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Hi Gkb47,

ENQ buys gas that was suposed to be injected into Magnus. That is no longer the case, as now they only inject water. Yet, there is a long term contract they have to honor, and thus buy the gas and sell it. (The switch from gas to water injection is what generated a $50M reduction in OPEX for 2019. I assume they sell it for the price they buy it (as I do not know the contract).
Apart from this there is gas production from different fields, but mostly from Magnus. That is sold and goes into the production revenue.

Hi Therapist, Many thanks for your file. Could you please add your lovely last page with numbers as well? I like the color system you use . I might be confused but are you excluding gas when you stated that August production was 53/54K per day. I ask this because E121 is mentioning different numbers. I am sure I am overlooking something here, but cannot do until the weekend.

Hi E121, Could you please elaborate further on how you get to $150/$200M in H2 FCF? In relation to H1 we are seeing increase of Kraken's production, which reduces the Oz loan and RCF. Reduction of production of other assets (other than Magnus & Kraken) leads to less money available to reduce the RCF. Overall the effect on net debt reduction is the same. It just goes to different pots. The net debt reduction is the same but tilted more towards the Oz loan, which is good as it has the highest interest rate. So, if production stays the same as in H1, I would expect net debt reduction to not be greater than what was seen in H1. And the average selling price in H2 will surely not be greater than in H1, unless the POO shoots up to the $70s and stays there until 31/12. May be I am missing something in my calculations, and that is why I ask for clarification of your figures.

I avoid commenting on the SP, because it is disconnected from reality, but I will make one prediction: when the tide turns it will rise suddenly and quickly. When will it happen?

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

Pelle,
i posted this yesterday. i see no reason to update it!
- Short run effect: US had already announced thy would sell 10Mbbls from SPR 2 months ago. Now, they might up it to 44Mbbls to reduce SPR to 600Mbbls.
SA might draw down its reserves, but they are below 200Mbbls to start with. My expectation is that the front end of the term structure of the POO will increase to above $65. Ideally, ENQ should hedge the downside of another 30K boepd (adding to the 21Kboepd it has already hedged) at a floor price of $65 until the end of 19 right away. Would not hedge the ceiling price, or if so, it could be done in the lower $70s, if there is not enough cash to buy the put options.
The increase in the POO in the next week will not tell us if the POO in previous weeks was already incorporating a major production disruption premium, except if the POO tomorrow does not go up.

- Medium run effect: i.e. the part of the term structure of the POO in the following 6 months. The event in SA might not shift this part of the curve much right away, i.e., until it is known if the effect will last more than a couple of weeks. But if it does, the 1st thing I would do would be to hedge the OZ loan related production, hedging about 150KBoepd for as much of 2020 I could at a floor price of $65. We know ENQ has to do this soon as per the conditions of the loan. This might be the best chance to do so now. Other ENQ production: If the downside can be hedged at $65 I would do it for 15Kboepd of 2020H1 production right away, even before finding out how long the disruption is going to last.

- Long run effect: i.e. the part of the term structure of the POO starting about 10 months from now. I expect this part of the curve not too move as much as the other two above, because shale can always fill the gap in total production, even if not of the heavy crude. However, if it does then one or both of two things must be true: i) the premium in the POO over the last few months for major disruptions like this was too small, and thus the new equilibrium level for the POO has to be higher so as to reflect a more correct premium; ii) the market expects major disruptions like this to be more frequent and so the premium in the POO needs to be higher.

I have not yet sold my oil call options, as i expect the POO to go higher from current values.

GLA and have a good week.

Pelle,

Yes, I wrote divi... (But it is time for me to remind you that SEC will also ask you about your other market manipulation by you referring to often to "dividends"!!! By the way I am fining you SEK50 (in addition to the fine levied by gkb47, which has the right to impose such a fine). You cannot fine him as long as his posts contain information (even if only indirectly connect to ENQ, or is an analytical piece), and are not just sound bytes or ramblings. I also read your exchanges with NeilH. Perhaps if you have some time read what he posts on the PMG bb. I cannot understand his logic. He dislikes ENQ because of its debt and because the POO might come down to $25. But he like PMG, which is a small E&P that produces zilch oil/gas (if you produce close to nothing then the price of what you produce does not matter), and that now purchased a bunch of land Owned by a company in which the wife of the CEO had a 75% stake in Aberdeenshire to install wind turbines (or at least that is what they claim), and claims that such deal is w/out suspicion, even if the purchase led the CEO&Wife to increase their holding from 20% to 25% of the company. If you challenge NeilH on that as some have done on the board he replies with "libel"! If he were coherent I would accept his views on ENQ, but his position regarding PMG says it all!)

Onto more serious things: I have come to believe that AB will want to pay a dividend sooner rather than later if he wants to see a higher SP. The reason is that the market will start focusing on oil companies that produce and pay dividends, as the E&P that have no production will be seen as not worthy of investment because of the climate change issue. Would you invest in a company that will start producing oil 5 year from now, when there is so much animosity against oil? No. So, you focus on the ones that pay dividends to their shareholders.

Squif: You might well be right. But, I beg to differ. I take the point you made in a post this week that ENQ has not generated much return from its projects, given the change in the value of the Equity in the BS over the years and taking into account rights issues, etc. But perhaps we will see a change. In fact, one of the things I want to do is to assess a few projects and try to figure out if they have been profitable or not, an how much money was made or lost in them.
I will try to assess Kraken over the next few months, and post about it, if I feel that I have some confidence in my figures.

Pelle: I have no idea of how much a 5% oil price increase tomorrow would affect the Enq SP? I know it will go up. By how much, I do not know and I am unable to predict. But will it reach 30p tomorrow? Of course not. Will it go above 20p? Absolutely!!!

The 40K is on top of the 17.5K shares purchased last week. I own so many shares that I have ordered bed sheets with ENQ's logo on them. How many do you own now? 3 million?

GLA.

Selected few

Have not had a chance to read and listen to CNE's 2019H1 earnings. Have only read some posts over the last week .. .Some comments.

DIVIDEND: As exceptionally well explained by E121 and Londoner7 $287M + ($35M October19 + $120M April20 + £132M PIK + possibly PIK from tomorrow if POO in the last 6 months was below $65) need to be repaid before a dividend. Note that ENQ does not need to repay all the $120M due April20 before it can pay a dividend, but since April20 will arrive before a dividend will be considered, I enter the full amount.
Bearing in mind that the final and largest RCF repayment is on Oct21 ($360M + £14MPIK if not repaid yet). This means that by Oct20 such debt switches from "non current liabilities to "current liabilities". Now, ENQ will not want to present an end of 2020 balance sheet that is stretched in terms of "current liabilities" vs. "current assets". at the moment it is $909M vs. $617M. This is far from ideal (you want assets>liabilities), but at the end of 2020 it could look worse given the switch related to the loan. So, I expect the RCF to be renegotiated before Oct20. And perhaps we might see also something with the bonds (in particular the retail bond) at that time . So, Pelle might get his small divi in 2021. (But will SA's event result in a much earlier cheque for Pelle?)

NETDEBT/EBIDTA: The idea that you can bound it within an interval is hard to achieve because the POO has huge swings. You cannot guarantee that from one year to the next the ratio will not increase/decrease a lot. You need to have a very large margin per bbl for the POO swings not to have a huge effect on EBIDTA. Thus my view is that initially ENQ should have a nominal target, say $1B net debt, rather than using a multiple.

SP: Barclays upping the target to 23p should have an effect on the SP eventually. posters have argued that they profit from a simple rule: buy at 18ish p / sell at 21ish p. It has indeed worked. But, you are trading off a small gain for a large gain when the SP eventually rerates to around 30p. And how do you know, that when you sell at 21ish p that the SP will not keep going up? I wrote many times in the past that a spike of the POO might happen unexpectedly.

Londoner7: why does a $10/BBL increase only impact EBIDTA by $60M in H2? ENQ will produce at least 12Mbbls. So it should be $120M.

gkb47: I simply meant that a statistical test on past POO prices (before you get tomorrow's prices) would not allow you to conclude if a major disruption was priced in. That is different from my subjective view. I have repeatedly posted that since the drop of the POO around $60 I have been trading short dated Brent call options (at the moment one that expires in October). The reason why I do so is because of what wrote in the past on the spikes of the POO.
I expect it to go up tomorrow, in which case I might even sell it :)

I added 40K shares to my ENQ holding!

GLA

Selected few,

Too many deadlines at work ahead of me plus traveling, but given the events I am taking a break from everything else to post.

POO: Unclear the extent to which the POO will react to SA's shutdown of part of its production. We do not even know if the POO was reflecting a premium for the possibility of such disruption.
I expect the hedging team to have already been put on notice to get going tomorrow early morning, or even tonight if they want to trade derivatives in the Asian markets!

- Short run effect: US had already announced thy would sell 10Mbbls from SPR 2 months ago. Now, they might up it to 44Mbbls to reduce SPR to 600Mbbls.
SA might draw down its reserves, but they are below 200Mbbls to start with. My expectation is that the front end of the term structure of the POO will increase to above $65. Ideally, ENQ should hedge the downside of another 30K boepd (adding to the 21Kboepd it has already hedged) at a floor price of $65 until the end of 19 right away. Would not hedge the ceiling price, or if so, it could be done in the lower $70s, if there is not enough cash to buy the put options.
The increase in the POO in the next week will not tell us if the POO in previous weeks was already incorporating a major production disruption premium, except if the POO tomorrow does not go up.

- Medium run effect: i.e. the part of the term structure of the POO in the following 6 months. The event in SA might not shift this part of the curve much right away, i.e., until it is known if the effect will last more than a couple of weeks. But if it does, the 1st thing I would do would be to hedge the OZ loan related production, hedging about 150KBoepd for as much of 2020 I could at a floor price of $65. We know ENQ has to do this soon as per the conditions of the loan. This might be the best chance to do so now. Other ENQ production: If the downside can be hedged at $65 I would do it for 15Kboepd of 2020H1 production right away, even before finding out how long the disruption is going to last.

- Long run effect: i.e. the part of the term structure of the POO starting about 10 months from now. I expect this part of the curve not too move as much as the other two above, because shale can always fill the gap in total production, even if not of the heavy crude. However, if it does then one or both of two things must be true: i) the premium in the POO over the last few months for major disruptions like this was too small, and thus the new equilibrium level for the POO has to be higher so as to reflect a more correct premium; ii) the market expects major disruptions like this to be more frequent and so the premium in the POO needs to be higher.

E121 wrote "hedge, baby hedge" yesterday. I would not quite say it like that, but the next 48 hours trading derivatives might be very useful to reduce net debt.

THERAPIST: glad you found your typo. could you please post the updated files (also with your calculations for depletion)?
Many t

Hi E121 and Londoner7,

E121 (I will write after CNE's results are out to complete my list of questions. I am traveling this week. I prefer to do it when I have a bit of time).

Londoner7,
Would be curious to know what your opinion of the H1 results is.

On the charge mentioned (we all agree is a non-cash charge, and depending on the derivative, one that could reverse).
I like your explanation, and it had crossed my mind. What led me to think otherwise was the following in the 2018 report.
" To mitigate oil price volatility, the Directors have hedged approximately 6.5 MMbbls of collar options at an average floor price of around $66/bbl in the first half of 2019. In accordance with the Oz Management facility agreement, the Group has a further approximately 1.5 MMbbls hedged across 2019 with an average floor price of around $56/bbl."
That led me to believe that there no hedges in place on 31 December that related to 2019H2 apart from the Oz loan related ones. But we know that these amount to "c.0.7 MMbbls hedged with an average floor price of c.$56/bbl in accordance with the Oz Management facility agreement." Not sure if they have a collar in place for the Oz loan or if they jut purchased put options. But this 0.7 MMbbls cannot generate generate "unrealised losses of $42.9M in respect of the mark to market movement on the Group's commodity contracts from 31 December 2018".
That made me think that there were hedges for H2 2019 and 2020 that were not reported at the time. Otherwise, how to explain such a large value?

If you have any ideas on why there were changes to the fair value relating to the contingent consideration on the 75% acquisition of Magnus and associated infrastructure, which resulted in non-cash charges of $26.9 million (which reflects the Group's expectations of continued strong performance at Magnus) and a $28.1 million unwinding of discount on the end 2018 contingent consideration balance, that would be much appreciated.

Overall Magnus Contingent consideration was $660M at 31/12/2018. 6 months later was higher at $678M. So ENQ is now supposed to share more money with BP... I do not recall the details of the deal, but a way this could happen is that they never thought they would eventually pay the $600M of the profit sharing in full, but now they do. How? It is possible that the increase in the POO from 31/12.18 to 30/06/2019, led to this? Bizarre.

Hi Pelle,
Please do keep track of the CAPEX amount for the different projects. gkb47 is on strike.

More figures:
ENQ produced 12.48Mbbls in H1. Depletion was $250M. So that is $20/bbl.
Inconsitency b/w "$165.0 million in respect of the Oz Management facility, comprising amounts drawn down of $157.6 million and capitalised interest of $7.4 million;" and note 10 to the accounts "Oz Management facility(ii) Principal 164,998;
Fees (2,975); Total 162,023"

GLA
p.s: Mavrick_10: 2.8Million ENQ shares? If SP goes up to 35.7p You will be an ENQ GBP milliona

Hi E121,
Many thanks for your follow up. Much more eloquently than I could ever say it to Mavrick10, even though I will have a go at it.

Mavrick10,
Yes, at end of the race the SP will all matter for me. But since I am not planning to sell any time soon, if the company execution is great (which seems to be at the moment) then eventually the SP will come good, and I can wait for it (think of it like a final salary pension: what matters is your salary at the end, not what it was along the way). I see no better way to assess execution except through number crunching. And, thus I am very grateful for all the number crunching that everyone posts. That is what makes this BB so good most days.

And if the SP is too low for you, do not complain, just use the opportunity add to your holding. Even I added to my holding (as much as I could on my ISA), even though I preach investment diversification... The prospects of ENQ are so good at the moment that it has crossed my mind if I will in the future regret not adding more to it (This despite IC's recommendation to Sell being reaffirmed; this time round they focus on the exceptional items. IC is stuck in a Sell loop about ENQ and virtually all E&P companies). On the contrary, The Times today had a positive write up of the H1 results.)

Pelle,
The CAPEX man. Worcester wells will cost $56M according to the earnings call. They say CAPEX per bbl is $14 and that they expect to recover 3 to 4Mbbls. so 4x$14M=$56M. Add that to your 2020 spreadsheet, as it seems it will be sanctioned. All this work to eventually pay you a dividend :)

GLA and may offload #45 start tomorrow. Where is Chilting?

HI E121 and Londoner7,

Hope all is well.
Any idea on my questions about the exceptional items? You seem to remember lots of details no one else does...

(oz loan figure: the principal came in at $162M, so $13M paid down. Good progress.)
(finance lease was $60,623M of which interest was $26,772M. If this includes rebates from stoppage, I am budgeting H2 payment to be higher by $10M, perhaps. If offload #45 starts tomorrow then things are looking rosier for September production.)
In the interview AB mentions 12.5m barrels hedged at $66. But he is referring to all 2019. See relevant passage from earning relase "For full year 2019, the Group's hedge programme covers c.12.5 MMbbls."

Hi Pelle,
The only downside on the results was the lack of a Pelle dividend. And you have been relapsing constantly. Make it another 50SEK fine on top of the one gkb47 issued. Why was repayment in May/June lower? (Answer: lower production in May (remember that), lower POO in June. Perhaps paying the KUPEFC people " A total of $5.6 million was paid in June 2019."
I have no idea if this means that the "frivolous" claim is now settled. If so, a RNS explaining it should have been put out. It is very material information.

Hi gkb47,
The last bit of my previous message was for you. Where is your homework?

Hi Therapist,
Data graphs much appreciated. Many thanks.

Mrd,
You did well once again (after PMO). What is your next up trade?

GLA.
p.s.: I never understand why there is so much interest on discussing the SP among long term holders. If you plan to hold for the long run then the SP tomorrow is irrelevant. Keep EV constant, and SP will appreciate as net dent is being paid down (taking into account that options matter for market value in the future).

Selected few,
I had not planned to post before the 10th (CNE's results day), but my schedule has changed, and next week will be quite hectic.

Summary: Very pleased with H1 results. I added 17500 to my ISA holding yesterday during lunch break.

1) Net debt: Below my projection by $28M (in the range I labelled "quite good") . Expect year end net debt to come just under $1525M (so those share awards kick in!). Good.

2) Production: My projection was close (only missed the upside of Malaysia's production). Reaffirming production guidance makes no sense. Why? In H1, production was 68,548 Boepd. So keeping guidance at 63 to 70Kboepd, means that ENQ allows for H2 production to be 57,452 Boepd (to average 63Kboepd in 2019). No way it would ever be that low. Furthermore, ENQ already has production data for July and August (we have for Kraken, and based on it I am 100% sure July and August's production was above 60Kboepd). In short, ENQ should have upped the lower limit of the production guidance by at least 2/3Kboepd. ENQ needs to realize PIs and analysts can do some math/stats!

3) OPEX: Revised down to $550M (part of the decrease is the reassignment of gas purchases for Magnus no longer being considered OPEX, as they are no longer used, but sold). OPEX came in at $20.1/bbl. If OPEX stays at that level in H2, that would imply ENQ would produce 27.35Mbbls in 2019. Since it produced 12.48Mbbls in H1, then it would have to produce 14.87Mbbls in H2, which means 81,250boepd in H2 (Can it produce that much per day in H2? No. I believe it can get to 75Kboepd across H2, but not more). This implies that OPEX per bbl is going to increase in H2. How much higher? If you take the upper limit of the production guidance, i.e. 70Kboepd as the 2019 daily production, it means it will be producing 71452Kboepd in H2, to average 70Kboepd across the year. If that is the case then OPEX per bbl will be $21.5 across 2019, and it will be $22.6 in H2.

In short, ENQ should have either upped production guidance or stated OPEX per bbl in H2 is projected to be go up to c. $23 in H2. (I'm not complaining about production or OPEX. Only asking them to put out consistent figures.)

I have a few questions for the erudite on this BB that relates to the $120M remeasurements and exceptional items .
- Unrealised losses of $42.9M (mark to market movement on the Group's commodity contracts from 31 December 2018). What could these be? Floor prices of 2019H2 hedges are above the current POO. Could it be from 2020 undisclosed hedges?
- Increase in fair value relating to the contingent consideration on the 75% acquisition of Magnus and associated infrastructure of $26.9M, which reflects the Group's expectations of continued strong performance at Magnus, $28.1M unwinding of discount on the end 2018 contingent consideration balance. What is going on? They never expected to pay the $600M to BP, but now they do? Otherwise how to explain this?

p.s.: Where is your homework