Member Info for londoner7

Stevo12, I've a few differences on cash interest, lease costs, EPL and Magnus BP share, which are minor, some up, some down, but I use a very different model, using crude oil sales as my top line number, add gas profit and subtract everything else.

Putting your numbers into my model returns $16m FCF for 2024. However, I'm awaiting some detail from the final results, largely in relation to gas fees, and I currently assume no interest on cash, which are likely to increase FCF by $10m-$20m, on my 2023 and 2024 models.

I'm assuming no M&A, incl. cash for Bressay farm-in, or changes/unwinding of working capital.

As to 2025, I've only looked at the EPL charge based on this year's profit, which is same again EPL. I'm a long way off considering volumes or prices for 2025.

Luxs, Willam123, thanks for your replies.

It looks like the segment I’m ignoring is the ‘sales direct from manufacturers’.

I now see this as a segment that isn’t available to the Likewise business model; which is distribution to traditional retail.

In Headlam’s update they described a spectrum of market opportunity running from traditional retail through, tradespeople & fitters, contractors to the larger sector of multiple retailers and larger housebuilders.

lux’s, I believe you operate in the retail sector, and I remember you expressing frustration with Headlam’s move into trade counters. Therefore, would I be right in thinking the trade counters are competing against you for the tradespeople & fitters and contractors segments?

Also, would I be right in thinking that very few homeowners would use trade counters and attempt to fit the carpet themselves?

Presumably, Likewise has no plans to go the trade counter route?

Likewise has a medium-term target of £200m revenue. Given the current proportion of own-brand (68%) that represents £135m of own-brand revenue. I guess looking at it this way that level of supply is possible from non-branded manufacturers.

Incidentally, at the growth rate, YTD, that’s a 3-4 year timescale for £200m.

Thanks luxs, I wasn't clear in my query.

If you aim to be a larger distributor of carpets within the UK market, can you do that by largely focusing on own brand?

I'd guess many distributors has an own brand product, presumably targeting the discount end of the market, but I'd have thought that the majority of carpet sales are of the traditional manufacture brands e.g. Axminster - that's the limit of my knowledge on such brands. Or are the majority of UK sales own brands from the likes of Carpetright or Tapi?

Can anyone shed any light on the relevance of branded business versus non-branded business within Likewise?

Good news on Pierce.

Unfortunately, last month SQZ reported a problem on Erskine, "Erskine has been shut in since 25th January 2024 due to an issue with a compressor. It is expected to restart during March." Erskine is a substantial producer for Ithaca - over 2 months production was lost from Erskine last year.

I've heard comments from Ithaca on Captain production that seem to vary with the wind - good, cautious then good again.

In a couple of weeks we'll have 2024 production forecast which should take in all the various anomalies. I suspect we'll see a relatively wide forecast taking in what I think will be unknows on Captain - when will the impact of polymer kick in and to what degree.

The detail on CapEx should be interesting.

This isn’t one of those companies that I delve too deeply into. Mainly, because when I try, I see too many moving parts to have confidence in my numbers. Rather, I trust Senior’s management to be capable of running the business effectively; a business operating in growth markets.

I was encouraged by the presentation and Q&A.

It reminded me that the build rates of Boeing and Airbus are still well below the rates of 2019, and will not return to those rates until 2025/6, with growth continuing beyond.

The business is well diversified, with 6% of total revenues in the troubled 737Max program.

In answer to a question on the likely timeline to a ROC target of 13.5%, the CFO didn’t hesitate to reiterate the previous expectation and gave end 2025 as a target.

FCF largely went to the dividend with costs relating to the acquisition of Spencer largely responsible for the increase in debt.

As we move through 2025/6, with ROC greater than the 13.5% targeted there’ll be a significant step up in profitability. A normalization of the growth rate and improvements in the supply chain will reduce WIP from last year’s £28m to a more normal c.£5m. In the absence of acquisitions, debt and associated interest costs will fall. All these components should contribute to FCF levels at or better than the c.£60 we saw in 2019.

Barring any jarring adverse company related event, which I see as unlikely given the product diversification, this is still a stock I’m comfortable to hold into the 2025/6 timeframe, when I’ll reassess my position.

There's $795m of gross debt.

The debt has covenants in place to restrict distributions ahead of the company's ability to repay debt. Is the threshold as simple as the debt/EBITDA ratio that is often referenced?

There'll be an update on shareholder return plans later this month.

Good find Nitro.

This was harbour’s position last August:

‘In Mexico, the unit development plan (UDP) for the Zama oil field (Harbour 12 per cent non-operated interest) was finalised and approved by the regulator in June and the partners have formed an Integrated Project Team to manage the delivery of the development. Preparations are underway to commence FEED and refresh cost estimates ahead of a potential final investment decision in 2024. This would result in approximately 75 mmboe of our 2C resources moving into 2P reserves, replacing over a year’s worth of Harbour’s current production.’

As an investor in Ithaca and an observer of the Rosebank development, which issued an FID on 27th Sept 2023, I believe provisional contracts are awarded during the FEED process and when the gun is fired on the FID a high level of CapEx is quickly incurred. On a 4-year build out project $0.5bn of the total $3.8bn Rosebank budget was spent in the 9 weeks following the FID.

This news update which says a an anticipated $1.24bn spend this year will now be $70m suggests to me that there will not be an FID on Zama in 2024, meaning a $9m net spend in 2024 rather than c.$150m.

Considering the proposed WD merger and associated developments underway the delay might come as a relief to the HBR board. An extra $140m in the coffers for this year’s budget. With the prospective spend on Zama in 2025 and beyond a relatively small part of an overall CapEx budget for the merged group.

It sounds like Talas are happy for the delay because they also have bigger fish to fry.

These tax considerations revolve around the fiscal rules. A core rule is ‘debt should be on course to fall as a share of national income in five years’ time’.

If the EPL expired in Mar 2028, then tax revenues would also fall. Extending the EPL out another year provides additional fiscal headroom in next weeks budget, i.e. room to cut taxes which are more likely to catch the electorates attention.

Hunt is also considering a change to taxing of non-doms.

Labour has already identified these two areas within the few concrete tax plans they have in mind to support their spending goals.

This is politics. Hunts is shooting Labour’s fox before it gets in the hen house.

These changes will happen anyway under what is a near certain Labour government.

There is still a clear political divide between Labour and the Conservatives - with the SNP very much in play – on the Labour proposal to raise the EPL to an effective tax rate of 78% and remove the EPL allowances. Theses allowances are the ‘full expensing’ allowance which is available to all companies against their corporation tax, and the additional allowance worth 29%, which was introduced to incentivise investment in the North Sea.

Currently, the UK NS tax regime is supportive of continuing investment by the O&G sector. Removing the EPL allowances would be the sectors death knell. This is the battle ground leading into the election.

Before the Russian invasion and resultant energy crisis we had Covid, which impacted - to the downside - energy prices and put much of the energy complex at risk. I don't recall any actions by the UK government to support the North Sea sector. However, the Norwegian government did take action.

Norwegian tax relief in response to Covid

‘In June 2020, the Norwegian parliament enacted temporary changes in the petroleum tax act to help oil and gas companies execute planned investments.’

‘Full depreciation, plus 24 per cent uplift, in the investment year, in the special tax base. Applies to all investments in 2020 and 2021, and investments until planned start of production under development plans delivered to the authorities before 1 Jan 2023 and approved before 1 jan 2024.’

‘In the second quarter of 2023, Wintershall Dea and its partners received approval from the Norwegian Ministry of Petroleum and Energy (MPE) for plans to develop the Dvalin North field and the second phase of the Maria field in the Norwegian Sea. The MPE also approved six addi tional developments where Wintershall Dea is a partner: Irpa, Solveig Phase 2, Njord Electrification, Snøhvit Future and the Skarv field satellites Alve Nord and Idun Nord. All eight approved plans for development and operations (PDO) were applied for in Q4 2022. The respective fields are expected to go successively into operation from 2025 onwards.’

The reason I raise this is to highlight that a number of current developments by WD as operator (2), non-operator (6), were initiated and approved ahead of the deadline and (as I understand it) will continue to see the benefit of the uplift in allowances on CapEx spent through to planned start of production, c. 2025-28.

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.

On a 2nd read, I now understand what you mean by, “the MV of debt is probably $0.5b below face value”.

How do you factor that into the EV metric, if at all?

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”.

Dumbley, thanks for posting.

The manifesto is available on the OEUK website.

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.

Correction

(with oil realised c.$68.6)

I added this for clarity but had the wrong number in mind.