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read the discussion on Alphaville. The disappointing news is that the alphaville moderator says that RBC is sticking to its 15p price target, even though RBC acknowledge that the covenants they looked at (not all of them; see my posts Sunday and yesterday) will not be breached. The latter we already knew. by the way as I wrote yesterday it is the trailing 12 month EBIDTA that matters, because you cannot use forecast in covenant tests unless the rules to forecast production have been defined precisely, which is not the case. So, 75% of Magnus might only kick in from the moment production was exercised, unless the accounts are restated to 1/1/2017.

As I wrote many times (and got called names for doing so) a re-rate to a nice party level (50p or higher) won't happen before execution improves. Brokers can always take a pessimistic view on the basis of past execution to attach a low price target.

Now that 2018 is over, it is time for us to forecast what level of net debt will ENQ as 2018 year end and see who gets it right. I hope to do my calculation within the next two weeks!

All the rest is noise. poo will go up then down, then whatever... ENQ just needs to hedge for 2019 Q2 to Q4, or let us know in the next update what has been hedged. I for one cannot believe that in December they had not hedged past March 2019. That would have been utterly irresponsible given ENQ's net debt level.

Hi Pelle,

What I posted was that the RBC had posted yesterday. So, if there was a correction, I have not seen it yet.
At any rate what matter is poo and execution. You cannot control the poo, so the only option is to focus on execution.

website. i am just posting it. i am not going to comment/discuss any more of the rbc's note.

Conflict Disclosures
RBC Europe Limited makes a market in the securities of Enquest PLC.

Equity Research Disclosures
Risks to rating and price target (1/7/2019): Consistent with other international E&P companies, our price target is exposed to material levels of commodity price risk, discount rate risk, foreign exchange risk, and project execution risk.EnQuest's portfolio is weighted towards later life assets, heavy oil production, and higher cost operations. A failure to control operating costs, combined with a delay to first production from Kraken and an increase in capex could require further equity placing and raise covenant concerns.
Valuation (1/7/2019): On a sum-of-the-parts basis, discounting at 12.5% from January 2019, our risked NAV for EnQuest is 47p/share. Our valuation comprises 37p/share for the company’s core asset base (producing fields and firm development projects), including the Scolty Crathes which achieved first oil in November and the Kraken project which came onstream at the end of H1/17. Scotty-Crathes and Kraken remain risked due to production challenges which remain unresolved due to funding constraints, which could impact reserves at year-end.Our price target is set at 15p/share, in line with our Core NAV at $60/bbl long-term. As a development focused business, we expect EnQuest’s stock to reflect its progress in moving developments into production. Our price target in line with our Core NAV reflects implied downside and supports our Underperform recommendation.

Fernan, I think he is asking how much will have debt changed from July 1st to December 31st.

when half-full glass people like Fernan and I think there is no issue with the tests, then the logical conclusion is that Victoria's worries will only worry her...Nevertheless, DOYR

Hi Fernan,

Super thanks for the figures.
Let me add that consolidated net financial indebtedness means the aggregate of all financial
indebtedness (with the PIK Amount excluded from the definition of indebtedness) of
the Group under the SFA at the relevant time less the aggregate of cash and cash
equivalent investments of the Group.
So it is aggregate of all financial indebtedness of the Group under the SFA only. Thus excludes not just the bonds but other debt like the mercury loan, etc.
Do you agree?
TA

Hi Pelle,

ENQ clearly passed the 31 December 2018, otherwise we would have been told by now.

Rereading whatever Victoria wrote (as posted in the proactive investors website) she does not say that the RCF repayments will not be met and that ENQ will fail the covenant tests. She says they will be increasingly changeling as the oil price decreases, which is true.

Before I say more, I wonder if she worked on the piece on December 24 when Brent was $50, then went on vacation, and when she got back to work today she did not realize the POO was now bouncing back up and very close to $60...

As I wrote yesterday night, 21:34pm, well before RBC's note release today one of the tests is:

Scheduled Test Dates set out in the left hand column of the table, the
ratio of consolidated net financial indebtedness to EBITDA (the “Leverage Ratio”)
is less than the respective ratios set out in the right hand column of the table:
Date Ratio ––––––––––––––– ––––
31 December 2018 1:75:1.0
31 March 2019 1.50:1.0
30 June 2019 1.50:1.0
30 September 2019 1.50:1.0
31 December 2019 1.50:1.0

where consolidated net financial indebtedness means the aggregate of all financial
indebtedness (with the PIK Amount excluded from the definition of indebtedness) of
the Group under the SFA at the relevant time less the aggregate of cash and cash
equivalent investments of the Group)

Ok, so any amount outstanding under the RCF (excluding PIK amounts) minus cash in the numerator.
This can be manipulated by entering into an arrangement of cash now repayment in kind later, as per the Mercury deal. Denominator is the issue, but it has to be past 12 months EBIDTA... otherwise it would be totally arbitrary, i.e., what production level do you use? This test can be passed, throough cash loans to lower the numerator.

There is however something else which is that on each Test Reference Date it is demonstrated to the satisfaction of the Majority Lenders that the Group has sufficient funds available to meet all liabilities of the
Group when due and payable for the period commencing on such date and ending on
the date falling 12 months after the Final Maturity Date (the “Liquidity Test”). The
Liquidity Test assumptions include a price deck of the historic average forward curve
oil price of the past 15 consecutive business days (minus a 10 per cent. discount). The
test covers the life of the loan plus one year, and includes 75 per cent. of the amount
due on the SFA Final Maturity Date (to be increased to 100 per cent. from 1 January
2020) provided that no event of default will arise if the Liquidity Test demonstrates
that such amount can be repaid from cash flow after debt service in one year after the
SFA Final Maturity Date.

Here is where things can go wrong because POO is worked out as "price deck of the historic average forward curve oil price of the past 15 consecutive business days (minus a 10% discount)."
A sudden sharp drop of the POO 15 days bef

Putting out a reactive RNS to a broker's valuation makes no sense. The reason is that if that was the practice brokers would put out recommendations just to "elicit responses" from the companies. So, the best response to the broker's note is silence.

On the other hand RNSs can be put out when there is a sharp change to the SP, which is not the case here. A drop of -7/8% is not a big deal.

Another reason to put out a RNS is if there is material information (e.g., finding out that AK cannot process enough oil, etc...) but there is nothing in the broker's note about material information that we do not already know.

ENQ IR is never going to say the broker is wrong. If it is clear the broker is wrong, Mr Market will say it loud and clear.

So, let us give it a rest and wait until something material happens that justifies a RNS!

there we go again with name calling... I wonder how such people were brought up...

Hi Pelle,

I mentioned the debt covenants yesterday (see my message Sunday 21:34). I did not comment on them...
What we need is to feed the info into an excel spread sheet and check whether the RBS conclusions are correct.
I suggest using $58 as Poo (today's price) and assume that production is not hedged past 2019 1Q. This is like a bad scenario, and see what happens. Unfortunately, I am quite busy at work today, so no time for me to do it.

We have not heard from Fernan... He might shed some light on this.

Needless to say that had ENQ hedged some of its production throughout the whole of 2019 when the poo was above $75, covenants would not be at risk, despite the Kraken problem. If ENQ has to write down Kraken's reserves when in releases its 2018 year results, then expect the market to punish the stock price badly.

E121,

Hope you had a good epiphany day yesterday.
I bet that the under performance of Kraken is the reason as well.

Interesting debate going on about at what level to start hedging. What is your take?

HI Pelle,

It just mention repaid from the revenues, so leaves open the possibility to be done as you suggest, but also others, i.e., ignoring Opex, although that would not make sense. That is why I have been trying to understand the terms of the loan more precisely. I assume the LIBOR rate they mention is the 1-year one.

anyway, poo is close to $58 now.
IMHO hedging should kick in as I mentioned yesterday if indeed there are no hedges in place for 2019 2Q.

Have a good day.

hi Pelle,
i had read it. but not enough detail in there:
"Reduction and repayment
The final maturity date under the OZ Facility Agreement is 5 years from the date of the
utilisation of the facility. The loan is to be repaid from the revenues from the sale of the
Kraken crude oil to which EnQuest Advance is entitled by way of monthly cash sweeps up
to pre-agreed monthly amounts.
(iv) Interest
Interest is calculated as LIBOR plus a margin of 5.75 per cent. per annum."

we do not know the pre-agreed monthly amounts.

btw for the rcf there are some tests that need to be passed every now and then, namely:

ratio of consolidated net financial indebtedness to EBITDA (the “Leverage Ratio”)
is less than the respective ratios set out in the right hand column of the table:
Date Ratio ––––––––––––––– ––––
30 June 2018 3.50:1.0
30 September 2018 2.00:1.0
31 December 2018 1:75:1.0
31 March 2019 1.50:1.0
30 June 2019 1.50:1.0
30 September 2019 1.50:1.0
31 December 2019 1.50:1.0
(where consolidated net financial indebtedness means the aggregate of all financial
indebtedness (with the PIK Amount excluded from the definition of indebtedness) of
the Group under the SFA at the relevant time less the aggregate of cash and cash
equivalent investments of the Group)

the ratio of EBITDA to forecast finance charges (the “Finance Charges Cover Ratio”) for the following 12 months on:
(A) 31 January 2018 (in respect of the prior Scheduled Test Date), is not less than
5.00:1.0;
(B) 30 April 2018 and 31 July 2018 (in respect of the respective prior Scheduled
Test Date), is not less than 5.50:1.0;
(C) 31 October 2018 and 31 January 2019 (in respect of the respective prior
Scheduled Test Date), is not less than 7.00:1.00; and
(D) on each Test Reference Date on and from 30 April 2019 (in respect of the
respective prior Scheduled Test Date), is not less than 7.50:1.00;

hi Pelle,

do you think that if it was very clear that the problems with Kraken's production were the result of AK and not the oilfield itself that ENQ would not have stated it in December? of course they would. my best guess is that either it is not clear at this stage or that it is more likely to be the oilfield.

their guidance is clear 35k for 2019.

what i want is to find out the details of the Oz capital ring fenced loan...

poo: will easily be in the $60s before the end of the month.

Hi Pelle

15 february is next payment of interest on the bonds/notes. the condition to pay interest in cash is: (i) the average of the Daily Brent Oil Prices during the period of six calendar months immediately preceding the Cash Payment Condition Determination Date is equal to or above US$65.00. i expect the condition to be met, given that the average at the moment is near $70.

close $$to 60% of production (excluding 75% of magnus) is hedged in 2019 Q1. question is when should they start hedging again as the poo increases. i say hedge 5% of production at $60, another 10% at $65.

gkb,

you are right. it is $275M, as per the schedule below. since $65 million was paid in November, only $210M of the rcf needs to be repaid in 2019

3. From 1 October 2018 up to and including 31 March 2019: US$855 million
4. From 1 April 2019 up to and including 30 September 2019: US$680 million
5. From 1 October 2019 up to and including 31 March 2020: US$580 million
6. From 1 April 2020 up to and including 30 September 2020: US$460 million
7. From 1 October 2020 up to and including 31 March 2021: US$425 million
8. From 1 April 2021 up to and including 30 September 2021: US$360 million
9. On 1 October 2021 (the “SFA Final Maturity Date”): nil.

Good morning Pelle,

$65 is enough to get Enq back to 32p.
POO at the moment has a minor effect on Enq's operational cash flow given the hedging in place until the end of Q1 2019. I read on a different board, adfvn, that someone got an answer from ENQ IR that they stand ready to get loans backed up by production as they did with mercury, if needed. It won't be as things stand. Repayment of RCF in 2019 is $330M.)

Hardly anyone has commented on the Oct 2018 production data. Here is my take on it. Positive: Magnus back to 17K, which is good. Can it go higher? Don South West also increasing. Negative: Alma's production declining. Kraken, but we already knew this. (It remains to be seen if a week of production was lost in December. That would lower ENQ's daily average production in 2018 by close to 500 barrels per day).

is 4 February 2019

Enqers,

useful information:
https://www.dallasfed.org/research/surveys/des/2018/1804.aspx

Happy new year MO. Good to know you are still following the posts.

hi Pelle,

that is why it would be a bad allocation of capital. pipeline owning companies are like utilities. they can only generate high ROE when they are highly leveraged. ENQ cannot be more leveraged that at the moment given the risk of its oil E&P business.