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17^th Nov 2019

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Hi Squif,

Many, many thanks for the info. I 1st bought at the end of 11/2016, and did not follow the news until mid 2017, when I increased my position.

I would subtract the First oil $130M "gift" from 0.705 x $2.3B Capex, and would get $1.49B. So higher than your $1.4B. Next, I would apply the proportional rule. Thus, a 15% WI in Kraken corresponds to $317M CAPEX. I would then feed this through the rest of my calculations. The revised rate of return on investment of a sale of 15% of Kraken at $345M would now generate a total return of 28%, and a 7.3% annualized rate of return.

At any rate, CAPEX is a sunk cost. Future is what matters. W/out knowing the new predicted production profile it is hard to know what a good price would be. You can get a deal that is good for both ENQ and the buyer on the basis of different costs of capital and risk diversification for ENQ. I hope ENQ will anounce a revised production profile for Kraken in the CMD, so that we can express a more informed opinion.

Like you, I firmly believe that reducing gross debt is the priority, in order to renegotiate what is left and bring down the
weighted interest rate on borrowing below 6%. Gross debt w/ a servicing cost of $60M per year and production (after subtracting BP's 37.5% interest in Magnus) of 60Kboepd would be enough to guarantee the Pelle dividend every year.

As you are versed on CAPEX: Do you have any idea of the total CAPEX on Scolty/Crathes, pls? ENQ stated this project has reached break-even. But I do not see how that is the case, since only 3.7Mbbls has been produced so far, and MOL has a 50% WI.

Going back to your last weekend's query about Kraken, my projections ahead of H1 results were posted on 09 Aug 2019 16:50. If you read my post then I estimated a reduction of $11.81M, when in fact it came in at $13.5M. I only got close because Londoner7 brought a few points to my attention which helped me to sharpen my estimate. Many TA to him. I am sure the different expenses had different figures than the ones I estimated, but those deviations ended up cancelling each other ( => I am unbiased!).

I believe that in H2 ENQ's Kraken WI will generate $175M of operational cash flow (ie. before finance costs and CAPEX which I assume is $0M). Not bad I would say. I assume Kraken premium is $2.5/bbl.

Hi Gkb47: I like your post on carbon capture. Indeed in part (II) of my post 2015 CMD: Goals and Achievements I had planned to write about that as well. SVT and ENQ's interests in the North Sea could be a good staging point to bury carbon, assuming it is technically feasible. At any rate, since my 2015 CMD: Goals and Achievements: Part I generated no interest, I am not going to write Part (II). The overall message is that ENQ's record on embarking on new projects is mixed.

Hi Therapist: I am sorry but I cannot find any info on the pricing of the Malaysia oil. I know that the difference b/w $5 and a $10 premium means a difference of $15M in FCF.

GLA

A good idea?

Capex of 15% of Kraken was $345M (0.15x$2.3B). 15% of Kraken has already produced 3.75MMbbls (0.15 x 25MMbbls ). Assuming OPEX (including FPSO lease) and transportation costs of $25/bbl, and average selling POO of $65, cash flow from production so far of $150M. This excludes finance costs of borrowing of $345M CAPEX . Suppose finance costs were incurred in the last 3.5 years at a rate of 8% (Simplifying matters; correct requires apportioning CAPEX over the earlier years of the project ). Finance costs of $96.6M so far.

So a sale of 15% of Kraken at $345M would still generate a total return of 15.5%, which annualized is not so good, just 4.07%.
That would be the return we would get as shareholders.
So, a price of $345M might not be such a good deal.

However, this not the proper way to make such a decision. Past CAPEX is a sunk cost. Bygones are bygones. So, focus on the future!

Would anyone pay $345M for a 15% stake on a field that has according to the estimates 112Mbbbls of 2P reserves (assuming they have not been revised) that in the next 4 years are expected to produce X, Y, Z and W Kboepd per day, after which production is supposed to decline to below 20Kboepd?
The answer depends on what X, Y, Z and W are (and only ENQ and CNE have a good guess about it! They should have a better estimate now than when they wrote down the FDP).
We know that in the FDP the first 6 years of production were supposed to produce 12.5, 45, 54.9, 52.4, 39.7, 28.8 and 23.5Kboepd, respectively. But what are the figures not predicted for the next 4 years? Do they still give you an average of 36Kboepd (which would correspond to the 52.4, 39.7, 28.8, and 23.5 Kboepd figures in the FDP)? If that is the case and if the POO in the 4 years ahead were high enough, let us say $70 (including the Kraken premium), then that would lead to a decent return on a $345M investment. Investment would be paid back in 4 years, if you ignore finance costs. If you include finance costs at 8% in the 1st year and 6% in the following years you would still be out by $56M. But there would be production for perhaps another 5 years above 10Kboepd according to the FDP.

If it makes sense for someone else to pay $345M if you only consider expected returns, it makes sense for ENQ to not sell.

The rationale for a sale is risk diversification - the variance of production (stuff happens) might be large.
And so, risk diversification might justify selling the 15% even if expected returns are good. In addition, reducing net debt by $345M means ENQ might be able to renegotiate its gross (not net!) debt 1 year earlier than otherwise. If that lowers the cost of the borrowing by 2pp one year ahead => $25M of finance cost savings.

So, the "implicit" selling price would be $370M!

Conclusion: $345M might be a decent price for buyer and ENQ. But w/out having Kraken's revised estimated production profile it is impossible to argue one way or the other.

GLA

Hi Londoner7, E121, hitman1 and Others,

A few questions for you.
Given the posts about Scolty/Crathes I am returning to questions I posted a few weeks ago.
Crathes/Scolty: In 2015 the 2P reserves were 14MMbbls. Does anyone have any idea if these 2P reserves have been revised up or down?
These two fields have produced 3.7MMbbls so far. 10.3MMbbls are left (if estimates have not been revised) of which 50% belong to ENQ, for how many more years will they be producing? Does anyone have a link to the FDP? (E121 you mentioned the FDP. Is there a file where one can one find the FDP's profile of rates of production?).

PM8/Seligi: does anyone have any information of the reserves being targeted and initial production of the two wells being drilled this year? I am talking about the reserves targeted by the wells, not the overall reserves of PM8/Seligi to be targeted.

As someone who has a few thousand Tullow shares, I am feeling the hit today... What Tullow's update suggests to me is that it is not shale companies that should focus on net debt reduction. Tullow and a few others should prioritize that, and care less about production levels.

Some posters have asked for us to post predictions about 5 topics. Let me just say that my thinking is that ENQ should focus on net debt reduction in 2020, at a cost of lower production, if that saves a lot of money in CAPEX. I would like the CEO to be bold ans say that ENQ is targeting net debt at no more than $1B by the end of 2020. If that means Eagle and some other CAPEX gets delayed that is fine. Apart from the Western Flank, and perhaps Malaysia, I would rather prefer to see other CAPEX projects delayed until Net debt is below $1B. There is no point in increasing production and be selling your reserves at low POO.

Having read the exchanges b/w E121 and Londoner7, I am mostly in agreement with both, and perhaps in between the estimates of the two, in the sense that I still think net debt at 2019 year end will be at most $1525M. Given most people's estimates (at least the ones i have read) I doubt the majority of us would be wrong and that net debt will come in below $1475M by year end.

GLA
p.s.: Londoner7: You mentioned you do not care much about the Oz loan debt reduction. The main reason why I care is that it allows me to have a rough idea of how much cash ENQ's Kraken's position is generating. I add the interest paid to Oz and get an estimate of operational cash flow - capex for that 15%. Easy then to obtain a rough estimate of operational cash flow - capex for ENQ's 70.5% WI.
p.s.: Pelle, no fines this week so far...and very good posts.

Hi Londoner7:

I had forgotten I had read that passage in the RI. The only part I remembered was that CGA was not fully convinced ENQ's plan was going to be a good one, as conveyed in the passage you quote. Let us hope that ENQ can deal with the problem and get production up again. We know that the two wells being drilled are not going to increase production by a lot, 2Kboepd and 1.5Kboepd at the start of production.
Is moving from gas to only water injection the optimal plan? I have no idea. Other posters might know.
I am only trying to use production figures to deal with Magnus's FCF. I do not particularly like that the vendor loan for the 75% pays 7.5% interest. Also, the contingency consideration from the cash waterfall will not decrease much every semester because the rate used to discount is quite high. Funnily enough it will move up and down with the changes of the POO and the changes to production rates. A decrease of the production rate will lower it, and so will a decrease of the POO, as it means delaying payment.

Let us hope for a good two months of Kraken offloads to end the year on a high. The figures you post about Kraken's production leave ENQ no option but to up Kraken's guidance in two weeks time.

et observet somnia vulvam:
your tanker tracking is very useful. Like others I though that offload #49 might have been a light one. It took 869 days from first oil for Kraken to reach 50 offloads. I hope for much less time to get to offload #100. I will settle for 31/08/2021. If that were to happen Pelle might collect his first dividend by then. And gkb47 and I won't be issuing double fines (Pelle pays to gkb47 and to me as well), which Pelle better pay, because he cannot escape: gkb47 is a strong chap that pumps iron, and I can still move forward at a fast pace...

Hi E121: i read that you follow GENL. I am glad you do. It is a company in which Pelle would like to buy some shares to collect dividends. I have been very happy with my investment there, even though the potential to re-rate is limited.

Hi gkb47: At the moment I have no Brent call options. Cashed in when the POO had a surge. Made some profit. If POO drops will buy more. I do not dare do this with ENQ, unlike BIFATH1, because I do not want to miss the re-rate. It is coming sooner than we think, I believe.

GLA
p.s: My screen is showing just 3 filtered messages today. very good!

Part (II) to be continued featuring Alma/Galia & Kraken & Scotlty/Crathes, and SVT too.

Lomdoner7, Thank you for the reply. I am not an oil&gas professional, so your reply is going to lead me to ask you more questions.
You write: "The OAG August number indicates only 16% of normal water injection. I understand the restrictions on water injection extended into at least Oct. With water production continuing at normal rates (speaking as a layman) I would expect voidage to become an issue."
Q1: Why would voidage be an issue? And what would be the short and/or long term effects of voidage?
You write: "However, Enquest are below their stated goal of 200K bpd water injection on Magnus following the introduction of the 2nd tower so I’d expect an update at the CMD."
Q2: What is the role that the 2nd tower plays in the water injection?

Speaking of Magnus, and now going into FCF matters, the H1 presentation I note the following: "Accelerated repayment of BP Vendor loans: i) 25% vendor loan fully repaid in August. My comment: That gives 4 months of 25% of Magnus until year end all to ENQ;
ii) EnQuest $100 million cash consideration plus interest repaid ahead of expectations - Paid back in c.12 months - Profit share with BP increased and commencing earlier than planned. My comment: the c.12 months does not have a clear time stamp, but using the time the option was exercised, I assume this means Dec18. So, I assume that in the first 5 months of H2 the FCF of 75% of Magnus, will accrue all to ENQ. Not clear if there is another interpretation for the "c. 12 months" ENQ refers to.

The Kraken production rates if they are to continue, as you describe - having a month above 50Kboepd would be wonderful), will lead me to lower the balance of the Oz loan at year end (assuming the cash sweeps are quarterly, and that there will be one just at the end of December) to less than $135M. I really would like to know the exact dates of the cash sweeps.
If I may ask what figure are your calculations showing for end year balance of the Oz loan?

POO: We are going into the 5th consecutive month of a POO below $65 (July - $63.92, Aug - $59.04, Sep - $62.83; Oct - $59.71; Source EIA+site). It seems it will be impossible to avoid a PIK for the bonds, next time interest is due.

I will come back to the gas figures that all of you (gkb47, Therapist, E121) posted, as I rely on them to use my toes and fingers (who needs a spreadsheet gkn47?) to add and subtract millions to arrive at a FCF number. I really dislike ENQ's gas line of business. It just messes up my calculations.

Scolty and Crathes: Do you have any info of what I asked? I am trying to figure out why ENQ claims they reached break-even of this project in H1.

And yet another question: i never understood the value of Tanjong Baram. It is developed under a Developed under a risk services contract. So, how much money does ENQ make out of it? Little for sure.

gkb47: please keep track of the fines on Pelle. He needs reminding that he owes the balance to you and me. In other words he pays a

In anticipation of the upcoming CMD, I read 2015 CMD's presentation and reflected on what was stated at the time and how
events unfolded.

2015 CMD was about its role as a scavanger (squeezing oil out of mature fields & bringing back to production fields that had ceased production) and the 3 new projects being developed (Alma/Galia, Scolty/Crathes and Kraken).

i) Scavanger operations: In 2015 these assets were producing c. 35Kboepd. In 2019 they are producing 42Kboepd out of such assets (from 19H1 production I subtract Kraken, Alma/Galia and Scolty/Crathes). An increase of 7Kboepd, but this is due to Magnus having been added to this set of assets. If we subtract Magnus we end up with c. 23K boepd. Assets producing c. 35K boepd were producing c. 23K boepd 4 years later. This shows that ENQ needs to add mature assets to prevent this part of its production from declining too much. This is exactly why Magnus was so useful. Most likely the best mature field that ENQ explores at the moment. Did not feature in the 2015 CMD presentation. Yet 14 months later had been added to this set of assets.
Veredict: Scavanger operations were a success in the last 4 years.
2019 CMD: These mature assets will be showcased again the upcoming CMD. Do not expect to be told which mature assets ENQ is looking at to add to the portfolio.
An interesting question is to what extent ENQ's reputation as a good operator will be affected by the issues with Thistle's platform. On the one hand some might say that this affects ENQ negatively, and this means more frequent maintenance checks of old platforms (this means expenditure next year will go up). On the other hand, if ENQ can solve the Thistle's platform issue in a way that keeps production going that will only cement its reputation as a scavenger.

ii ) TBAdded...

iii) TBAdded...
Therapist, gkb47 many TA for your posts I will come back to them. E121, I understood that your FCF $150/200M in H2 is before debt is paid down. I have to run my numbers again. But using all the info I have, I believe H2 production will be just close to, but not all the way up to 70Kboepd . And the POO in the months so far has been 63.92 59.04 62.83

GLA

Hi Therapist: Many TA for your file. Such outstanding work. Your work really helps many of us understand the changes in production in the different fields better. I like the last page with numbers on production of OIL only, and the GAS figures on a separate page.
If I understand correctly your GAS figures have the shrinkage/correction as per column labeled "Gas%", correct?
(If so, the shrinkage number might explain why your gas figures for magnus differ from the ones posted by E121 and Gkb47, correct?)
But, I have a question as your numbers are different from E121's, I believe. I am talking about your Magnus graph. It shows
for August a boepd production of 17,662Boepd. But if i add up your numbers in the other file I get 19957boep. So, the points
in the graph might need to be upped to make us smile a bit more!

Your Kraken graph shows how much its performance has improved. August, dismissed by many posters including me as not such a great month, still came in as the 7th best month ever since production started. Furthermore, we can say that only 3 of the previous months had substantially higher production. This shows how our reference points have changed... We now expect higher production than 6 months ago.

In your post last weekend you wrote it does not pay to be polite. That might be true. But nothing is gained by reading posts of people who abuse others repeatedly and randomly. That is why I filtered HMHn and will not read his posts again, and I expect that he does not read mine either.

Hi gkb47: I am sorry but I cannot understand why your figures are different from Trepapist's ("Following on from the discussion yesterday I did a bit more analysis and so far this year the Associated Gas Produced over the first 8 months was 39.1907 MMSCF/d which equates to 6,980 BOEPD. As we know the major contributor is Magnus which is averaging 26.6435 MMSCF/d and 4,475 BOEPD. The rest of the fields contributing the other circa 2,000 BOEPD.") Therapists's figures show lower gas production. Is it because of his shrinkage/correction column "Gas%".

I want to have a go at using these figures on my handwritten calculations at some point. Diminishing marginal returns apply to virtually all activities humans engage in, not just here...

KO: my goal is not to ramp or de-ramp, but instead post predictions that prove to be accurate as possible ex-post. Thus, i try not post SP predictions, apart from the direction of travel, which is up. ENQ's SP is like the ketch-up in a bottle. you keep trying to get it out, and it does not come out. but once it comes out it is a lot of it. That is how the rise will be. 6 months ago i wrote that a re-rate would occur only after a long period of consistent production by Kraken. I wrote about reaching 50 offloads this year before a re-rate. That mark happened today.

Hi E121: many TA for your fcf answer. i will reply tomorrow. also, many TA for all the shale-related posts.

GLA

All
Crathes/Scolty: In 2015 the 2P reserves were 14MMbbls. Anyone has any idea if these 2P reserves have been revised up or down?
They have produced 3.7MMbbls so far. 10.3MMbbls are left of which 50% belong to ENQ. I am eager to see how much production will be reported now that the two fields are back in production.

Magnus 2019 wells: if you read the RI file they are estimated to have initial production rates of 2Kboepd and 1.5Kboepd.
20-21Kboepd is the GCA mid-case for 2020.
londoner7: i had asked you if you knew whether the water injection issue at Magnus had been fixed. perhaps you did not read my post, but if you could answer my question that would be much appreciated.

PM8/Seligi: does anyone have any information of the reserves being targeted and initial production of the two wells underway? I am talking about the reserves of the wells, not the overall reserves of PM8/Seligi.

Kraken: Has now produced over 25MMbbls. This is a milestone to be celebrated despite the past FPSO hiccups. The base case had 147MMbbls, of which 10MMbbls will be used by the FPSO. If there is no FPSO long shutdown until the end of 2019, I predict that the Oz loan will be down to no more than $135M, i.e. a repayment of $40M in the first 15 months of the loan, which means that finance charges with this loan next year will be $3.6M lower.

Net debt: for about 6 months i have been saying that by the end of the year it will be about $1525M, and I have not had to revise my prediction, unlike others. I smiled when I read Londoner's post on HMHn's predictions and his subsequent revisions, which were news to me since I do not read his posts, and I hope likewise he filters mine, as I asked him to do after his abuse. His first prediction in the Spring was a $611M net debt reduction and he is now getting closer and closer to my figure of less than $300M net debt reduction for this year...

Pelle: Before you ask my calculations still point that by the end of 2020 net debt won't be down to $1B, unless POO is in the $70s and Kraken continues to attract a premium of $5/bbl, or some how production shoots up to 80sKboepd.
Until there is more guidance of how and when Heather/Thistle be fixed , it is premature to engage in overall production projections.
I look forward to seeing Therapist's masterpiece file with more data.I use it to predict cash movements.

On the latter i want to thank everybody, especially Pelle, who posted about what is going on at Heather/Thistle. It is a pity ENQ prefers to keep silent about it, and choose not to inform the shareholders at large. The largest shareholder is being kept up-to-date... I do not understand how anyone can defend ENQ's board silence on this matter.
I see the CMD being dominated by questions about Heather/Thistle, rather than by other matters. So, I hope they issue a RNS in advance of CMD to clarify matters.

E121, TA for the posts on the Shale companies results.
GLA

Hi gkb47, Apologies for not having replied to your question about which platform I use to trade derivatives. We have an account in the continent which we use to trade our Eurozone equities and trade Commerzbank derivatives. W/ the POO higher now perhaps I will be holding a party, not the 60p party, but the $62.50 party!

Hi Therapist, a compliment for you: your posts show that you are too sophisticated for some of the people posting here a dozen or more times a day :)
Your production data is quite useful in light of the Thistle/Deveron stoppage. I am now projecting monthly production
below to be below 70Kboepd from October onwards and until Thistle is fixed. So, 5Kboepd lost until fixed, if I understood the issue correctly. Obviously they will fix Thistle as there is too much at stake (there were 35MMbbls to be recovered back in 2012; so hopefully there is still a lot there).

Hi Londoner7, Thak you for the replies. Wrt to Magnus is it the case that the water injection issues are still ongoing, or were
they dealt with by the end of July?
I read the broker's report you alluded, and even though I do not know you I feel I understood how you would like your words about that report to be interpreted.
Oz Loan: I might be wrong but I believe the loan terms might be structured to repay the principle in equal amounts over 5 years. So, $35M a year, and so $17.5M a semester. Thus the balance being close to $157.5 at the end of H1 (as the $165M reported includes $7.4 million of capitalised interest). By 2019 year end, balance will be $140M, and given current production capitalized interest will be repaid.

CMD: Lots of different opinions about it. I do not expect any news on debt renegotiation. It does not make sense to me to renegotiate now that gross debt is around $1750M. How many basis points would the cost of debt be lowered if renegotiation were now? I bet no more than a 100. In my view that is not worth the fees that any renegotiation always attracts. In 2020 Q2/Q3 perhaps the outlook would be much better so that the renegotiation would result in reducing the cost of debt by a lot more.
Therapist's mentions news about the Seapulse deal. I believe he is spot on in the sense that ENQ is going to tell us more...

Hi Pelle: At $70 poo deleveraging would be quite fast, but below $60 it would be very slow. At $65 read what E121 says.
Of course, I am oversimplifying as the dollar trade-weighted exchange rate also matters a bit because in fact once you take that into account the poo did not fall as much as the headline figure shows. Also, all sterling denominated costs are lower in dollar terms at the moment, given the exchange rate. I expect ENQ to have hedged some of its USD revenues in light of a possible appreciation of the sterling in the short term.
Very good news on premiums to Brent: Kraken paid 3-5 USD over Brent. That is another $50M a year! Impressed by the Malaysis oil premium: $10? Is that so good :)

GLA

Hi Londoner7, Therapist, Chilting and Pelle,

Hi Chilting: Many thanks for all your post on offloads. I have #48 at 13 days. Are 23 hours enough to offload 500K?

Hi Therapist: May thanks for the details of your production data file. I was under the impression that the data figures at the end of the file was after shrinkage as gkb47's production data for July that heposted pointed towards 52.5 Kboepd. I now realize the figure was actually closer to 50Kboepd. Hope August production data is better and above 60Kboepd. Kraken's contribution might be an extra 5Kboepd in relation to July. Hope Magnus also was substantially higher in August than in July. Overall, it would be good to see August production to be back to mid/high 60s.

Hi Londoner7: you mentioned a few things in relation to shutdowns/maintenance that I quote "water injector problems on Dons; compressor issue on Heather; Kraken pipework repairs (albeit offset by postponed Q3 maintenance to 2020); water injection problems at Magnus;". Was all this detailed in the H1 results? For example, i thought that the Don's issue occurred in Q1. ditto for Heather. Are the water injection problems at Magnus something recent and related to the decrease in production in July? If so, I had not seen a reference to it.

On more general issues let me say that i find my views to be closely aligned with yours. W/ poo at $60, Enq will sail to close to the wind in 2021 if the poo stays where it is at the moment, and deleveraging is going to be painfully slow once the hedges w/ price floors at $66 expire. There are no prospects for the poo to go up in the short term, and like you, contrary to what I had anticipated (household consumption in strong all over the world; industry related consumption is slowing down in OECD countries but that is in part driven by a long term trend of manufacturing still being moved to developing countries; consumption in non-OECD countries is not slowing down, see e.g China, and others)

I expect some CAPEX to be postponed in 2020.

ENQ's record is mixed. From all the projects undertaken, it seems the big success story so far is Scolty/Crathes. As stated in HY2018 "The successful production optimization strategy at Scolty/Crathes has resulted in the project achieving payback just over two years after start-up. It remains to be seen how successful. On Magnus, I have been advising people to read the GCA report. It has lots of valuable information, and provides detailed data on the different production scenarios, and how much the different projects will add. For example, the two-well drilling campaign in 2018 provided a boost to production, but it remains to be seen how long lived that is going to be. Kraken is looking better now than 6 months ago. Can it reach 52 offloads before year end? I would have been happy with 50 + plus the long shutdown that was planned.

GLA

Hi ProdOpt, Londoner7, Therapist and Pelle,

Londoner7: ENQ's earnings transcript sheds some light on why an increase of POO of $10 (which failed to materialize) would not increase FCF by $120M, given 12MMbbls H2production, but by much less.
On the 3.9MMbbls hedged the upside would be only $15.6M. On the 0.9MMbbls hedged theupside might be just $4.5M if the price ceiling is $65. So that is $20.1M. Of the remaining 7.5MMbbls, I presume ENQ is taking into account that 37.5% of Magnus's production goes to BP. If Magnus produces 16Kboepd in H2 the FCF accruing to BP is that of 1MM bbls.
It goes all to BP. The other 6.5MMbbls would generate $65M, but the Malaysia production sharing agreement leads to a higher percentage going to Malaysis (if I recall correctly).
So, of the $85.1M total perhaps a coulpe of million have to be deducted. So, there is for sure something else I am missing.

SVT:
https://www.energyvoice.com/oilandgas/209658/sullom-voe-workers-reject-enquest-proposals-to-restructure-firm/
A headache for AB!

ProdOpt: Many TA for your great posts. Very informative. When I wrote that the comparison b/w the headline figures of BP and ENQ in relation to Magnus are not like-for-like I obviously did not mean that either company flaunts accounting rules, but that often the headline numbers released are subjective. Think of ENQ not including the FPSO leasing costs in OPEX.
(It is also the case that accounting rules are not always followed in a strict sense: there is always some leeway as examples of other companies have shown (UTLW, BURFORD, etc.) on the booking of revenues, assigning values to court cases pending, etc.; That is not the case here.)

Therapist: Many thanks for your figures. I like your prediction based on a 4-month moving average. Your files clearly show that production in the NNS must have been chocked in July. In the last page the middle column for each month is after the shrinkage, correct?

Pelle: I am not on anyone's team. I am just interested in making accurate predictions .
I did not imply that your calculations are wrong. What I question is ENQ's 2020 production of 75Kboepd. We will find out ENQ's guidance at the Capital markets day.
On the figures that you wrote, I have something different on my notes:
Interest charges (including the lease interest) $173M
Other lease expenses $ 94M
Decommission expenses $ 20M
Capex $175M
G&A expenses $ 10M
For a high level of FCF as you describe you need the POO to be at least $65.
You will get your dividend at some point.

Mind you that I have added more oil call options this past week that mature at the end of this month, so I am counting on the POO going up shortly a few bucks! But OCED oil inventories are still to high at this st

Hi Hitman1a,

Many TA for your excellent posts. A couple of comments from me.

- On NET DEBT, like you I have stated that targeting net debt as a multiple of EBIDTA is not going to communicate to the market ENQ's situation is improving. A volatile POO will move the ratio netdebt/ebidta up and down from one semester to the next (Pelle has referred to this in the past). ENQ really needs to announce net debt reduction targets (say £100M in 19H2) and stick to them. However, to be sure the targets can be achieved it has to hedge more of its production. PMO has net debt reduction targets which are credible because it has hedged a lot of its 2019H2 and some of its 2020 production at good prices.

Hopefully ENQ can bring Net Debt down to $1B by the end of 2021.
(BTW, I was surprised to read some people predicting FCF in 2019H2 of $250M/300M and being
below $1B by 2020H1; or getting $500 FCF in 2020 w/ POO at $60).

I noticed that ENQ is now working with lower cash balances. It was $180M at the end of H1. If it can continue to do so that would be great because it can reduce its gross debt faster. It reduced its gross debt by $200M in H1. That means savings of about $15M in finance costs. Let me note that ENQ lowered net bet by $137M with a production of a bit above 12MMbbls.
That amounts to around a "net debt" reduction margin of $11 per bll. Not much I would say. This has to increase to $15 per bbl to help the balance sheet because reserves are being depleted, thus reducing the value of the assets on the BS.

- ON CAPEX, like you I think that "After Q2 2020 when Kraken Worcester is pumping away, Enquest have to restrict annual capex to just maintenance and PM8/Magnus.ie Tier 1 prospects".
Reducing CAPEX might lead to small decreases in production, but reducing gross Debt is more important.

- CONTROLLING COSTS: ENQ needs to look at all its operations and see how it can save money by lowering OPEX and other costs, w/out compromising the safety of its operations and employees. Can they bring annual OPEX down by another $25M or so? AB once referred to ENQ as a scavenger. Can it live up to that?

- HEDGING: Only 3.9M bbls hedged in H2. I asssume no more hedges in place.

- KRAKEN's oil premium: There is no evidence that it is attracting a $10 premium. Bloomberg article cited 2 weeks ago mentions other oil as getting such a premium. The mention to Kraken's oil was just one offload that had been well received. Having accurate info on this would be useful as ENQ's net interest in Kraken is between 9 to 10 MMbbls a year. Even a premium of $5 would add $50M to FCF.

- EXCEPTIONALS: Only the ones that involve cash outflows matter. The others are sometimes reversed later on, i.e., the ones related to the mark to market of derivatives. But yet, there are still bit and bobs that show-up.

-------------
Pelle: $500M FCF w/ POO at $60?

GLA

Hi Londoner7, colebrooke, beerbull, Squif, and Gkb47

SVT: It is critical infrastructure given ENQ's assets. It is of utmost important that it stays viable. So a lot of
effort needs to be put into it. BP is arguing for SVT to be remodeled, which will require CAPEX (by all partners)
so that it can take VLCCs. Lots of news about this on Shetland papers. I hope ENQ goes forward with this, while at
the same time simplifying operations there, and bring the running costs down further (positive effect on ENQ's Transportation costs and a more viable operation).
They are laying off 80 people (which is always a tragedy for the people involved, and I hope they can find work),
and hopefully can bring the running costs down by another $25M or so in addition to the $50M they achieved in 2018.

In fact, infrastructure availability (i.e., pipelines, etc. ) matters a lot if ENQ ever takes on more fields from other parties. It is key that such infrastructure is guaranteed not to shutdown in the future for such deals to make sense. Otherwise, ENQ would be at the mercy of the pipeline's owners, etc.

MAGNUS OPEX: Beerbull and colebrooke note that there are several factors that are often confounded. One is that
what counts as OPEX for one company (e.g., workovers, etc.) is not OPEX for another company. There was some work done no Magnus by BP a
few years back and BP might have conuted that as OPEX while ENQ calls such work CAPEX. So $60 vs. $20 is not a like
for like comparison. Furthermore, OPEX per bll has decreased for all operators in the last 2 to 4 years. Contractors' rates
came down. So, again not like for like. The water injection instead of gas (if it reduces costs by $50M as per
current year's OPEX reduction, amounts to just under $9 per bbl as mid case production prediction in GCA report.
FOR ENQ to be better than other companies it must the case that it is bring OPEX down by a greter percentage than
such companies.
ENQ often brags about "right assets in right hands", but in my view the jury is still out. As far as "reservoir
producing above Competent Person's Report and ENQ's purchase case" as stated by AB let us wait until year end
to assess that.
At the moment that is not the case: production in the first 7 months is below. The average is 14.5Kbopd while
the report's mid case was (16.789Kbopd for 2P). And even the low case (1P) had a higher number, 15.077KBopd.
I suggest people read the GCA report so that they can also read that GCA was not convinced by some of the 2P
reserves booked by ENQ, see section 2.4.5 on voidage management.

Londoner7: Many , many thanks for your great analysis of Alma/Galia Opex and operations (Squif thaks a lot for that as well). $44 per bbl capex is something and reveals that it was a very bad project to start with. ENQ seems not always to convert 2P into 1P reserves at a high percentage. SO, I do not see any need to go forward with 2C reserves at the moment.

GLA

Hi Londoner7, Therapist, Squif, Gkb47 and Pelle

PRODUCTION Data: Gkb47 (Many TA for posting). Therapist, could you please update your nice graphs along with the
spreadsheet at the end with the actual production numbers. What are the percentages that you use for the shrinking?
I ask this because I am not sure I understand how you do the shrinking for Magnus. Your data work is outstanding.
By looking at it I immediately noticed that the July prod. decrease (drop from 77.5Kboepd to 52.5KBoepd) (probably maintenance related) this year was much higher than the maintenance decrease in 2018. I do not know the reason for this.
At the H1 results ENQ SHOULD have announced that in July there had been a big drop in production, and told us the numbers for July and August, which they knew. Other oil companies do so. Neither the results nor the earnings call suggested such a drop. Using these I had predicted and posted that July production would at least be 60Kboepd (it tuns out I was very optimistic), which was already a bid drop from 77.5Kboepd, due to maintenance and Kraken coming under 30Kboepd.
I am baffled by the decrease in Magnus, and nothing on what was stated at the time suggested a decrease from June to July.
Just hope that production can recover until the end of the year for it to reach an average of 70Kboepd.
That will require production in August to December to average 75.2KBoepd. This is simply not doable if there is a
shutdown in Kraken before year end for maintenance, no matter how many times Pelle posts "record production ahead."
The best month in 2019 has yielded production of 77.6Kboepd, requiring Magnus and Kraken to be firing on all cylinders.
Let us wait and see.

ROAD AHEAD: Posters have talked about another Magnus type deal, or other possibilities as good future plans.
ENQ has a lot on its plate at the moment and a still very stretched balance sheet. No room to take on more debt or embark on very risky projects (eg joining Bentley, discovered decades ago. As a board member of a midsize oil company w/ interests in the North see told me at an AGM not a long time ago, all these old discoveries have a much higher risk than usual, as otherwise they would have already been developed. More, as s/he told me if they were not developed when the POO was above $100, then the case for developing them is much less clear at POO b/w $50 and $70.
As E121 noted a way forward is to slowly try to repay debt. I second that. I just want ENQ to focus on execution of
the assets producing at present for the time being. They have a series of wells lined up, some of which might have to be postponed if the POO stays low, as they cannot afford high CAPEX levels. Example, if you read the file on Eagle it is nit is not clear cut the project is good enough to go forward . The production projected there is the P05 case. Why spend $60M on CAPEX for something like that? This bring me to something else ENQ should do: SVT

GLA

Hi Londoner7, gkb47, Pelle, colebrooke, squif, Chilting and Therapist,

Londoner7: Many thanks for you thorough response. Some people will say I have a sense of humour, while others think the opposite. Rest assured that I never ask anyone the price of Brent next month. The reason is that I already know it :)
I fully endorse your views on considering FPSO leasing costs as part of OPEX. I bet that is also the way analysts do it in their spreadsheets. A $115M yearly lease payment on 35Kbopdx365x0.705 = 9MMbbls yields $13/bbl leasing cost charge.
My question about moving the EnqProd FPSO elsewhere is driven by my interest in assessing how much of the Alma/Galia Capex is not totally "lost". That is why (perhaps FPSOs need to be extensively modified to operate to deal with completely different oil specifications at a huge cost; i bet the hull still has some value...).
I understand that the 34MMboe was estimated taking into account the POO at the time (how do you get 7.4M recovered?).
However, the shortcoming in production so far is so huge that I am absolutely sure that commercial recovery factors play a subsidiary role in all this, unlike technical recovery factors. I have not read a forthright explanation in ENQ's HY and FY results, or TUs.

Let me congratulate you on timing you entry perfectly: May 2019 with a SP around 20p, was a great entry point. The drawback is that E121 would not consider you a LTH yet. You have to stick around to earn your badge. I have, having entered in Nov16 (when Alma/Galia was still very much praised by ENQ), but bought most of my holdings below 30p.

gkb47: Pls interject always. Many TA for your thoughts on depletion. On such matters as they relate to ENQ , I trust Therapist's figures, which I am eagerly waiting to get my hands on. Therapist, wakey, wakey...
Which 6 wells? 2 in Magnus and 2 in Malaysia 4Q19, 2 + 2 in Western Flank. Others?
Finance costs: Gross debt is around $1800M. Add BP vendor loan of around $104M, and you can see that they are not coming down that soon, unless there is renegotiation with a lower interest rate. And this will not happen before 2020H2, I think.

Pelle: Your dividend is my dividend. I would like ENQ to announce they will reduce net debt in 2020 by at least $300M, and stop emphasizing the Netdebt/EBITDA .

Squif: Pls Alma Capex figures.

colebrooke1972: Magnus NPV. See Rights issue. NPV_10 is $355M on the basis of 1P reserves (for 2P is $524M) under N assumptions, such as POO in 2018H2 ($78.84), 2019 ($75.08), 2020 onward ($70 + 2% every year). POO in 2018H2 was below $70 and in 2019 if it stays where it is it will be below $65. See NPV_10 with POO lower by $10 in relation to POO above: 2P NPV drops to $377M. Pricing of bonds suggests Mr Market uses higher rate to discount. Calculate NPV_12.5 and get < $350M. Do 1P NPV_12.5 with POO lower by $10 and you get <$250M... If POO is even lower then NPV drops more.

Chilting: TA offload #45.

p.s.: E121 away?

GL

Hi hitman1, Chilting, Pelle, Therapist, Squif, Londoner7

Hitman:
There was a mention to sale and leaseback of Enquest Producer in the 2015 Full year results. There is no reference to it in subsequent HY or FY results that I could find. Such operation would have to be in the accounts. Thus, the FPSO belongs to ENQ.
Exceptional items are not all the same. Mark to market losses really do not matter because they cancel previous gains. What matters are the net effect of hedges. See E121's posts.

Hi Chilting,

Offload #46: I have per MO's post that Offload #45 finished on 10/09 at 16:00. You have offload #46 finishing on 24/09 at 11 am. So that is roughly 13 3/4 days. This leads me to believe that production was about 37.5K tops. You seem to have a different time from MO's for offload #45's finish.

Hi Pelle,
Any CAPEX figures for future years with details by field that you could share?
- I have looked at Magnus's figures as per the GCA report. Capex in 2020 and 2021 will be $5M. It will increase to $38.1M b/w 2022 and 2025 due to late life CAPEX.
- I have no figures for Kraken's CAPEX or any other fields, including Eagle. Do you have any?
(btw with POO at $60 ENQ will not pay divi until 2022 the earliest. Remember that after 2021 production from Kraken and Magnus drops considerably according to FID/RI documents)

Hi Londoner7: Not sure if you saw my questions for you and ProdOpt about technical details in my 21 Sep 2019 10:19 post. Western Flank/ Alma/Galia.

Hi Squif: You claimed that CAPEX on Alma/Galia was $1400M. Could you please provide your workings? That seems a lot to me.

General comments:
NET DEBT: ENQ needs to provide guidance on debt reduction like others (PMO, TLLW, etc.) do, i.e., saying we want to reduce net debt by $250M in 2019. Just referring to netdebt/ebidta is not enogh because the denominator fluctuates a lot with oil prices.
POO: Anyone buying call options at yesterday's bottom will do well. I was focused on work so missed my chance. We know that SA' lost production since Sept 24 was at least 1.7Mbbls x 16 days = 27.2MMbbls according to Rystad's best scenario. In addition some of the other oil is not being processed, so stocks of oil that can be exported will continue to decrease.

EIA data: Reported adjustment of close to 1 Mbopd. Even Canadian crude-by-rail exports missing figures cannot explain this adjustment. Here is the official data:
https://www.cer-rec.gc.ca/nrg/sttstc/crdlndptrlmprdct/stt/cndncrdlxprtsrl-eng.html
It has always been below 0.4Mbopd. So, something else has to explain a close to 1Mbopd adjustment. Either exports were lower, imports were higher, refinery utilization has lower, or production was higher. We hope it is not production.

SHALE & RIGS: With a high stock of DUCs even a decline of the rig count will not help in the short run to curtail production. A lot more has to be stated so that people appreciate Shale's business model. Depletion is not all that it seems

Selected few:

A brief post given time constraints.

Look at
https://shaleprofile.com/2019/09/26/permian-update-through-june-2019/

The graph shows that the wells that started production in 2017 were producing 1.379Mbbls in December of 2017. Six months later , i.e. June 2018 they were producing 0.827Mbbls. So depletion rate was 40%.

Now look at the wells that started production in 2018. These were producing 2.128Mbbls in December of 2018. Six months later , i.e. June 2018 they were producing 1.191Mbbls. So depletion rate was 44%.

I am sure everyone can interpret what this means...

-------------------------------------------------------------------------------------------------------
Are there any estimates of the CAPEX needed for Karaken's Western Flank wells next year? It is supposed to come into operation in H2.

Pelle: Thank you for your production estimates.
Therapist: Could you please post your updated files? I saw one, but you wrote you were taking a break for football watching.. If you have them, they are very helpful.

MAGNUS' RELATED PROVISION: The Magnus contingent consideration as it relates to the 50/50 cash flow sharing is not debt, as I am sure everyone agrees. ENQ will only pay it if Magnus delivers positive cashflow. So paying it down would actually be very welcome news as it would tell the Market that Magnus has done very well!
Does anyone have any guess when the 50/50 cash flow sharing arrangement started? Was it August/September?

(We know the vendor loan for 25% of Magnus has now been repaid. This means that the cashflow accruing from 25% of Magnus now all goes to the bottom line; The vendor loan for 75% of Magnus is now down to $104.5M as $12.5M was repaid in 2019H1. This loan is the only amount that is debt and has to be repaid and earns interest at 7.5%.)

KRAKEN PREMIUM: Not known. Sold at a discount of about $1 a few loads in early 19, but then my impression is that it has since sold at a premium. How big is the premium? If you knew the premium to Brent at which the other oil is sold, then you can write down a (long, one term for each month of production) equation and solve it for the premium, given total revenue disclosed in H1. I hear that gkb47 has volunteered for the job.

Net debt reduction: Note that in H2 more of the finance costs result in cashflow movements. You can see it by comparing 2018H1 and 2018FY results. The same will happen this year. It is simple to see why. Gross debt is about $1.8B. If the weighted interest is about 7.5%, the yearly interest is about $135M. But in H119 the Net interest and finance costs paid were only $48.7M. This means that in H2 we will see about $90M Net interest and finance costs being paid. Same thing happened in 2018.

GLA

Selected few,

Therapist: Many thanks for your 15/09 spreadsheet.
I cannot understand the last page, p. 10. You refer to Prod FY17 and Prod FY18.
What are these? I am sorry but I do not understand if the figures are boepd or something else.

Londoner7 and ProOpt: I read with interest your exchanges on the Western Flank.
In particular that " demand for hot water from FSPO will not diminish with fall off in oil production
from the current well stock so either hot water capacity is added to the FSPO to support the Western
Flank development or an alternative solution is developed. Hence consideration is being given to the
'downhole electrical heating and ESP' solution.

The questions I have for you are: Could ENQ send the Enquest Producer FPSO to the WF? We know that
Alma/Galia project failed, so can the FPSO be sent to Kraken? By the way does any of you know why Alma/Galia
did not perform?
It has produced only 6.3MMboe so far. It was suppposed to produce a lot more given that gross 2P reserves were
set at 34MMboe. Does any of you know what went wrong? I ask because the new ESPs evidently did not
improve production.

Have you seen the plan for Eagle? It is available at:
https://www.enquest.com/fileadmin/content/operations/Downloads/EHE8014_Eagle_Development_ES_Complete_Rev01.pdf
They intend to start production in 09/21 (Capex will be in 2021), and stop after 2 years,
producing a total of 4.3MMbo in the high [P05] case for oil rate.
I do hope that Capex on Eagle will be no more than $60M!

Pelle: You asked about the feasibility of hedging during Monday and Tuesday. Yes, it was possible. 5Billion bbl
changed hands on Monday in the derivatives market. E121 casted doubt on direct hedging. If he wants he can explain
more why he thinks that would be hard. There were surely parties out there trying to cover their short positions
and I am sure ENQ knows who to ring/email. We shall see if they hedged anything in the next OUpdate. Shale
producers did take the chance to hedge, as confirmed by the media.
Yeseterday you wrote that you expect production at 30Kboepd, if you exclude Kraken and Magnus. How do you get
to that number?

SP: I am not one for running commentaries on the SP, but I am puzzled as to why it does not budge.
We know one thing, which is that AB bought on 23 November 18 at 23.3p. After that his purchases were
all below 20.4p. It seems Mr. Market wants to see more evidence that execution is as planned.

PO: $4/5 higher than last Friday! Good news that rigs are down and that EIA weekly production is stuck at
12.4Mbopd. Better yet that part of the positive adjustment every week seems to be driven by crude-by-rail
from Canada. So the import data from Canada is not accurate on a weeky basis. At least we know that
it is not immediately unaccounted-for US production that is explaining the adjustment. As E121, insistently
says keep an eye on shale to see where the POO is headed.

GLA