Member Info for londoner7

Two years ago I looked at the clean energy sector, primarily hydrogen, with a view to investing in companies like CWR and ITM or an EFT for a wider spread. I appreciated the replies to my queries from these boards but ultimately decided it wasn't an investment for me.

The suppliers of clean energy technology make compelling cases but I wanted to assess it from the customers side. As a long term investor in BHP, the largest miner in the world, I looked at what they had to say. Surprisingly, or perhaps not, they had a lot to say about the part hydrogen had to play in their mining activities and customer's activities such as steel making. Their primary argument against hydrogen was that EVs - and I'm talking huge EVs - are available today at competitive pricing while hydrogen was just a prospect for the future. The BHP documentation also showed a very wide view of future demand for hydrogen in the overall energy mix by 2050. The likes of BHP and Shell view hydrogen as a niche product with a 2% share of the energy mix, while supporters such as Berenberg had the hydrogen share at 15% by 2050.

Clearly a wide range of views but I found the BHP case most compelling. Since then I've followed the plot with interest, and while I've never had an interest in the solar or windfarm investment case, from an engineers perspective I find the arguments for the all sources of energy compelling.

To my point.

With that in mind I've started to read the latest Lazard's assessment of US energy supply costs, considered a bible of the industry. There is a section starting page 26 on hydrogen, which may interest follows of the hydrogen story.

https://www.lazard.com/research-insights/2023-levelized-cost-of-energyplus/

Tamovv,
Looking at this section from your post:
EBITDAX 2023E: 1.800 mUSD
- 120 mUSD financing costs
- 660 mUSD DD&A
Accounting profit before tax: 1.020 mUSD
Corporation tax (at 40%, without applying tax losses): -408 mUSD
EPL (35%): -449 mUSD
CFFO: 822,5 muSD (30% equals 250 mUSD, so nearly sufficient to close to gap to the 400 mUSD divident target this year)
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Your interest is in the Cash Flow From Operations (after tax) number. What was that number in 2022?

The presentation slide 23 has net cash from operating activities at $1.723m. This seems to me to me the metric for determining dividend payments. The slide doesn’t include tax payments but if I deduct the $184m tax charge from EBITDAX I get $1,732m, so isn’t that essentially the calculation?

The 2022 tax charge of $184m, included $131m for the EPL, leaving a $53m conventional tax charge. My understanding is a ‘net deferred tax asset’ of $392m should result in a low level of conventional tax in 2023. But I’m not an expert in oil taxation, e.g., where does $53m in 2022 come from? Next month’s Q1 numbers might help. In the meantime, I’m going to focus on the EPL charge.

I don’t see where you get EPL $449m. I have $283m. But rather than looking at the detail of my EPL calculation I think it’s worth reflecting on the $131m 2022 EPL charge as a point of reference.

2022 EPL is paid on a cash flow from Ops number of $1,723. Abex and finance costs are non-deductible, but lease principle and CapEx spending is deductible.

Given your 2023 EBITDAX $1,800m is below the 2022 number $1,916m and 2023 Capex guidance S420m is above the 2022 number $381m, and both movements reduce impact of EPL in 2023, then grossing the 2022 EPL charge will set the limit for the 2023 EPL charge.

2022, 7-month CPL charge, ((131*(12/7))/25%) = $898m equivalent FY EPL liability before 25% rate.

For 2023, 35%*$898m = $314m.

Therefore, based on guidance and current oil& gas prices the 2023 EPL charge will be <£314m.

* On the lower Q1 production I’ve revised my 2023 Q1 EBITDAX down to $475m (same as 2022 Q4)

I don’t recall such a strong consensus around prospective cash flows, but the issue in the minds of management is liquidity.

Last month’s update from Moody’s illustrated the liquidity challenge given upcoming mandatory debt payments, including the accelerated repayment schedule on the RBL, resulting from last November’s changes to the EPL, the $50m payment to Suncor (GE consideration), and the repayment of the 7% Retail Bonds due in October.

The ‘going concern disclosure’ in yesterday results adds some detail. The period under consideration is 12 months from the publication of the 2022 final results. In addition to the Q1 repayments already made to the RBL the latest determination requires a further $100m before end 2024 Q1. I don’t know the schedule but $25m per quarter seems about right.

So, $25m each quarter, $50m in Q3 and c$135m in Q4.

The base case is that this profile can be met at an average Brent price of $78.5. The recent bump up in Brent is helpful to the cause. But the text provides alternatives if the base case is challenged and importantly, the auditors have accepted managements guidance.

The CFO comment of all options under consideration for the Bonds was interesting.

This is not a year for dividends. Given the liquidity challenge I was surprised by the level of focus on M&A for UK producing assets. Presumably there would be corporate actions associated with any M&A so I’d assume these actions would improve liquidity.

Last week Ithaca made similar noises in relation to UK M&A. perhaps Ithaca and Enquest are fighting over the same assets.

No doubt Enquest focus for the year is maintaining best production performance and controlling costs – hasn’t it always been so! I thought the Q1 production number was a good start, and talk of Magnus top-sides stabilising and a permanent solution to the P-seal issue affecting wells sounds positive.

Assuming the ‘going concern’ base case is satisfied, there isn’t a Suncor consideration or Retail Bond repayment in 2024 and perhaps there’ll be a floor to the EPL reversing the RBL hold. Hence, the talk of prospective shareholder returns.

* What a dunce I am!

It seems the repeated Magus well failures have been due to P- Seal failures. I thought I was paying attention in class but missed this information nugget from EnQuest’s updates.

Back of the class facing the wall londoner7. Any other dunces joining me?

"Breedon are going to the main market so we might pick up some of their AIM investors."

Not this Breedon investor.

The IHT attractions of AIM shares were important to me but I'm (hopefully) some years away from popping off and I now think there is strong likelihood that the IHT advantages will be removed within the next 10 years anyway.

In the early days I was invested in SRC seeing it as a company that might replicate Breedon's early growth, but I found it difficult to follow the strategy given the somewhat adhoc acquisition of assets.

I think SRC offers good value and a strategy of buying cheap assets can't be a bad one if the funding is appropriate. But SRC feels more like a fund of assets managed by MV rather than an integrated business.

I prefer the integrated nature of Breedon's assets. But continue to follow SRC for read across of the resources market.

I've just come off the Ithaca call and there are a few points of interest here.

10 mins into the call (I guess there'll be a playback posted later) there is a very clear explanation of the severe impact the implementation of the EPL has on RBL facilities. They mention 'constructive talks with government' and give the strong impression that changes will be implement. Though, as I've speculated here, I don't expect any material change in the cash cost of the EPL in 2023, but I do expect changes which will limit the impact on RBL facilities. The question is when? The sooner the better for Enquest - I did wonder if they had delayed their results in the hope of firm news, but 'constructive talks' may be sufficient for their planning.

I was surprised at how communitive Ithaca were on the relative merits of UK development versus UK M&A. I'm left with the firm impression that Ithaca are in talks on UK M&A and wouldn't be surprised to see something happen in 2023.

Tamovv, I've only made a quick pass on the report. I'll go back to it after the presentation, but to your points

Agree, Q1 and FY production guidance disappointing, No doubt the market was aware the issues. I'm new here so hope for clarity on the call. I thought Pierce had started production in Dec.

Q1/Q2 2022 predates the acquisitions. Closing net debt $960m, net cash spent on acquisitions $957m, so if debt free was an earlier goal that's close enough for me.

RBL will have been impacted by EPL. The new level of $925m takes that into account, leaving $325m head room and $250m cash. I suspect EPL adjustments are still in play, but apparently not today as part of the energy policy update - politics?

$400m dividend for 2023 financial year is reconfirmed. The 15-30% metric is for 2024 and beyond.

A couple of good items:
Received $51m in Feb from judgment in their favour - not previously counted.
Some beneficial improvement in the 2023 gas hedges, but may be modest. The presentation slides should be clearer than the text.

Stevo12, this is from Harbour's statement:

"the majority of our 2023 EPL liability is expected to be paid in 2024 due to one of the Harbour entities not currently falling within the UK tax instalment payment regime. "

I don't know what the read across is to Enquest's 2023 EPL payments schedule.

I had Wed in my diary, but I see their calendar does say Thurs 30th, so thanks for the heads up.

Looking back to an earlier post, I said, "I've made estimates for 2022 Q4 and 2023 Q1 EBITDAX of $530m and $580m respectively."

I don't see how I could have got $530m EBITDAX for 2022 Q4 - guess I had a typo in my calculation - now c.$475m.

We should see a tighter estimate on 2023 Opex and Capex, which will help the 2023 calculations but any additions to their gas hedging position in 2023 is likely to have a greater impact given the recent pullback in day ahead gas prices.

BacchusII, thanks for you post. It's an interesting perspective.

BHP removed their primary listing from London, which removed them from a FT100 ranking, but they are still listed on the London market and that will continue.

As a UK investor I'm not aware of any impact on my holding in BHP, other than the addition of Woodside shares which have a similar secondary (?) listing status in London.

I can see an adjustment to the EPL which improves lending making sense politically.

I don't think the profit hit to the NS sector gets sympathy from any political party, but the buzz phrase last spring was 'energy security'. If NS sector investment is restricted by lending terms then I can see a political opportunity tomorrow to ease that restriction.

The terms will be interesting but I don't expect a 'game changer' wrt to the EPL paid in 2023.

I never understood Enquest's claim of a deferral in Kraken development. The news I saw said Kraken development in 2024, with some purchase contracts in 2023. I hope this 'deferral' is clarified at next weeks call.

But I think near term Malaysian activities may be more important. The 409 block award requires a drill this year (2023). The last trading update wasn't conclusive on Malaysia, but any easing of the RBL might allow the drill to go ahead. Currently, I see it as a tight call, given other cash demands.

Hi Tamovv,

I've nothing to add numbers wise until I see the detail on the 2022 final numbers and 2023 guidance. But your view that CapEx will be lower than 2022 and your expectations on the 'conventional' tax are interesting.

I'm new to Ithaca 2.0 and looking forward to getting up to speed on their operations with the finals presentation.

But I wonder if enough has changed wrt Cambo financing to cause much change from confirmation of the $450m-$550m 2023 CapEx made only last Nov. Also, I never expected 'spades in the ground' on either project in 2023 so I don't see a significant 2023 CapEx impact.

The 2022 H1 acquisitions added a significant deferred tax asset, which should reduce their exposure to 'conventional' tax in the last half year and 2023. That's my expectation, but stand to be corrected. We'll know more later this month.

Tamovv, your understanding of puts, swap and collars looks good to me, but premiums are paid on the puts and swaps. This may only be a couple of $s - depends on how tight the contracts are to forward pricing at the time the contract is purchased.

You describe Ithaca's hedging information as complex. I'd describe it as detailed. Broken down by quarters is considerably more informative than the average year numbers provided by other companies, given the volatility of pricing. Also, it highlights gaps in the schedule - I wonder if Ithaca took advantage of the pop in gas prices in Dec to add collars to 2023 Q4. The next update will tell us.

Given volumes and Opex It's relatively easy to work out the EBITDAX numbers but for FCF you need EPL, CapEx, finance costs, etc.

You've assumed 82Kboepd for 2023 but latest guidance is still the 72-80 number provided at the time of the IPO. CapEx guidance is also wide, but higher than 2022.

I've made estimates for 2022 Q4 and 2023 Q1 EBITDAX of $530m and $580m respectively. But I'm holding off on a FCF estimate for 2023 till we get fresh guidance later this month. My preliminary look points to $800-$900m FCF in 2023, but that is a very rough estimate, with volumes and CapEx the biggest unknowns.

The dividend for the 2022 FY is 2.1p. An interim dividend of 0.7p was paid last Sept.

The final dividend of 1.4p will be paid in May.

tornado10, my interpretation is that there will be 3 payments of c.$133m making a total of $400m for 2023 paid as follows:

1st payment next week
2nd payment after the 2023 interims
3rd payment after the 2023 finals - that would be Mar 2024, so 2x cash payments this year.

For the 2024 financial year, (1/3 of $420m) $140m paid after the 2024 interims, and the final dividend of $280m paid after the finals are announced Mar 2025.

Hi Stevo,

Your 1st paragraph - I don't agree.
The current lease liability of $137m shown on the balance sheet account is the amount Enquest expects to pay over the next 12 months on leases. The capital and interest components are split out for the P&L account.
The Kraken FPSO is hired at a day rate of $447,352. Enquest's share is 70.5% = 0.705x447,352x365 = $115m p.a.
The balance of lease expenditure is for offices and (I'm guessing) standby support vessels. (Incidentally, the day rate drops mid 2025 to $36m on a 12 month contract. Unsure of the precise date because of delays to the start of contract)

I've just scanned your recent post but I think you've captured the correction. If you disagree say so and I'll look closer.

2nd paragraph - I'm nit picking.
I think the OpEx of Magnus is closer to $40 boe than $25 boe. The current contingent for 2022 was c $30m, which points to a high OpEx even after CapEx. This month's results will reveal more.

3rd paragraph - I agree. From memory your numbers for ENQ and HBR are similar to mine. However, the benefit of leverage for ENQ diminishes after the first year, assuming ENQ use FCF to pay down debt rather than pay dividends. (I added that last point without much thought so stand to be corrected)

Hi Jan, I'm almost afraid to ask how you extrapolate '600' from my post.

I try to assess the FCF of the various NS companies I follow for comparison purposes. As Stevo says, there is more to a valuation than the simple FCF yield metric I use. Leverage is also a factor - the amount of EV going to Mkt Cap - but so to is how the FCF is distributed. Having made that assessment I leave the share price in the lap of the gods, politicians and the market.

I want to be on the winning horse for my chosen investment period - whether its a fast circuit time or a slow one isn't in my control.

I don't make SP predictions so I guess that disqualifies me as a broker.

Strictly, I think your comment, "Kitchen sinking it again", nails it.

Perhaps I've been around this game too long, which has made me cynical, but executive teams tend to come out of turbulent times with returns well ahead of the long term investor.

Lower expectations ahead of the 3 year bonus plan that will be determined by a compliant renumerations committee, then boom!

Stevo12, an interesting approach to valuation. As Jan says, always good to see numbers.

Of course the balance sheet is important, but , call me old fashioned, I prefer to track the cash. My preferred metric in FCF yield versus enterprise value. It's a more short term measure than yours appears to be but in my limited experience of investing in this sector too much unexpected stuff happens for me to have confidence in predicting a long term outlook.

But going back to your numbers, the bit that jumped out at me was your expectation that $300m of lease and deferred consideration would be paid per year. I'm sure $50m will be repaid on the GE acquisition and c$120m on the Kraken lease, but beyond that I don't have a clue.

Perhaps key, is that I don't view the Magnus contingent as debt, rather the payment of 37.5% of Magnus production / free cash flows, to BP for the foreseeable future - beyond 10 years - unless something dramatic happens to the Magnus field or oil prices.

2nd April?

Must be expecting heavy weather.

No doubt a typo on Marine Traffic.

steelwatch1, thanks for your update.