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Stevo12, you say, " I calculate it (WD EBITDAX) being higher than 23 due to gas hedges and oil price improvements. "
Computing gas was easy but I found it harder to reconcile the 2023 realised oil price with Brent price, so I took a very conservative approach on 2024. I only allocated a 2.5% gain on oil price in 2024. I'd guess your number is much higher. The Q1 results should clear this up.
Stevo12, I didn’t see an answer in your response to my question, so I guess you’re still on a 260p valuation. Don’t chance it, take the 252p on offer today.
Your valuation approach exposes the difference in valuations of International O&G (largely Norway production) with North Sea O&G.
Everyone is aware of the lower valuation of the North Sea sector. It has something to do with recent tax changes and the unpredictability of future tax changes.
The merger changes Harbour’s exposure to the UK fiscal regime from 100% to c.30%. We should expect to pay a premium. The premium is essentially paid for through higher debt, but at lower interest costs.
Today HBR consists of:
160K boepd of production (2024 guidance)
$2,713 EBITDAX (2023 – my estimate)
$500m Bonds, cash interest $28m p.a.
$300m Cash
Post merger HBR’s 45.5% share of combined business will be:
220K boepd (2024 guidance)
$3,310 EBITDX (2023)
$2,500m Bonds, cash interest $53m p.a.
$135m Cash
Balance of Bridging loan, c.$1bn * 45.5% = $450m, int?
In addition, HBR presentation slides point to pro-forma 25% reduction in OpEx, 30% increase in 2P and 300% increase in 2C.
(An FID converts 2C to 2P. The CapEx to first oil converts 2P to 1P. I think of 1P as oil behind the pipe)
My calculations for 2024 EBITDX, with gas averaging 60p/therm and oil at current prices, has WD EBITDAX down 2%, and HBR EBITDAX down 5%. It’s my first pass for my own benefit but implies an additional pro-forma gain from the merger.
I like the merger.
Stevo12, in a recent post you said, “I hope I am missing something and this is the great value of these boards to challenge thinking. Please someone shot me down.”
I’m not trying to shoot you down, just trying to examine various points to an agreeable conclusion – or agree to disagree.
In your recent response to my post on your use of the EBITDA/EV metric benchmarked against Aker BP to get to a fully priced post deal valuation for HBR of 260p. You say, “While not perfect, I think Aker bP is the best proxy for valuing WD/HArbour post merger.” At no point did I say that Aker BP was not a good proxy for valuing the post-merger business.
You go on to say, “(ascribing) a liability of $1b to the $6b of debt is I believe unrealistic.”. This begs the question, what is realistic?
Perhaps you capture it with your comment, “the MV of debt is probably $0.5b below face value.”. But it isn’t clear to me what you mean.
Taken to the extreme, a debt at 0% cost and unlimited duration, would be cash. Here we have a debt at 2% interest, a $120m cash interest charge on $6bn. That is very cheap compared to the cash generated by the business.
Of course, the debt isn’t cash and will need to be paid back or refinanced. The MO of Linda and her crew has been to pay down debt, by example $2.1m reduction in net debt between April 2021 and Dec 2022, alongside $553m of shareholder distributions (taken from slide 19 of the 2022 FY presentation). Further progress has been reported for the year 2023.
The UK tax regime has changed and the phasing of the EPL payments impacts FCF in 2024, but that will be unwound to some degree in 2024. FCF generation will be supported by the merger with WD. All my numbers point to a merger accreditation on FCF through 2024 and 2025, but I’d rather leave that to another post.
I’d like to focus on your EV/EBITDA metric which leads you to a 260p valuation.
What is a realistic liability you would assign to the $6bn debt? (I appreciate that assessing the ability to repay rather than refinance is a factor here, but please have a stab at it. That’s what we’re required to do as ‘informed’ investors.)
Also, please clarify your comment, “the MV of debt is probably $0.5b below face value”.
From the news feed
Britain's reliance on speculative private development had led to a widening gap between what the market will deliver and what communities need, the CMA said, with developers producing houses "at a rate at which they can be sold without needing to reduce their prices, rather than diversifying the types and numbers of homes they build to meet the needs of different communities".
The statement describes the private developers business model,, but what's new. The use of the adjective 'speculative' suggests a political influence, M. Gove?
Must be a general election coming and ground work being laid to protect the conservatives NIMBY narrative. It's not us, it's those nasty private developers.
Q4 had Capex €427m, well above the 2023 quarter average of €1,152/4=€288m. I’d expected cash tax to have settled by Q4 from the higher profit levels of 2022 into 2023Q1 and be reflected in FCF, but it looks like Capex timing impacted Q4.
Normalising CapEx for Q4 leads to FCF €336m ($363m). Given same again cash Capex in 2024, I’d expect this level of FCF to be the run rate to completion.
Skim reading the docs associated with the Bond amendments, it looks to me like the amendments will be published formally tomorrow, giving holders one month to contest the change, but this 'contention period' seems related to points of law with regard to the changes rather than a vote, which I think was the 'votes without meeting' held last week.
Effective date for implementation is 3rd April 2024. Holders receive a resolution fee of 0.25% of coupon for their trouble.
Stevo12,
In your assessment of valuation for the combined HBR/WD business you’ve reached a Mkt Cap valuation of $5.4bn by subtracting $6bn of debt from $11.4bn enterprise value.
I use similar metrics, but treat comparisons between companies with great care, particularly when debt constitutes a large component of EV. In these cases, the cost of debt and the cash generation of equity should be factored into the consideration.
In the case of the HBR/WD business the cash interest cost of the $6bn gross debt at c.2% is $120m. The equity component generated $7,600m EBITDA.
After deducting CapEx, interest, and taxes, FCF might be around $1.5bn - $2bn. (Currently, the tax payments are erratic for both HBR and WD)
Therefore, the weighting of the debt component is a big factor in determining a resultant Mkt Cap. Assign, what I think is a conservative, 1:5 weighting, and the Mkt Cap is five sixths of $11.4bn, or $5.6 per share (450p).
Of course, your benchmark valuation on Aker BP would also be weighted, but I think my point is clear.
Stevo, I can agree on the EBITDAX rate per barrel with a conversion to US$ from Euros.
WD 2023, EBITDA = €4.19bn *1.09 = US$4.6bn, and a unit value of $38.7 per barrel.
For HBR H1, I have EBITDAX unit value of $40 per barrel. (I haven’t seen an H2 EBITDAX number)
But going back to a realised price for gas I maintain the $42 /boe, as I detailed in my previous post. (with oil c.$72)
I see how you have constructed your $25 number, but it comes after €4,677m of ‘production and operating’ expenses, which works out at €39/boe, a bit more than the €6.1/boe headline number.
I’ve no doubt the discrepancy relates to the mix of continued and discontinued operations – trading or otherwise - but what matters to us as HBR investors in the merged business are the realised prices within the new business. The hedging for 2024 and 2025 has been provided and I guess the existing contracts on the non-European gas production will remain, at c.$21/boe.
If I assume the current 60p/therm spot price as an average for 2024 I get a WD realised price of $41, only $1 below my 2023 number.
Running the same numbers on HBR I have $45.6/boe for 2024 gas.
Stevo12, in your post yesterday, 15:06, you said, “WD is only realising an average of $25 per barrel equivalent for gas. This is equivalent to 34p per therm compared to Harbour who in 2023 realised 58p per therm, even with very poor hedges expiring this year. It appear this is primarily due to very low prices on its non European gas sales.”
Referring to page 54 of the accounts I get very different numbers. (I use 5.64 conversion for mscf price to boe price)
WD’s realised price of $7.74/mscf = $43.6 /boe
Breaking it down to constituent parts:
62Kboe/d hedged @ $49.5/boe
51Kboe/d European non-hedged @ $72.5/boe
97Kboe/d Non-European @ $21/boe
Leads to an average of $42/boe. Given the approximate % volumes of the breakdown this is close enough to $43.2/boe to give me confidence in this result.
This compares to a 54p/therm ($39/boe) for Harbour 2023 realise gas price. (Not the 58p you quote)
How do you get $25/boe for WD gas?
A couple of posts suggest my earlier post has been misinterpreted..
I've no doubt that HBR are capable of meeting the $2.14bn cash call for Wintershall Dea.
It's a big deal, and the more I look into it I see a clever structure. The assignment of 360P to BASF holders is their bone. Our bone is the ability of the acquired assets to largely payback the $2.14bn cash call, which represents the assets current cash flow benefit, thereby reducing the cost on our investment.
Ahead of completion we have 5 quarters of cash flows from Wintershall towards the $2.14bn.
On Thursday, Wintershall report their 2023 Q4 numbers,. I'll be watching.
I haven't looked at the detail of the leasing contact posted but my recollection was that it was a c. 55% reduction in 2025.
If ENQ has stated 70% reduction then I take note. Trading updates are brief, so any comment should be closely interpreted. In the same way that the comment on a $40m WC positive impact should be a caution against how we interpret the year end debt number, the lease reduction comment, I think is important.
Perhaps EnQuest has negotiated better terms. As i recall, the Kraken lease contract runs on a 12 month rolling basis from 2025.
On decom - stuff happens.
Stevo12, you missed the GKA hub in your comment. I don't expect anything immanent, but a consequence of operators ceasing operations on NS fields is that it increases the pipeline tariffs (OpEx) on the remaining operators. The regulator is guarding against such consequences and that may provide opportunities for the remaining players, i.e. cheap acquisition of assets.
I wonder if these 'sensible people' are aware of the current price of gas. My guess is that they do a simplistic comparison to AkerBP to come up with their $15 billion valuation, which I think is nonsense primarily because of the high ratio of gas in the HBR/Wintershall combination c. 60% (AkerBP 15%) and c.$11/boe Opex (AkerBP c. $6/boe).
Or perhaps they refer to the purchase terms, $11.2 bn (effective date 30 June 2023), which include a $4.15 bn valuation on issued shares (thereby assigning a 360p valuation to the shares) and a $2.15bn valuation to cash flows that accrue between 30th June 2023 and completion in 2024 Q4.
Add that $11.2bn valuation to HBR at 227p, $2.2bn, (ahead of announcement) gets you to $13.4bn. I’m happy to call that a rounding error on $15bn, but unless there is a significant recovery in the price of gas, and or significant increase in the price of oil, $13.4bn market value is way too optimistic.
The 360p number is meaningless. It’s the price on the completion date (or their share sale date) that’s relevant to the Wintershall owners.
The $2.14bn of cash flow costs is important. If the cash flows don’t meet $2.14bn then HBR pays the difference to the Wintershall Dea’s owners. HBR has a $1bn bridging loan in place to cover the shortfall.
Quarterly cash flow numbers are highly volatile, particularly given the nature of the Norwegian tax structure, which is time related close to actual profits and investments – I think it’s a two-quarter delay.
Taking 2023 Q3, the first 3 months of the relevant ‘cash flow period’, operating cash flow was €409m, and after €274m of investment the FCF was €134m. Of course, the investment adds value to the business, but these investments were already in the schedule, as will the 2024 investments, ahead of determining the $2.14bn cash payment. (That’s my understanding, but I’d be delighted if someone can convince me otherwise)
After 3 months, the cash flow contribution to the $2.14bn payment is €134m ($144m). This Thursday we’ll get the 2023 Q4 number.
Stevo12, in 2022 Enquest IR communicated the EPL calculation which was posted here. The lease was one of the line items.
I was going to clean up my worked example (based on 2022 H1 numbers) but decided to leave it as it is - see below.
Interesting that you question it. If I was applying logic I'd have treated it as an ' effectively operating leases and expensed against tax as spent' as well, which now makes me wonder if it was part of the corrections EnQuest made which reduced their 2022 EPL from $75m to $60m paid last year.
Based on 2022 H1 numbers – using 25% WFT and 45% tax relief
UK Revenue $1,032m minus $267m (hedge loss) = $765m
(less) Opex (excluding depreciation and interest costs) 586-174-59=$353m
(less) Magnus profit share $32m
(less) Kraken Lease – principal element ((123-45)/2 = $39m
Taxable Profit (pre-Capex) = 765- 353-32-39 = $341m
(less) UK capex – I’m attributing $45m to UK of $55m spent in H1
(less) Tax relief = 0.29X Capex (investment allowance totals 1.29x capex) 0.45x 45 = $20m
Taxable Profit = 341-45-20= $276m
EPL applied at 35% to taxable profit (25% for 2022) = 0.25x 276 = $69m
Pro-rata for May 27th – 30th Jun = (37/182)x 69 = $14m.
Same again in H2 leads to 69+14 = $83m for 2022.
Tamovv, I might be having the same problem you had earlier. I'll try again after removing a special character that might be causing the problem
EBITDAX provides a good insight to the EPL charge before allowances. I’ll spare you my workings, but I estimate a current EPL charge for Q4 between $42m-$57m, making a total for the year, $330m. However, the Q1 current EPL was high at $126m, which makes me wonder if that included a $72m refund of the 2022 payment. If so the current EPL charge for 2023 is $258m. This is in keeping with numbers I posted last March (?) where I implied the 2023 EPL charge would be less than $314m. Given the lower 2023 production and prices, and the higher CapEx spending, much less than $314m.
In summary, in 2024 I’m expecting a c. $260m EPL cash payment and ‘low digits CT’, which I going to surmise is $10m, for a total cash tax payment, $270m. Cash tax paid YTD (Q3) is $163m, and I don’t expect a Q4 payment. Therefore, a c.$100m additional tax payment in 2024 compared to 2023.
(I’d be delighted if anyone can critique that analysis.)
I’m unclear about your comment on CFFO and Rosebank CapEx.
CFFO is after cash tax payments and Decom spending, but before CapEx spending and acquisitions.
To be clear, after 30% dividend payments, 70% of CFFO is available for CapEx, acquisitions and debt repayments.
I missed a section:
EBITDAX provides a good insight to the EPL charge before allowances. I’ll spare you my workings, but I estimate a current EPL charge for Q4 between $42m-$57m, making a total for the year, $330m. However, the Q1 current EPL was high at $126m, which makes me wonder if that included a $72m refund of the 2022 payment. If so the current EPL charge for 2023 is $258m. This is in keeping with numbers I posted last March (?) where I implied the 2023 EPL charge would be