PYX Resources: Achieving volume and diversification milestones. Watch the video here.
Yes, it was positive commentary from Ibstock, but no numbers (at least that I could see) on the Q3 or full year expectations.
I'm a Breedon shareholder so look across the sector company updates for some insight to 'bottom line' performance. Something beyond the confidence surveys, ONS measures etc. Useful as they are.
I'm looking forward to Sigmaroc's update on Thursday. I hope it is positive, but I'm confident Max will at least give us a Q3 revenue number - something to work with. Anything else would be a bonus.
Tigar, Sipp10,
Interesting points on Magnus, which prompted me to look at the notes in the latest interim accounts.
"Within the statement of cash flows, the profit share element of the repayment, nil (2021: $1.0 million), is disclosed separately under investing activities. At 30 June 2022, the contingent consideration was $392.4 million (31 December 2021: $344.6 million). The contingent profit sharing arrangement cap of $1 billion was not met as at 30 June 2022 in the present value calculations (2021: cap was not met)."
The clearest point is the reference to "contingent profit sharing arrangement cap of $1 billion", so we can exclude certain payments made to BP from the $1b figure, but while present expectations continue as "cap was not met" our expectation should be that BP will retain a 37.5% share of Magnus cash flows for the foreseeable future, unless you choose to use numbers different to Enquest.
What is in the foreseeable future?
The two obvious elements are oil price and volumes.
Oil price
The contingent consideration is based on present and future oil price expectations. As we know, these are noisy. In Oct 2021 expectations for Brent in 2023 & 2024 were $69 and $66 respectively, and today are $83 and $80 respectively (Ref McD. & Associates)
Volumes
Enquest released a table of anticipated Magnus volumes on proven plus probable reserves
https://www.enquest.com/fileadmin/content/Corporate_actionsPDFs/Rights_Issue/RIProspectus.pdf
Refer to page 203.
Note the CapEx out to 2025. This includes the current well drilling and over the next few years.
The contingent consideration to BP's profit share captures these numbers and revised expectations for the foreseeable future, which is tabulated on page 203 of the link. If you are wondering why the $392m number is so far off the £1b cap it's because future expected payments are shown at present value in the balance sheet at a discount rate of 11% p.a.
Sipp10, your reference to 800m barrels of moveable oil takes us to 2C territory and perhaps beyond. One day those reserves might close out the obligation to BP's profit share. It's another option available to Enquest, and the on-rig drilling facility could support a low-cost route to addition barrels.
I wrote the last line with Kraken and Bressay in mind, alongside a recent comment that Golden Eagle might move to an on-rig drilling option for future wells.
A consequence of any sudden rush to drill in the NS are restrictions on the supply of services, rigs, etc. There will be cost inflation. All the more reason for believing Bressay will be a lower cost phased development than might have been considered at the time of the Kraken development. We shouldn't have to wait long for the answer. I'm expecting a Bressay FDP within the next 12 months.
Tigar, good spot on the $350m net cash flow benefit from Magnus. Excluding any discrepancy between the alignment of the first tranche purchase and the second, I interpret that as a net payment to BP of $210m to the end of 2021.
However, still a long way to $1b. (Sipp10, yes, from BP’s perspective, subject to a 40% tax, it’s ‘only’ worth $600m to them, but on first look I don’t see any beneficial impact to Enquest from the EPL. I haven’t looked very hard.)
Based on recent oil price expectations and Magnus production, Enquest doesn’t expect the $1b to be repaid so, unless that position changes a good assumption is that BP will ‘forever’ maintain an entitlement to 37.5% of Magnus free cash flows.
What is clear from the financial metrics of transactions like Kraken, Magnus and Golden Eagle is that good early year’s production numbers are vital to the eventual return on investment. Any early mishaps are difficult to make-up. (To be clear, the nature of the Magnus transaction, doesn't lead to any loss, but the potential for lost opportunity)
A good contrast with Kraken is Premier Oil’s development of Catcher. Both projects operated along similar time frames and so were impacted by the 2014 collapse in the oil price, but while Kraken fell well short of its initial 50K boepd target, Catcher exceeded theirs by a similar amount. Consequently, Premier Oil were able to announce payback on the Catcher project within two years of first production. Premier Oil got a lot wrong, but their Catcher project was a good one.
In 2019 I estimated Kraken would never get full payback on the project due to the fast build-up of finance costs. (I posted my numbers here) But I hadn’t anticipated a potential extension to Bressay. Perhaps the ugly duckling will have its moment.
• Tigar, you agree with my interpretation that only one well has been drilled on Magnus in 2021. I note SIPP and L3 have referred to two wells. Reference?
I don’t know the reasons AB participated in the RBL, but it does not represent an ‘equity’ component. The risk to us as shareholders is that AB is taking an unfair advantage of his position. Within a ‘premium listing’ the FCA offers other shareholders safeguards. Quoting the FCA, “The safeguards are intended to prevent a related party from taking advantage of its position and also to prevent any perception that it may have done so.”
I believe, as do others on this board, that AB’s actions through various transactions over recent years has been in support of shareholders' interests, and no doubt adds to creditor confidence, which, typically, at the margin reduces costs.
AB is the founder of Enquest and no doubt has an interest beyond the usual CEO renumerations to see Enquest succeed – or at least get the SP back above the 100p listing price.
I don’t have any insights to the terms of the new bond or RBL but having read the terms of previous versions I can make an educated guess:
- I didn’t note a date for the expiry of the $305m bond but I’m assuming it aligns with the RB in Oct 2027.
- The RBL facility closes in April 2027, ahead of the Bonds.
- Repayment of the $305m bond isn’t permitted unless the RBL drawdown is zero.
- In the early years Enquest would need to pay a premium for a full or partial buy back of the new bonds,
- In the last one or two years, before Oct 2027, there is no premium on buy backs.
In summary, it is a little early to be looking at a refinance of the refinancing.
Hi ukbbb,
yes, 2022. Good spot.
I'm surprised your EPL number is so low. I'm dashing out but appreciate if you could elaborate on your number. I haven't seen the Jeffries number. I'll come back to this later.
Bish, bash, bosh – job done! (Okay, 25/10/22 if you want to be picky)
I guess that is what Enquest finance meant when they said, “ready to move when market conditions are right”.
I prefer the lower sizing ($305m) than some expected, even if it might be at a marginally higher coupon than could have been obtained a month or two back, which would have been at a higher sizing.
Some interesting detail:
$400m of the $425m RBL to be utilised (assuming $75m restricted to Letters of Credit)
A $300m accordion facility – this represents additional optional financing at a premium to the basic RBL terms. This is likely to have added to the fee, but no interest charge unless utilised. A ‘nice to have’ if an M&A opportunity arises, an earlier development (Bressay, or Kraken WF) makes sense, or the oil price crashes.
PYUECK. Your ‘headscratch’.
Unless I misunderstood your comment, Enquest has not been buying ENQ1 bonds in the market. They have been buying the US$ HY Bonds.
I didn’t anticipate the move earlier this year to ‘exchange’ the 2023 Retail Bond, with a 2027 RB at the higher coupon (9%), but I read it as an astute move. I guess they would have liked a higher take up on both the new issuance and the exchange, but it removed an unknown element from the overall restructuring.
I think Enquest has been clear in their comments on ENQ1. The offer of exchange has been made (it is no longer open) and the balance of ENQ1 will be repaid Oct 2023.
We’ll get some clarity on cash flows over the coming months, in particular the cash cost of the EPL – I have $75m in mind for 2021, and $150m for 2023. A $50m payment to Suncor in 2023 H1 and c$125m payment on the RB in Oct 2023.
I don’t expect any of these payments to require a dip into the accordion facility.
Given AB’s recent comment I’d be very surprised if the new arrangements materially impact potential returns to shareholders. I look forward to the detail on any hedging obligations.
Hi Tarmak,
I did check out your spreadsheet. Impressive work.
In 2019, when I first invested in Enquest, I'd have dug into the detail to validate my own workings, but repeating myself, I'm at a point where I'm comfortable with my estimates on Enquest and able to make reasonable adjustments as the news comes in. That's why I tend to be quieter on the board between announcements.
In 2019 I had the likes of Mo, e121 and L3 answering my myriad of questions.
Today's new investors can avail themselves or yours's and Therapist's detailed spreadsheets, alongside more general comment on Enquest and its market. There may be better boards but amongst those I post to ENQ is the best for relevant comment.
But you ask for a critique. From memory, there was one item that jumped out at me. In a Magnus 2022H1 column you had a $50m vendor component. The vendor loan was repaid in 2021 so I wondered why you'd continued with that component. (I could be wrong)
On Magnus. Yes, perhaps a last-minute change on the timing of payback on the two wells relative to an imminent expectation of refinance. Or perhaps a change due to what does now look a significant failure in H1 on an existing well. We know that the wells average <1Kboepd, but some can produce 2K or more. A focus of fixing a key well and production from the one they did drill might get some life back into Magnus numbers. (Is that L3 I hear groaning in the background? ;-))
I still maintain a spreadsheet on Kraken offloads - thanks to the tanker spotters here - and as of the last offload 4th Oct, I have a Kraken (gross) average of 26,334 bopd. Very good if, as I suspect, this year's maintenance has been completed.
I'm guessing your Kraken number is similar.
Best,
Londoner7
Therapist, I'm unclear on your numbers.
Pg33 of the interim report has:
Average realised prices
Period ended
30 June
2022
$/Boe
Period ended
30 June
2021
$/Boe
Average realised oil price, excluding hedging (M/Q) 111.0 67.3
Average realised oil price, including hedging ((M + P)/Q) 89.9 62.8
The average oil price achieved per barrel in H1 2022 was $111.
McD & Asso. reported 105.55 average for Brent, so Enquest achieved a higher price.
I put this down to a combination of higher dated Brent than 'front month' and a Kraken premium. I don't know about Malaysian pricing.
The loss due to hedging is a separate item. Contracts closed monthly and values at Volumes x (closing Brent minus hedge ceiling price). The average ceiling over the period was $78 but there's likely to be some variation between months.
The realised price simply reflects the impact of the hedging contracts (financial instruments) on the actual production sales. The two items operate entirely independent of each over but can disrupt cash flows, for better or worse.
L3, on your other points.
You say the reduction in the RBL from $600m to $425m is surprising.
I hope ukbbbb has nailed it. Less restrictive T&Cs, with no or little hedging requirement, and a Pelle dividend in prospect. (Adding hedging requirements into RBL agreements seems to me to be a recent development. Perhaps it’s time has passed)
I would add that I’ve seen Companies report a reduction in their RBL to save on fees. If your plans don’t include a higher level of RBL then why pay fees on an element you don’t intend to use.
Is this the New Enquest – debt light, organic in-fill drilling and low capital phased investment in developments.
I've nothing to add on gas revenues. I don't think gas pricing is a game changer for Enquest. But I do have a holding in HBR so I might pop there occasionally to talk gas.
Best,
Londoner7
Hi L3Trader,
As always, good attention to detail. When I first invested in Enquest I also paid attention to the detail until I got to a point where I felt I had a good understanding of the business including an expectation I wouldn’t be hit by an unforeseen accounting surprise.
That’s where I feel I am and, as I commented in my post, now take a simpler view of Enquest’s finances.
Given AB’s guidance of a 0.5 net debt : EBITDA objective I’ve come round to the view that following restructuring, total bonds would come out to c. $500m with an RBL on top. There was some discussion around this topic earlier in the year.
I haven’t seen confirmation of Voiceofreason1’s £300m Bond number, but it aligned with my expectations, and I assume he didn’t pluck it from the air. Subject to exchange fluctuations adding this $300m to the UK RB makes it $570m, and $450m after repayment of the outstanding 2023 issue next Oct.
On the detail of your first paragraph, it seems to me the main difference between us is on the usefulness to Enquest of the ‘restrictive cash’. If you look back over yearly accounts, you’ll see there is always a significant element of ‘restrictive cash’. At 2021 year end it was $191m and as of 10 days ago was $188m. Perhaps the nature of this ‘restrictive cash’ does allow Enquest to drop to a level of $35m of unrestricted cash you’ve determined. Enquest will have a good insight into cash flows over coming weeks, if not months, and will judge the level of Bond replacement accordingly. Remember too, there are the timings of those lumpy offloads from the likes of Golden Eagle and Magnus to take into account. I don’t know the timing; you don’t know the timing, but Enquest do know the timing.
Within the next few days, we might have the answer to our speculation on the Bond numbers.
In a recent post you said, “I expect ENQ to be very cautious about spending on CAPEX until Q3 in 2023.”
Replace the last part with ‘until the HY Bond is refinanced’ and I agree with that comment. I think we’ve already seen caution.
On Magnus we heard, “The North West Magnus production well, which is the longest reservoir section drilled this century at 1,914 metres with the longest liner ever run at Magnus, has been successfully drilled and logged in late July and is expected online around the end of September.” I look forward to the production numbers, but I missed comment on the other two Magnus wells due in 2022. We got, “Further infill drilling is now expected in 2023.”. Have those two wells been deferred?
On Kraken, I had an expectation that there would be drilling on Kraken in 2023, but that was not in the plans discussed in the interim update.
True to his word, I think AB has been/is focussed on getting debt levels down ahead of refinancing. Once the Bonds are away Enquest can plan short- and medium-term CapEx with greater confidence. That gets a ‘thumbs-up’ from me.
Hi L3Trader, I haven't seen those numbers. What's your reference?
My simple view is that based on the end Aug numbers, RBL ($90m) plus HYB ($794m) equals $884m to be financed. The cash position was c. $340m.
The proposal outlined is $300 Bond and $500 RBL ($425m excl, LofC), therefore $725m.
Cash and cash flow since end of Aug will cover the difference of c. $160m.
As Moody's say, the RBL "is projected to be largely drawn at closing".
If this goes through, and Enquest will have dropped the ball if it doesn't, it's great news and Enquest will have greater clarity over their Cap Ex options over the next few years.
romaron, I don’t know why you are confused. The RBL and related hedging requirement has been discussed at length on this board.
“amended and restated $500 million RBL”
I repeat, I wonder if there is a hedging requirement.
Hedging forced on you by your creditors given the current level of backwardation is a bad thing. I prefer Enquest free to implement hedging as they see appropriate.
Voiceofreason1, good spot.
A $300m bond replacement sounded right to me, alongside an RBL. Let's see how the issuance plays out.
From Moody;s
"London, October 10, 2022 -- Moody's Investors Service ("Moody's") has today placed on review with direction uncertain EnQuest plc (EnQuest)'s B3 corporate family rating (CFR), B3-PD probability of default rating (PDR) and the Caa1 rating assigned to the backed senior unsecured high yield notes due 2023. Concurrently, Moody's has also assigned a B3 rating to the proposed backed senior unsecured bond issuance due 2027. The outlook has changed to ratings under review from stable.
EnQuest seeks to fully refinance its outstanding senior unsecured notes due October 2023 through a combination of new senior unsecured notes, drawings under its Reserve Base Lending facility (RBL) and available cash balances. Moody's review will focus on the timely and successful completion of the planned transaction, after which the CFR could be upgraded to B2 and the PDR to B2-PD. On the other hand, failure to timely address the upcoming bond maturities could lead to a downgrade of EnQuest's ratings because of heightened refinancing risk."
"The company will have access to an amended and restated $500 million RBL (including $75 million letter of credit-sublimit) which is projected to be largely drawn at closing. The RBL contains a net leverage covenant (set at 3.5x) and a liquidity covenant testing the company's sufficiency of funds for the next 24 months. Moody's expects EnQuest to retain sufficient headroom under both covenants."
I wonder if there is a hedging requirement?
Good to see the shareholders winning out over the CNE board. The proposed tie up with TLW looked a poor deal for CNE shareholders.
Perhaps the CNE non-execs fulfilled their duties, though I see the CNE executives still manged to get their snouts in the trough. I guess that was always going to be a consideration to get an alternative deal through - evidence of the ongoing mismatch between board execs and shareholders.
I never expected the award from India to materialise, so I saw it as a bonus when it finally happened. But CNE had previously announced that they had funding in place to support their NS producing assets and finance development in Senegal, so any award would be returned to shareholders in its entirety. Prospects looked good, unfortunately:
Strike 1 – the decision to exit their North Sea assets and enter Egypt.
Strike 2 – only c50% of Indian Award was returned to shareholders – looks like Tullow shareholders will get the balance
Strike 3 – the agreed merger (by management if not shareholders) with Tullow.
I had been reducing my holding in CNE since the decision to sell NS and enter Egypt, but on strike 3 I sold out completely.
Once out I rarely go back, but I viewed the recent interim results presentation. I was struck by slide 9 which listed the contingent considerations resulting from recent M&A. It prompted me to consider where CNE would be now but for recent management decisions.
Strong cashflows from Catcher and Kraken.
In 2019 CNE had $373m of cash flow from these assets @ a Brent average of $64.
In 2021 CNE received $306m in cash flow from the UK disinvestment and earned contingent consideration of $77m, which Waldorf paid this year.
Waldorf, with their interest back dated to Jan 2020, had fully repaid the cost of acquisition by end 2021.
In 2022 Waldorf has production of c.16K boepd priced at $100. That’s $580m in revenue and c$300m after operating costs and a 25% windfall tax. Leaving c$200m in cash flows after an expected $100m contingent payment to CNE.
Asset 1, Management 0
Senegal development 63% complete with first oil due in 2023.
By my estimate at the time (I don’t recall the detail) CNE sold out at a loss on their investment. A possible $100m contingent in 2023 might get them to breakeven.
Woodside took up pre-emptive rights to acquire the sale (c36% WI) and now have an 83% working interest in the Senegal development. Transactions were dealt in a $60 oil environment – I guess that’s where CNE expected prices to remain. Over the first year of production Woodside may see cash flows above breakeven ($41) of 36K boepd * $60 poo * 365 = $788m from their pre-emptive purchase from CNE.
Asset 1, Management 0
I have investments in the assets, Catcher, Kraken and Senegal. The CNE management I leave to others!
It’s good to hear institution investors speaking out against the Tullow merger, but I wonder how much visibility they will have of the current discussions on ‘alternatives’. Management will decide under cover of confidentiality agreements. Will their decision be in the interests of CNE shareholders? I hope the non-execs take their duties seriously.
I’m not familiar with Tullow, so I don't have a view on their assets or management, but I wish CNE investors well in the outcome. I’ll be watching from the side-lines.
Reflecting on the recent HBR and Ithaca updates I was struck by how low their realised gas price was in H1 compared to the 'month ahead' prices we often see reported on the news.
I suspect the company's realised prices are more reflective of 'day ahead' pricing and perhaps includes some smoothing, say last 5 day average - I'm guessing now.
I estimated the 'month ahead' pricing to be c.230p average in H1, but HBR stated a realised price of 176p, which is more reflective of the 'day ahead' price data I've seen.
The relevance to Enquest is that it prompted me to look back at a post here a couple of weeks back and make a correction.
I said, "Breaking down the 2021 numbers my estimate for gas is that Enquest sold 1,398 boepd (c3% of reported production) @ $86 boe, for $44m.
For 2022 using 1,400 boepd and a price of 250p/therm for H1 and 400p/therm for H2 (pick your own numbers). This leads to c$50m in H1 and c80m in H2."
Using HBR's 176p/therm I now see H1 gas revenues (excluding 3rd party purchases) at c.$32m.
* The debt ratio is NET debt to EBITDA and AB has mentioned a target of x0.5 but I don't recall any August target. I can see bond debt up to $500m in alignment with the 0.5x target. In practice gross debt may be a combination of bonds and RBL drawdown, assuming an RBL is still in operation after restructuring. In any event c.$150m of bond debt is in place out to 2027.
But what is the current EBITDA? The latest update implies $880m. Is that H1x2 or H1 plus 2021 H2, i.e. rolling 12 months. But EBITDA isn't my focus. I want to see bond restructuring complete, thereby easing market concerns on debt and substantial FCF, which is what's left after CapEx, Decom, law suits and other stuff is deducted from EBITDA.
Another $35m to ease any ongoing credit discussion.
Is Enquest delaying Kraken shutdown? The latest update was unclear.
"The Group continues to assess optimisation opportunities for the planned shutdown scheduled in the third quarter of 2022."
My read-on Hugo Rifkind’s article: the mistake has been avoiding the boggling costs of offshore wind and nuclear. His conclusion: build it now, build it all.
The backbench conservatives he refers to represent a wing of the party which will die out over time – the sooner the better!
A key message I took from Rifkind’s article is that there are always arguments, financial or otherwise, not to progress to a decision on long term projects, and politicians, given their short lives on the front line, have been able to duck those decisions.
When I hear Ed Miliband barking on about the current energy crisis, I wonder what he was doing as Secretary of State for Energy and Climate Change between 2008 and 2010. It seems not much.
The only positive I take from the article, “Rush to drill for more oil in the North Sea” is that at least ‘government’ is talking to the oil companies, people that can make a difference near term and longer term. Let’s see what comes of it.
Today, Ithaca Energy released their interim results. Ithaca is a private company but I follow their updates because there’s good read across to my North Sea investments.
Several items caught my attention but the most topical is the Energy Profits Levy. Ithaca had no complaints about its objective, terms or implications.
The CFO presented some maths relating to the EPL allowance which surprised me, but he will know more about such detail than I. Given the Capex schedule already in place he expects Ithaca to be paying about one third of the 25% levy in the near term and none in 2024-2025.
Like Harbour last week, Ithaca said that they don’t currently see any change in their Capex plans out to 2025, which would utilise more of the EPL allowance. However, I’d guess over time there’ll be a tweak here or there. I’d imagine a key factor in future assessments will depend on the outcome of the next general election.
Understandably, Enquest’s recent focus has been on debt repayment and restructure. Aside from continued infill on Magnus and in Malaysia and new drills on Kraken in 2023 we know little about Enquest’s CapEx plans out to 2025. Perhaps we’ll hear more next week. but my expectation is for a significant update after the bond restructuring.
It was refreshing to hear the Ithaca CEO answering questions in a free and easy manner. Quite the change from the guarded responses we get from Enquest in Q&A. Ithaca are looking at a possible market launch in 2022 and I’ll be looking them over.
What does Jude Lagan, Managing Director - Breedon Cement see that prompts him to add to his holding?
Breedon's share price can't withstand market forces but nice to know (I assume) that Jude Lagan sees good operational performance within Breedon.