Member Info for londoner7

Digging deeper into the Feb numbers.

Pierce was offline in Jan so not a contributor to the 10Kboepd drop. Erskine and Scheihallion contributed 5,360 boepd.

The balance is Captain, 4,400 boepd down in Feb. Again, the status of this field would have been considered in the guidance, but could have been a surprise to the markets today.

Captain numbers have been noisy outside of last year’s shutdown - c. 3K drop between May and June 2023. Probably due to the ongoing EOR works, which are completed this summer. Guidance still had 2024 Captain production higher than 2023, but not by much.

Feb production is down c.10Kboepd on Jan production.

Ithaca confirmed the issues at Erskine and Pierce, which were fully offline in Feb, although the news on problems related to the infill drilling on Schiehallion was new to me, apparently the market was aware. (?) My take from the update last week is that Schiehallion is sorted, Pierce close, but little was said on Erskine, though I think I saw the problem related to a host facility, rather than Ithaca’s operations on Erskine.

As I like to remind myself ‘stuff happens’ in this industry, and it’s rarely good. That said, these Feb production numbers were known to Ithaca when they gave their 56k-61Kboepd guidance for 2024. However, the market (algos) is unlikely to react favourably to bad news even if flagged.

I think it was Stevo12 who clarified aspects of the EPL (including the timing of payments related to tax loss status) in posts on the ENQ and HBR board.

Historically, in the UK non oil gas sector, capital spending was written off over various periods of time depending on the asset purchased. Recently, the UK has gone to full expense of capital, though there will still be historic capex to write down, D&A as you describe it.

However, the UK oil gas sector has operated essentially full write down of capex for a long time – 40% first year capital allowance against a 40% tax charge. An additional 6.25% allowance was added after the asset moved to production.

When the EPL was 25% the EPL allowance included an additional allowance of 80%, providing a total allowance of c.91%. (1.8 x 25% = 45%)

When the EPL was raised to 35% the EPL additional allowance was reduced to 29% to maintain the total allowance at c.91%. (1.29 x 35% = 45.15%)

Incidentally, this highlights the ambiguity of the political debate on removal of EPL allowances and the increase in the EPL rate to 38%.

There can be little doubt that the complete removal of the EPL allowance would make any new investment in the North Sea difficult to justify, but there is room for Labour to claim political capital out of removing the ‘addition’ EPL allowance – sometimes referred to as the super deduction – while still providing a case for North Sea investment.

If full first year capital relief was allowed against the EPL at the new rate of 38%, then this would align with the capital relief applied to the rest of UK business.

With the removal of the additional component of the EPL allowance – super deduction - the total tax relief at an effective tax rate of 78% would be (46.25% + 38%) = 84.25% (78% first year capital relief, plus the 6.25% relief on production).

I sensed the Ithaca chairman sees this as a possible outcome – a Norway solution.

I also listened to Ithaca’s presentation a second time. Two points formed in my mind. One, the ENI assets are unleveraged, meaning no associated debt coming across to Ithaca, and whether the assets carried tax losses or not, Ithaca would be able to offset their own tax losses against profit, so in the near term only the EPL charge applies. Two, clearly Delek is familiar with the UK political landscape and would be looking at ways to alleviate the worst-case impact, i.e. the complete removal of allowances associated with the EPL. In which case, only Rockwell would be completed, albeit perhaps with loss of allowance on half the investment, but unlikely to see any further, non-regulatory investment made in the North Sea.

Against normal field decline, ENI adds c. 40K boepd now, Captain adds c.15K bopd from 2025-6, and Rockwell adds c. 15K+ boepd from 2026-27.

The applied tax rate would be 38% until the current CT losses are used. No doubt Delek and ENI will be looking for full dividends along the way, with room to increase

Enquest has already updated on both Jan and Feb YTD numbers (43Kboepd and 44.5Kboe respectively), so my interest was in looking at where the c. 3K uplift in Feb versus Jan came from.

I only look at the oil numbers and the net uplift on oil is 1,383 bopd. Magnus did the heavy lifting with Feb Magnus oil up 2,112 bopd, and estimated gas from Magnus taking the total North Sea increase in Feb to c.1,750 boepd.

Which leaves the balance of c.1,250 boepd coming from Malaysia, which seems a lot, but perhaps it had a poor Jan.

Enquest don’t normally provide any breakdown on field production till after the April numbers. That will provide the clearest guide to a (net) revenue estimate for 2024.

I’d appreciate it if anyone else looking at these numbers could confirm my summary.

Hi Tamovv,

Your EBITDAX number is close to mine.

In 2023 the net CFFO of $1,291m included a negative impact from movement in working capital of $210m. What will be the movement in working capital in 2024? Not knowing makes an estimate of CFFO difficult. But assuming a neutral movement in working capital I have a $163m dividend for the financial year 2024.

On your EPL question, let’s go back to the 2023 numbers:

Adjusted EBITDAX $1,723m.

As you say, decom and interest are not deductible before EPL, but other costs are. To keep the calculation simple, I’ll just deduct lease costs $42m and Admin $34m, for a combined $76m.

The investment allowance before EPL is applied is (1.29x(393+97)) =$630m.

Profit subject to EPL is 1723-76-630 = $1,017m.

EPL is 35%x$1,017m = $356m, which is close enough for me to the reported current EPL charge of $333m, and the estimated cash tax payment in 2024 of $345m-$355m.

Applying the EPL calculation to your EBITDAX number for 2024, same again lease and admin, and the higher Capex:

1160-76-(1.29x (365+210)) = $342m subject to EPL.

EPL is 35%x$342 = $120m.

A cash tax reduction due to EPL in 2025 (using my simplified calculations) of $356-$120m = $236m. Potentially adding $70m to the 2024 dividend, for 2025.

I suspect that most North Sea companies, (I’m thinking ITH, HBR & ENQ) will see similar cash flow profiles over the 2023-25 period, i.e. reduced CFFO in 2024 when EPL cash payments are at their highest, with a reversal in 2025. All three companies are also predicting higher production volumes in 2025 versus 2024.

On Ithaca's dividend yield, I find the reference to a $400m dividend payment for 2023 misleading. My interpretation is that only the 2nd and 3rd interim payments apply, i.e. a total of $267m. The 1st interim of £133m was effectively a dividend on 2022.

But my current focus wrt Ithaca is understanding the logic of the combination with ENI and the future impact on dividends. The ENI assets add to cash flow, with little or no ongoing capex. My initial assessment is that this combination supports the dividend alongside new investment in Cambo, Flota and Marigold, assuming Labour's adjustments to the EPL permit the investment. But would an adverse fiscal adjustment hold Ithaca back? I can imaging Labour calling the bluff of North Sea company executives, and winning - at least in the short term, and to a politician that's all that matters.

Stevo12, thanks for the IR communication confirming the treatment of EPL on the Bressay farm down.

Out of interest, do you know the workings to get a $50m EPL charge from the $141m total consideration?

All, please ignore my posts yesterday (12:11 & 14:59). I didn’t recognise the $86.6m transaction as an additional component to the agreement announced in December, which led me down a rabbit hole.

Stevo12, from this:

"In December, EnQuest announced the sale of a 15.0% equity share in the Bressay licence and the EnQuest Producer FPSO for a total consideration of £46.0 million (c. $57.0 million). Subsequently the Group received $85.6 million for a 15.0% farm-down of capital items identified for potential use on the Bressay development. Through these transactions the Group has realised near-term value, expecting to yield c.$58.0 million post-tax cash flow in 2024, and delivered an important step in moving the Bressay project forward. "

$85.6m is the cash component of the transaction received in Jan.

The $108.8m is a component of the vendor loan facility, described here:

"EnQuest received $108.8 million repayment of the vendor financing facility. The remaining amount ($36.3 million) is repayable through net cash flows from the Bressay field in accordance with the agreed payment schedule. In the event, however, that the project does not achieve regulatory approval, there remains an option to deploy the assets on alternative projects. As such, proceeds from the transaction are reported within deferred income on the balance

sheet."

The $108.8m is recorded as deferred income.

Stevo12, you've opened up some interesting aspects, I look forward to IR’s response.

This is my read.

At the time of the announcement the total consideration was £46m (c$57m), including a deferment of £11.25m to be paid from future Bressay cash flows.

In the Feb update we were told, “In December, EnQuest announced the sale of a 15% equity share in the Bressay licence and the EnQuest Producer FPSO to RockRose UKCS 10 Ltd for a total consideration of £46 million (c.$57 million). The transaction was net debt neutral at 31 December 2023, with cash settlement realised in January 2024.”

Based on this update I assumed the January cash payment was £46m minus £11.25m (c.$44m).

Now, we learn, “With the Bressay-related farm down proceeds offset by a vendor financing facility of $141.4 million (from EnQuest to RockRose, arranged to manage the companies’ respective working capital positions) the Bressay transactions were net debt neutral at 31 December 2023. In the first quarter of 2024, EnQuest received a $108.8 million repayment of the vendor financing facility. The remaining amount ($36.3 million) is repayable through net cash flows from the Bressay field, in accordance with the agreed payment schedule.”

The $108.8m is reported as a gain from the transaction and recorded on the balance sheet as a deferred asset, so not a component of the reported net debt figure $409.6m, end Feb.

The year end the vendor facility ($141.4m) – from Enquest to Rockwall - is added to net debt but balanced by ‘proceeds from farm down’ of $141.4m, hence debt neutral at year end.

In cash terms, $85.6m has been received, presumably the cash settlement reported as paid in Jan.

I believe the net debt figure is affected as follows:

End 2023, $480.9m.

$85,6m received.

$32.6m ($36.3m is non-current deferred value) owing under the vendor loan facility, so current net cash gain of $53m from farm down.

End Feb 2024, net debt $409.6m.

Therefore, net cash flows from operations, Jan/Feb, is $18.3m.

Enquest say, “Through these transactions the Group has realised near-term value, expecting to yield c.$58.0 million post-tax cash flow in 2024”.

Based on this I see the tax impact as c$28m ($85.6m - $58.0m).

Given we were expecting c.$150m EPL payable in 2024, and reported current EPL is $175.1m, the tax impact on the farm out makes up the difference.

Tamovv, it looks like you've used the Capex number rather than the Opex number in your sum.

Hi Stevo12, could you clarify how you get to your $630m cost number.

A recent report by Savills illustrates the growth in the Build to Rent market in 2023, “BtR Houses, otherwise known as Single Family Housing, saw £1.9 billion worth of investment, up significantly from £360 million in 2022. This represented 42% of total BtR investment, shattering the previous record of 8% in 2022.”

This statistic represents a significant movement to new development, rather than acquiring existing housing stock for the rental market.

The latest ONS construction report for Jan 2024 shows, latest 3 months on year earlier, public new housing up 5% versus private new housing down -20%. (Currently, public only represents 15% of all new housing)

Perhaps the Vistry CEO is correct in saying the time is right for the partnerships model.

I’ve been following Vistry’s progress towards the partnership model for a few years. I was invested in Galiford when Vistry (formally Bovis) acquired their partnership subsidiary. While I’ve been attracted to the partnership model as key to getting more homes built, addressing the societal need, from an investment perspective I’ve struggled to understand the barriers to the traditional builders moving to the model and negating any Vistry advantage.

I watched the recent results presentation by Persimmon.

I was surprised to see that partnerships accounted for 23% of Persimmon’s sales in 2023, up from 18% in 2022, but partnership volumes were still down 17%. The CEO acknowledged the need and likely trend towards an increase in the supply of affordable housing, particularly if Labour wins the next election. But I interpreted his comment as favouring the status quo with the return of a coalition if not Conservative government. Perhaps I over interpret the comments, but it encouraged me to believe that Vistry will get a clear head start in the partnerships sector, and that creates a moat over the traditional builders, albeit for a few years.

I see this as important because I expect the future housing market to be quite different from the market that has operated for the last 30 plus years. I think a potential reversal is illustrated in the house price to earnings ratio, which peaked in 1989 (5x), 2007 (6.3x) and most recently in 2020 (7.0x). Each push higher has its own stimulus and, in my view, the latest was due to:

Planning restrictions, supported by the emergence of the Nimby, which favoured the large builders over the small and medium builders which struggled after the 2008 financial crisis.

Low interest rates, which made higher house prices affordable to buyers.

A diminished desire for flats, following the cladding and lease issues, and Covid lockdown.

(and I’ll add, with lower conviction) A more constrained construction labour force following Brexit.

Today, because of the cost of housing, the marginal first time buyer remains in the private rental sector, and the marginal private sector renter has fallen back to local authorities for social housing. Key is that local authorities have a statutory requirement to support the lower tier, and it then becomes a government problem, which can no longer be ignored.

Assuming Labour form the next government, I’m doubtful it will achieve a substantial increase in the number of houses built, particularly given a continuing constraint on construction labour, but I’ve no doubt that tax funds will be directed towards the affordable housing market. The current CMA investigation should provide evidence of the impact of planning restrictions and Labour might implement a policy solution, which I doubt strengthens the hand of the dominant large private house builders over the affordable market or the small and medium sized builders.

Amundsen Spirit hooked-up in the last hour.

Amundsen Spirit has been sitting a few miles west of Kraken for several days. Offload interval now 29 days and counting.

Eco West Coast, which I think is the onward transfer tanker, has been sitting in Scapa Flow since the 11th.

A few days delay in an offload isn't a biggie, but something upset plans just before or during the offload. AIS is poor but I thought I saw a short hook-up on the 9th. If so, it was abandoned early.

Meconopsis, now I understand.

The note was generated by A.I., which was instructed to include moat status.

A human would not have included the phrase, “the no-moat homebuilder”. Given the definition of moat, a redundant phase in the context of home builders. Only needs a minor modification to the instruction set. I’m guessing next year’s note on Persimmon will not mention moat status.

In 1978 I was writing machine code to program Motorola 6802 microprocessors. We’ve come a long way!

Meconopsis, thanks for clarifying their use of the term.

I don't have access to the site. Can I assume that no home builder has a moat? I wondered if Vistry's partnership model gave them a moat, but minimum 10 years (narrow moat) sounds a stretch.

The Morningstar note describes Persimmon as a “no-moat homebuilder”.

If Persimmon is a no-moat homebuilder, is the same true for Bellway, Barratt Developments and Taylor Wimpy, i.e. all the traditional house builders?

If so, is there a homebuilder that does have a moat?

Frac, do you have a link to this OBR statement?

I was looking for these forecasts a few days ago and couldn't find this level of detail.

So good that I wonder if I’m missing something, which is why I’m posting my numbers for someone to highlight my error.

I’ve been concerned about the prospect of this third platform in the US because of the high PEs that are being attributed to US aggregate companies. As a result, I anticipated a dilutive placing for any substantial sized acquisition. Today’s news comes as a relief - a modest price for a substantive US acquisition paid with debt.

My numbers:

BMC EBITDA (TTM Oct 2023) $35.5m (£28m) – probably higher year end given the run rate.

Combined group EBITDA £28m + £242m = £270. BMC represents 10.4%.

Enterprise value = BREE mkt Cap (pre-acq) + Net debt + BMC acq = £1,340m + £170m £240m= £1,750m. BMC acq cost represents 13.7% Enterprise Value.

That’s a modest premium (EV/EBITDA) for a 6% growth market, with, judging from BMC’s history of acquisitions, a good pipeline of bolt-ons. Bolt-ons that Breedon can afford from ongoing FCF and debt - a slide in the appendix shows good liquidity and a clear debt maturity profile out to 2026.

Still to digest the 2023 numbers, but at first sight it looks a robust performance with higher FCF than 2022, with same again c.£100m net CapEx. Final dividend higher than I expected too.

Stevo12, my EPL generated in 2024, payable in 2025.

Rather than work a number afresh I worked from the expected $150m on 2023 figures.

Pre EPL = 150/35% = $430m

Anticipating slightly higher oil prices in 2024 I went with same again EBITDA.

Same again Kraken lease and BP Magnus deductions.

I assigned $30m extra to UK CapEx, worth an additional allowance of 30*1.29 = $39m

(430-39) *35% = $137m.

As a mental note, I registered it as same again.