at 70 as you're down to salvage value by then.
Life goes on, this is not the end of the world.
Best, HMH
Hello lads,
Hard times. World is in a strange place and nothing makes sense right now.
We've got a couple of tough months ahead of us, but the past is way worse than what's comming with regards to the market. A lengthy recession is priced in, Enq has a market cap of $170m and oil is expected to stay here forever.
I took all excess cash and all holdings in retailers and went into oil companies today. Weight is almost 30%. Risk/reward is skewed because of the fact that oil-dependant countries need higher prices to sustain government spendings, and if this continues supply destruction will be massive. A jump in prices will follow regardless, and companies that will be around in 12 months will see what could be a new super-cycle of demand growth with very suppressed supply growth.
This little debacle will subside and the sun will rise once again. Economy will run hot in a couple of years due to the stimulus now being deployed and fortunes will be made. But then winter is upon us, could take 10 years...
Hope you're all healthy and that your spirit remains in the game. Don't waste a recession.
Best, HMH