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Hi Pelle, I don't agree.
I still have a 2-3 year investment horizon, though it is reviewed at each update.
The planned Capex last year was $160m, but this came up short largely because of Fx but also (possibly) because of the 2nd GE drill moving into 2023, but certainly due to reduced works on Magnus.
Expected 2022 CapEx is $120m.
I can see a CapEx spend in 2023 of up to $200m including any deferred 2022 spending.
If AB chooses to increase CapEx close to my number then I'd expect that to include the advancement of Kraken works from 2024 and perhaps development of another licence.
I'd trust AB to make the right call.
If 2023 capex comes out at c$120m -$160m then Yes, returns to shareholders are in order.
Sorry, I don't know how to write that in Swedish! But I'm guessing you're all smart bi-lingual types. Unlike us dummies this side of the channel.
ironknut, thanks for the heads up.
This comment is interesting, “It has a good ‘moat’ and is well managed. A mooted shift to America freaked the market but is now off the agenda. If the share price stays like this, someone will snap it up, perhaps private equity with the support of the founders.”
The moat and the management are reasons I invested and continue to hold.
Talk of a move to the American market freaked me out too. The valuations are much higher than UK. I'd see it as an overpriced buy similar to Lagan, which at the last interims wasn't showing the growth anticipated but I'm reserving judgement on Lagan till the finals. I'd be delighted if Breedon has backed off from America.
I don't buy or hold a stock on the basis of a potential bid. But this is an interesting observation. The founders launched a cash shell BAY to repeat the trick they've pulled off with AI and Breedon. I have a small holding in BAY, just to monitor events, but I hadn't considered they might make a bid for Breedon with private equity backing. Not the daftest idea.
mrc, thanks for the link to the Eagle environment statement. I'd lost it.
My recollection of events is that the regulator rejected the farm in. Odd, considering a key remit of the O&G regulator is to encourage development. I also noted that Eagle wasn't mentioned in the CMD just two months after it appeared to get the go-ahead. However, Enquest was going through a rough time with lumps falling of Thistle and a fire on Heather, which permanently shut down both platforms. Given the situation perhaps Enquest opted for the no risk farm in maintaining a 15% WI in any production.
My understanding of the NS licencing regime is that if Enquest has completed work requirements on Eagle with the drill, they can hold the licence with a yearly fee, which increases over time.
Perhaps the Scolty and Crathes rework provided the breathing space to the GKA hub, and Eagle's time has come.
Or perhaps I'm giving Eagle more air-time than it warrants. Time will tell.
Tarmak, hang onto that hope!
Hi romaron, I’m not sure there was a question in there, but I'll make a general comment.
Ahead of the EPL’s introduction I didn’t expect Enquest to be significantly impacted because of their tax position. In hindsight I thought the EPL was cleverly structured – cash in the coffers now with an incentive for further NS development. However, as a rule, increased taxation adversely impacts investment, so I’d expect NS production decline to accelerate over the medium to longer term.
The public are influenced by self-interest not common sense, and politicians know how to manage the mob. Linda’s (HBR CEO) appearance in front of the Energy Select Committee was easy meat for politicians like BG and CL. They got the headlines with Norwegian tax equivalence and the cost advantages of green energy. (I think Harbour’s CFO would have handled the Norway question more effectively, but from that single exchange I now see EPL @ 38% baked in).
Within the next two years we’ll have a general election. Recently I posted my working assumptions on near term policy as it impacts UK O&G. AB will have his own working assumptions and I’d expect each prospective Enquest activity in the NS to be assessed against his working assumptions. What else can he do!
I’ll manage my investments in a similar fashion. However, I don’t have to be invested in the sector, so I have more options than AB.
* I’m long past being concerned about the ‘public verdict’ or the outcomes of the democratic process. I simply deal with outcomes as they present themselves. I’d guess you’re familiar with Plato’s views on the natural order – over 2,000 years old but still relevant today. A current movement is towards coalition government. David Deutsch, in his book ‘The Beginning of Infinity’ raises strong concerns about such a movement in his chapter ‘Choices’.
In Scotland I see the overweighed influence of the Green Party in coalition. I’ve no issue with moving towards a cleaner planet, but I do have an issue with socialists! That said, I also have an issue with conservative ‘Nimbism’. However, I don’t have an influence on outcomes, so better for mind and soul to simply adapt.
Rant over.
Hi Tarmak, I took up Eagle based on the 'widening opportunities' comment made by AB in relation to the EVT.
Outside of the known plans to tie backs on GE, Magnus and Kraken, the only other UK opportunities that come to mind are Eagle and Tiger (211/12b).
As you say, Tiger is a larger opportunity, but it isn't as advanced as Eagle. The Tiger licence conditions require seismic by Dec 2023, with a drill within the following 2 years.
For newbies, here are my notes on Tiger:
211/12b (exploration) - Tiger prospect east of Magnus
Conclusion on relinquishment March 2013
Elixir has fulfilled the PART I work commitments by obtaining and reprocessing 633 km2 of 3D seismic data. On the basis of this data and new biostratigraphic and fluid inclusion studies, Elixir has mapped the Tiger Prospect, which whilst economically attractive, required a farm-in partner to commit to drilling the contingent exploration well. Elixir has not been able to find such a partner and has elected to relinquish the Licence.
From 2011 “The Tiger prospect is a direct analogue to the Magnus Field, which is located 5 kilometers to the West. All of the play components, being source, migration, trap, seal and reservoir have been demonstrated to work at Magnus. The most likely, unrisked recoverable resource for Tiger is estimated to be approximately 90 million barrels.”
In Sept 2019 it looked like Eagle was going to proceed. (I've views on why it didn't, but will leave them out of this post)
This describes the status in 2019:
https://www.energyvoice.com/oilandgas/north-sea/207708/enquest-outlines-plans-for-landing-eagle-field/
At $65 oil I could see $200m of operating cash over two years in 2019, which implies a development cost <$100m.
A bit higher today, but now there is a 54% EVT allowance on the investment.
Another factor is the benefit of an Eagle tie-back to the economics of the GKA hub.
I'd be delighted to hear news on Tiger but I think Eagle is closer to generating returns. I'm hopeful of news in the coming updates on any licence developments but see it as a long shot. I think the last Enquest licence development that went into production was Scolty and Crathes in 2016. That didn't go to plan and had to be reworked - I suspect Enquest has grown cautious of such developments. Their purchase of producing assets has been more profitable - though the EVT now changes the tax/allowances component in favour of development.
In the 1970's the Rolling Stones were paying 84% tax but still lived in big mansions.
The O&G sector is exploiting the UK's natural resource to mutual benefit. Nothing wrong with paying taxes. (Though I admit the step up was a shock)
If the tax bill is $6b in 2024, then whichever party is in power at the time will be hesitant about taking actions which risk that tax income. There's a big public sector to pay for. Seems to me that in rough terms a $6b tax bill translates to $2b of FCF p.a. A nice return on current valuations.
Every sector has its risks. Be it policy/tax changes or technology disruption.
Worth keeping things in perspective.
The Eagle field has become something of a hobby horse for me. Last year I asked AB about Eagle but formatted my question poorly giving AB an easy exit which he took. "No current plans". I'll be wiser next time.
I listened again to parts of the Q&A session following the latest interims. A couple of comments jumped out which are relevant to current discussion.
AB said that the allowances under the EPL has widened the net of development opportunities - I had missed that on my first hearing and suggests we may hear a bit more about these 'wider' opportunities at the finals update, if not before. Come on Eagle!
He reined back on any change (due to the EPL) in the development program at Magnus because this development is constrained by the available well slots. Meaning, you don't side track a current producer for a marginal improvement in production.
There is an acceleration in the assessment of seismic acquired at Kraken last year. Will that bring forward further development of the Western Flank.
Referring to the (then) backstop of 2025 on the EPL allowances he gave some indication that something could happen on Bressay (within the timeframe) to take advantage of those allowances. It seems early to me, but that's what the man said.
I'd better hold on to my stool during the next updates.
A corollary of the statement, “In 2023, Enquest will cash fund 54% of every $1 spent on allowable UK capex due to the EPL”, is, “In 2023, Enquest will cash fund 100% of every $1 spent on allowable UK capex without the EPL”.
It’s natural to focus on the impact of the 35% EPL on cash flows from existing production – it’s a big whack. But there was also a motivation behind its introduction to maintain development in the North Sea to support UK energy security.
When the EPL was announced at 25% I tried to make a positive argument here for the allowances, but it didn’t gain much support. (I recognise Stevo12 has recently been supportive of the EPL allowances regime)
Last night I ran some numbers on a fictious large scale tie-in. (I decided to cut my numbers from this post as they are a distraction from the main point) The compound return on investment over the 5 years of the project was higher under the EPL regime. The difference wasn’t large, but it was positive. Obviously, more attractive at $100 oil than $70 oil, which of course is a key risk.
The politics to NS development are challenging, but the numbers can be made to work under the EPL.
On the politics. My working assumption is that Labour will be in power from the end of 2024. No new field developments will be approved after that date. Those already approved, which might include Rosebank as the last biggie, will be allowed to continue. The development of existing fields, e.g. tie-ins, will be permitted. The EPL will go to 38% (driven by politics), unless there is a collapse in the oil price, but no changes to the EPL will be applied retrospectively (Jan 2022 has been mentioned by Labour). The additional allowances relating to the EPL will cease on new projects, but again no retrospective action taken. The existing Ring Fence allowances will continue.
* Harbour’s decision not to be involved in the current licencing round, given the level of NS infrastructure they already have in play, has confused me. They qualified their stance with a comment that they already have sufficient opportunities to pursue. But another thought occurred to me. I suspect that several of the licences will depend on infrastructure linked development and the regulator has powers to compel certain activities. I wouldn’t be surprised if Harbour becomes involved in new licensed developments even though they may not be the primary/initial licence holder. Just putting it out there!
L3Trader,
Repeating your worked example (Sun 21:44):
“Suppose that after I deduct all the costs I am left with £250M, and that I have to pay £50M in interest.
For the ring fence corporation tax this means that PBT is £200M, after which I pay tax of £60M (30% tax rate).
But for the EPL, since interest is not deducted, I will pay tax of £87.5M (35% times £250M).”
The maths is correct but your follow up to frame EVT as a tax on interest is more of the gibberish you started with, “keep an eye on gross debt because interest expenses are effectively taxed at 35% (as they are not an expense for EPL purposes)”
To close the maths in your worked example, the total tax paid, Ring Fence plus EVT is £60m + £87.5m = £147.5m.
Let’s go back to your example and add another $50m interest making £100m in total, because we haven’t been keeping a eye on gross debt. As you would put it.
Under Ring Fence deduction this interest is deducted from £250m profit leaving PBT of £150m. Tax at 30% is £45m.
But for the EPL, since interest is not deducted, I will pay tax of £87.5M (35% times £250M).
In spite of the higher ‘gross debt’ the total tax paid is lower, Ring Fence plus EVT is £45 + £87.5m = £132.5m. The Ring-Fenced tax is lower because of the higher interest deductible, but the EPL tax is the SAME.
You close your post with a valid comment (supported by the calculations above), which appears a common theme in your posts when your looking for a deflection from your gibberish.
In summary your latest post is, valid maths, gibberish, followed by a valid comment. An improvement on the complete gibberish you posted 18th Jan.
As I said, I was happy to end the exchange. When I described your Jan 18th post as “your reply wasn’t very clear” I was being polite. But the way you now try to twist the argument rather than own up to your confusion or at least let it go is disappointing.
Good luck with your investments.
Hi Stevo12, thanks for your reply.
On your 3 points I just have a couple of minor queries.
On 2), only the principal element of the Kraken lease (c$70m) can be offset against the EPL. The interest component c. $53m isn’t. This is a P&L computation. I tend to focus on the cash flow number, a c$123m cash cost for the Kraken lease. (Note: this lease charge drops to about half from 2024/5)
On 3), I assume you are focused on the P&L component of Magnus, and your numbers may be correct, but I suspect Magnus profits for 2022 will be lower than expected. Again, my focus is on the cash flows. The cash payment to BP will be based on net cash flows from the project after OpEx and CapEx.
I haven’t followed the detail of your calculation of taxes, because I’ve already made my own assessment on EPL (posted here in various forms) and we’ll get the 2022 EPL numbers in a couple of weeks. I can wait for those.
But you say, "EPL payable of £278m which will be payable in quarterly instalments during the relevant tax year." During which tax year do you expect $278m (I assume £ is a typo) to be paid?
I was expecting an EPL charge for 2022 of <$100m and an EPL charge for 2023 of <$200m. I know roughly 45% of the 2022 charge will be deferred to a cash payment this month. As I write this, I can see an EPL cash payment approaching $278m in 2023, so I guess that is the tax year you refer to but appreciate confirmation.
Getting to the crux of the ‘91% funding before spending’ statement. You, say, “Accordingly for every $1 Enquest spends on post FID Capex it will reduce EPL payments by 46 cents and add 45c to losses carried forward.” Therefore, in Enquest’s case in 2023 it is ‘46% funding before spending’ with the balance of 54% to be covered by debt. (As you say, 45% of the investment can be added to losses carried forward, but a small detail. 6.25% of the 45% can only be added once the investment starts generating income.)
I wasn’t explicit in my reason for asking your views, so now I’ll be explicit.
There will be a capital cost for any investment which is eligible for tax allowances. We agree that for Enquest in 2023 the net cash cost will be 54% of every $1 spent. That isn’t close to negligible, considering Enquest’s debt position. But there may be opportunities within the portfolio whose development aligns with the new tax regime. No doubt Enquest is studying these. But I struggle to see much change in 2023, other than a possibility that further development of the Kraken Western Flank could be brought forward from the currently anticipated 2024 spend.
I’ll ‘fall off my stool’ if the words ‘Tiger’ or ‘Eagle’ are introduced by Enquest in the coming updates.
* I don’t mean Golden Eagle but the Eagle field next to the GKA hub – 8K bopd potential.
Stevo12, your post (10:42) is illuminating on quarterly tax payment accounts – I mean that.
This is an Enquest board. I find posts relating the specifics of Enquest more useful and debateable that generalised comment that might be presented to a class on tax. Some posters might be able to extract the relevant specifics, but most can’t. You seem to have a clear opinion on the relevance of the EPL and associated allowances, on North Sea capital investments. You also seem to have knowledge of Enquest’s assets and tax position.
Given Enquest’s CapEx expenditure of $120m in 2022 – I estimate c$80m spent in the UK, with an additional c$15m on the 2nd Golden Eagle drill extending into 2023 – would you expand on the CapEx options (incl. anticipated cash spend) you see available to Enquest from 2023 onwards, that would utilise the ‘91% funding before spending’ you describe?
Hi L3Trader, I’ve just seen your comment from a few days ago to Stevo12, “thank you for commenting on to my earlier reply to Londoner7. You made a valid comment, and i will get back to it in my further exchanges with Londoner7, at some point.”
It implies you are expecting a follow up from me.
I queried your comment, “keep an eye on gross debt because interest expenses are effectively taxed at 35% (as they are not an expense for EPL purposes)”. Also posted as, “Cost of debt is taxed at 35% (interest expenses are deemed "profit")
Your reply wasn't very clear but satisfied me that your comment, as I understood it, is wrong. I was happy to let it drop, rather than continue the exchange.
If I query a point, I appreciate any reply, but I’m not out to reach a consensus on every discussion point. That’s why I didn’t follow up.
Sweatysock, thanks for your response.
I still don't see a loan facility at the likely funding but happy to be proved wrong. It could be a good outcome for share holders, ending the placing model.
"Londoner where does the 70 pm come from?"
In my post on 'cash flow' last Oct I estimated net cash outflow in the 6 months to June 2022 at c$60k per month. I had a stab at the following 6 months with an expectation the outflow might be lower. Subsequently, Mosman announced a placing to cover higher than expected costs on completing C1, which suggests the $60k outflow per month may have continued through the month.
Deducting this $60k outflow from the C1 cash flow of c$125k inflow results in a net inflow of $65k. Rounding up, that's my $70K number. It's this net $70k monthly inflow plus the balance of the last placing that I see covering Mosman's share of the next drill, assuming some level of farm-in. IMO the sooner the drill the better - the report due in March will give a better picture of the pre C1 cash flows.
Of course, JB has these numbers in his cash flow projections and will be pursuing which ever route he see's as appropriate. I'd expect him to look at the farm-in market first, but time will tell.
Sweatysock, you say, "years ago we debated a bank loan facility with welch"
Do you mean it was debated on this board, or do you mean Mosman was in discussion with a bank? If the latter, do you have a reference?
I ask, because it's my view that there is no way that reserves supported bank debt would be raised for a Cinnabar development. Even if a bank offered a facility at something approaching an acceptable rate, which in the North Sea is 12-15% p.a. I can't image JB risking his control over Mosman. I made the point some years ago that as long as Mosman maintained positive free cash flow from producing assets Mosman would always be able to raise additional funds via a placing, regardless of whether the business was profitable at the operating level. It came down to the discount for placing against the existing share price - the warrants are the cherry on top. Clear the placing shares at any profit and there's a free ride on the warrants. If debt had been raised at any point in the past the bank would be at the door.
The placing process isn't necessarily good for LTHs but it offers trading opportunities and keeps Mosman solvent.
Fair to the say the placings process is getting a little stale - evidenced by the recent difficulty clearing the last placing at 0.07p.
* Each time there's a placing discussed there's also talk of forward selling. I don't know if that is the case, but if it is I wonder how it's done. What are the mechanics?
If a placing was done today for £1m at 0.05p, 2,000 million shares would be raised. I think posters here would notice that number of share being 'forward sold'.
**I see the choice between a farm-in on C4, a placing, or doing nothing. (Reworking G1 might add something to cash flow but I doubt it would be significant)
fordfarliane, you questioned my numbers. I used your C1 $1.5m free cash flow.
"Cash flows = $70k + 2x $125k = 320K / month, $3,840K / year. "
2x$125Kx12 = $3m
I agree that Mosman will not accrue $2m anytime soon to pay for the next Cinnabar well, but there is an option to another placing. Given the Oct placing and post C1 net positive cashflows which I estimate at c 70k/month, Mosman could accrue sufficient cash to pay 50% of C4 well costs within 6 months.
Compare a placing to a farm-in:
Placing - Say 2 wells for $4m with $3m placed @ 0.05p = 5.0 billion shares for 11.4 billion total. (Doesn’t included a c5% cost of placing, c $150k)
Cash flows = $70k + 2x $125k = 320K / month, $3,840K / year. Divide by 11.4 = 0.028p / share (converted to sterling)
Farm-in -Say 50% of one well, then 50% of 2nd well.
Cash flows = 70k + 2x 62.5 = 195k / month, $2,340k / year. Divide by 6.4 = 0.036p/ share (converted to sterling)
The closing position could be a 100% funding of C6.
There are lots of caveats to these equations but I post them in support of the point steakpie has been making on the impact of placings on valuation. I also struggle to see the long term value to LTHs. The post C1 $70K / month net inflow is based on my assessment of cash flow last Oct. The cash position might not be clear until the interims to Dec 2022 are released in March, but it’s all I have to work with.
Last year Mosman looked for a farm-in to C1 in the local PI market. It failed and a placing was announced. Subsequently, a PI came in for a 10% WI. With the benefit of what JB thinks will be an improved Cinnabar reserves report and the financials around the C1 drill, Mosman may be more successful with a farm-in this time round. I don’t know the cash flow position or the current cash balance but if they are supportive, I’d be surprised if JB isn’t looking at a farm-in before falling back to a placing.
That said, I admit the Mosman form guide points to a placing for C4.
*In my Oct post I proposed a more aggressive 2 well Cinnabar development ASAP, but I had $1m/well cost in mind. $2m/ well cost is a different proposition.
Hi L3Trader, you say, “keep an eye on gross debt because interest expenses are effectively taxed at 35% (as they are not an expense for EPL purposes). So huge incentive to reduce them.”
This is the 3rd time I’ve seen you post this viewpoint on this board and I haven’t seen any rebuttal, so I guess it’s just me.
A baseline for the calculation of the EPL is UK Revenue (less) hedge loss (less) Opex (excluding depreciation and interest costs).
I agree that interest costs can’t be applied to reduce the EPL, but I don’t see how the level of interest costs has any bearing on the amount of EPL paid.
What does it matter whether you are excluding $10m of interest costs or £10b of interest costs?
Can you clarify your point?