The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
Since my flight is delayed, let me revisit Tigar's comment:
"The debt grip? I suppose after the $70m raise of new money we must be at the point of having repaid all of the RBL and are now accumulating cash as next payment of debt being sept 2023 unless new terms agreed in mean time. Debt is not a problem!"
I am afraid the amount of the RBL faclity that has to be repaid at the end of April was no less than $250M, possible more.
Hedges capped price received for 33K boepd every month from Jan to April (4MMbbls hedged over 4 months). remove Petronas's entitlement and you get about 12Kbopd sold at spot prices + gas production b/w January and the end of April. This means profits and FCF b/w Jan and April were not at the level that would justify a windfall tax, much less an increased tax rate going forward.... Going forward profits will be much higher given less of the production is hedged.
ATB
Seav, BP and anyone with neurons that still fire cannot be happy. The government had stated it was discussing a windfall tax. This isn't a windfall tax. So BP and others feel misled.
Of course BP allocates capital all over the globe. And they will select to invest in the projects that have the highest IRR. As a BP shareholder I hope BP just delays its investments in the North Sea. First it was was forced to write down its stake in Rosneft. Now, is being hammered again. It shpould change its name to Pinata Petroleum.
Enquest can also re-direct its CAPEX to Malaysia rather than in the North Sea. It is irrational to invest to mitigate current taxes. All about IRR...
Pelle is never going to get his dividend....
uk6xb, yes opex is a cost to subtracts from profits. I was not saying otherwise. My concern is if not all that is not OPEX (in terms of accounting rules) but is CAPEX will be eligible for the new allowance. The spirit of the bill to be passed will most likely emphasize Exploration and new investment (so new fields, and so forth; but we have to wait and see).
Hi Therapist, only production in thr UK North Sea will attract the new tax. All fine in Malaysia regarding taxes.
ATB
Hi January,
"So taking romarons £ 300m profit after costs etc .
We are only interested in the 25% Windfall Levy as we are protected with tax credits from CT etc.
25% of £300m = £75 m However only 7 months So £75m divide by 12 x 7 = £43.75m
Now deduct investment expenditure relief ! You could end up paying "bugger all"
Where does the £300M come from? Profits and FCF are different. Note that there will be a lot of exceptional items this year. POOil goes up => book value of reserves goes up, etc. . etc. reversal of impairements (so extra profit). All that will be additional profit even if it is not FCF. Profits this year will be much higher than that!
As I said impotant to read the details. this is not a one-off tax. It lasts until 31st Dec 2025. AB's donations to the Tories got him and ENQ shareholders no favours...
New investments are assessed in terms of their IRR. And the new tax will make those IRsR lower. You do not invest to lower current tax. You invest on the basis of the IRR. So, yes the North Sea will suffer going forward. ENQ's effective tax rate on UK profit going forward will be below 25%, but won't be single digits...
Also, not clear what qualifies for tax relief. Not workovers for sure, and I doubt infill wells will. For sure Eagle, Bressay, etc. meet the criteria but their IRsR are now lower because of this new tax.
anyway, everybody is free to believe whatever they want. But Mr. Market sets the SP!
ATB
Hi January,
No, please read the table:
https://www.gov.uk/government/publications/cost-of-living-support/energy-profits-levy-factsheet-26-may-2022#_ftn2
Sunak is just talking non-sense... "they will recoup 90 per cent in tax relief," Yes, but "the Total tax relief under current scheme at the monent is 46.25% already.....
The key figure here is
Tax rate Relief Relief rate Amount of relief (assuming £100 investment)
Energy Profits Levy 25% Investment allowance[2] 80% 20
First year capital allowance is 25%.
Anyway, enough said by me.
ATB
Krakie,
They just cancelled your 60p party. That is for sure. International IIs will not be keen to invest in companies that mostly produce in the North Sea. But ENQ might have a few things that will shield it this year, but not next year. But, it is up to the CFO to do his job!
ATB
Hi January,
Please look at the details before expressing judgment on what the impact is.
"The Energy Profits Levy is an additional 25% tax on UK oil and gas profits on top of the existing 40% headline rate of tax, taking the combined rate of tax on profits to 65%.
To appropriately tax the extraordinary profits, companies will not be able to offset previous losses or decommissioning expenditure against profits subject to the levy.
Tax rate Relief Relief rate Amount of relief (assuming £100 investment)
Energy Profits Levy 25% Investment allowance[2] 80% 20
The tax will take effect from today, 26 May 2022, and will be legislated for via a standalone Bill to be introduced shortly.
In future years, if oil and gas prices return to historically more normal levels, the Government will phase out the Energy Profits Levy, and also the legislation will include a sunset clause, effective at the end of December 2025."
It could last until 1st January 2026.
Unfortunately NSea foccused producers will get hammered. Much better to invest in companies producing elsewhere, until they too become subject to higher taxes. Not in the US, though...
ATB
Let us see what the review tells us. One thing is for sure: those estimates of OCF of close to $200M in 2022 look unattainable. So, the question is whether OCF in 2022 will be enoigh to pay finance expenses and CAPEX. I still think that will be the case, but IOG is now sailing to close to the wind if the problem is not solved quickly.
AGMs statements are more compehensively. They usuall report production figures for the first 4 months, and other relevant material informaton. The fact that the CEO did not do this is not good in any way. When there are good news to be told they are always told (I am thinking Kenya here...). Let us hope he is asked hard questions at the AGM.
Hi Londoner7,
Thank you for sharing your thoughts and analysis.
I am surprised the SP is drifting lower and lower. Hard to think this will not deliver good EBIT in H1 and also in H2. They have market power so easier for them to pass cost increases onyo their customers.
ATB,
L3
jonfon, their WI is 50% of the prodution. The rest belong to WBuffett...
Hi Modestus,
Thank you.
CJ is one I had never looked at. Their performance is very impressive. So, you will net a 150% dividend yield on your purchase price. That is like winning the lottery.
I am actually surprised that CPG is not heading higher. I guess this will allow me to increase my position there.
Do you have any idea why?
Have you looked at CNE (Cairn/Capricorn)? I have holding there and only see positives. They are bound to make a lot of money from the contingency payments associated with their sale of Kraken and Catcher:
"Additional consideration payable based on a share of revenues generated by Brent prices in excess of US$52/bbl in the years 2021 to 2025"
"The amount of any Earn Out Consideration payable in respect of any year will be equal to the amount
by which Average Daily Brent Crude Price for that year exceeds US$52/bbl multiplied by the number
of barrels of production in that year in relation to the Sale Interests multiplied by a percentage rate set
for each year."
The percentage rates agreed for each year are:
• in respect of 2021, 60%;
• in respect of 2022, 50%;
• in respect of 2023, 40%;
• in respect of 2024, 30%; and
• in respect of 2025, 20%.
So, this year it is 50%. Assume Kraken produces 26Kbopd. CNE's WI was 29.5%. So, 2.8MMbbls. Assume it is sold at an average of $102/bbl as it is VLSFO. So, 50% x $50 x 2.8 MMbbls = $70M without doing anything for it. If you add Catcher We are talking about c. $100M this year.
Now, the interesting thing that most people following ENQ have not noticed is that their announcement had valuable infor about the Kraken field:
https://www.capricornenergy.com/media/2980/north-sea-circular.pdf
According to CNE, at the end of 2020, ENQ's 2P reserves in Kraken were 54MMbbls, but in 2021 they produced 8MMbbls. So 2P reserves left would be 46MMbbls at the start of this year.
ATB,
L3
Hi Londoner7,
What is their net entitlement BOE for the gas production?
I guess the 6Kbopd gas entitlement is after the production costs have been recovered from the rest of the production, so selling price is net margin, i.e., no need to subtract OPEX, correct?
Their contingency payments for catcher and Kraken this year will be quite high I think.
Did you go to their AGM?
ATB,
L3
The bottom line is that Tullow has had a fantastic Q1 in 2022 in terms of production. OCF was also great. But do not expect FCF or net debt reduction as Tullow paid $118M in March to exercise of the right of pre-emption related to the sale of Occidental Petroleum's interests in the Jubilee and TEN fields. It is even possible net debt would have increased marginally in Q1. However, since the TU is at the end of MAY, Tullow will give figures for the first 4 months of 2022, and 4 months of production, even with all the hedges might just have generated enough CF to pay the $118M acquisition, so that net debt would stay constant. This would be fine as all net debt redution would take place from May to Dec.
If Tullow announces good news on Kenya that involve some form of cash payment made through the farm out, then I would rate the first 4 months as very successful.
We will wait and see.
Additional comments:
Note date since completion of the exercise of the right of pre-emption related to the sale of Occidental Petroleum's interests in the Jubilee and TEN fields to Kosmos Energy only took place on 18 March no OCF accrues from the increase in the WI in both TEN and Jubilee.
We knoe the shutdown ofJubilee's FPSO was 2 weeks. That means that if production stayed stable at 91,000bopd, 1/26th of the yearly production would be "lost" due to the shutdown. If we take into account that correction we get 87,500bopd.
This is above guidance "Jubilee production is expected to average between 80 to 84 kbopd". And since Production pre-shut down of ~95,000 bopd (gross), with another injector and producer coming online by end of Q3, I would not be surprised if by year end average production, even after accounting for the shutdown gets close to 90,000bopd. Given Tullow's equity interests of 38.9% in the Jubilee field starting on 18 March, we are talking about something not far from 35Kbopd for Q2 to Q4. And any additional barrel that is produced is sold at spot prices. So, ability to reduce net debt increases slightly.
TEN continues to be the problem, because production at 25,000bopd in Q1 is clearly a decrease from Q4 2022, even if not so large. It will be difficult to arrest the decline for a few quarters.
ATB
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BloodyRedBaron, thank you. will do. Still think it should be possible, and paying 10.25% is high and only further deleveraging of the BS will unlock value. Mr Market gets nervous about large amounts of net debt because the costs of servicing it are quite large, and MCap always reflects underlying perceived costs of financial distress.
wrong board... it is just IOF
Kosmos reported results earlier today for Q1 2022:
-Jubilee production averaged ~91,000 bopd, gross in 1Q
– FPSO uptime ~99%
– Successful Jubilee water injector drilled and completed in the quarter
– Production pre-shut down of ~95,000 bopd, gross
– Jubilee 2-week shutdown commenced 29th April
– Plan to complete second water injector and producer in 2Q
• TEN performing as expected with average production of ~25,000 bopd gross in 1Q and FPSO uptime of ~99%
Jubilee Southeast remains on track in a more challenging environment. Kosmos is also a partner in the Jubilee South East project to boost production at Jubilee. Drilling is expected to start around year-end 2022, and production from the first well is pegged at mid-2023, pushing gross production of the field over 100,000 b/d of oil.
ATB
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BooldyRedBaron, where is the info saying that "2) the agreements to repay it don't allow much if any early repayment."? I have not read the bond prospectus in detail, but usually bonds can be redeemed prior to maturity.
Selllowbuyhigh,
this prepayment was agreed in advance. every year until 2026 it has to repay $100M in May of the $1800 bonds issued. the rest, i.e., $1400M are due to be repaid on 2026. I wonder if they can repay more now that they are generating a bit of FCF, not much but a bit!
Stevo,
I have not read the RNs in detail, but if FCF in Q1 was $600M, then even with higher CAPEX and ABEX in Q2,Q3 and Q4, if POO stay as they are the $600M FCF in Q1 will be easily beaten (before dividend payments) every Q going forward, as POO in Jan/Feb was lower than now. We have had 40 days in Q2 with high oil prices...
It is clear to me that $1700M debt reduction will not be a big challenge.
Hi Lemming99, it does not matter whether they fix it next week or before that. Henceforth risk premium is higher. For me IOG's unlocking of value is all about Southwark's first as starting on time, i.e., Q4. Management should just focus on that. If they achieve that, IOG could be debt free by Q1 2023.
Davidspellacy, depends on the relative demand in the two different places. With the interconnector working arbitrage takes care of large price differentials, not all. Which countries rely more on Russian gas and are worried about cuts?