Member Info for londoner7

I don’t think AB sees Bressay or Bentley as large-scale developments, rather extensions of Kraken, perhaps with local supporting infrastructure.

During the FDP process I’d expect all options to have been considered including a large-scale development, which might have been more to Equinor and Harbour's liking. If an extension to Kraken looks the obvious option then the smaller-scale might have been a deterrent to Equinor and Harbour. Hence their withdrawal. The terms with Equinor mean Enquest would have got their share for free. I suspect the same will be true for Harbour’s share.

What next?

Waldorf with a 29.5% share in Kraken would be the obvious partner for an extension to Bressay.

The job advert is interesting, but, say, a £100k salary is a small price to pay to keep the options in play. I won’t hold my breath for first oil in 2025.

Ordinarily, I’d expect some clarification from Enquest at its finals in March on its plans for Bressay, but my experience with Enquest communications leaves me feeling we’ll be fed scraps at best.

Interims should be out 9.30 pm UK time.

Production volumes and pricing are know. The cost of the recent acquisition is known.

The market will be looking at the level of ongoing debt BHP want to carry - c$10b from memory.

I don't expect the dividend to be maintained as BHP has moved from the progressive dividend model to a capital allocation model. But the analysts will be attempting to 'read the tea leaves' of the announcement for clues to further M&A activity.

Tonight's CNBC Asian coverage normally gives better insight into BHP and analyst views than your likely to see on tomorrow morning's coverage.

A net debt of zero may have some appeal but I agree with comment that it is somewhat arbitrary.

If/when HBR hits zero net debt metric they will still have a level of cash on the balance sheet balancing gross debt in the form of the Retail Bond - $500m with a 5.5% coupon. A great rate on Senior Notes and I can't imaging HBR are planning to give it up. That's $500m available for acquisitions and/or shareholder returns, above any level HBR might run up on the RBL.

On the timing of achieving any particular level of net debt it's worth remembering that H1 will include a c. $150m cash payment for the 2022 EPL charge, an H1 dividend of at least $100m, and I'd guess, other UK and international tax cash payments.

If HBR provide guidance on their 2023 FCF expectation that will provide great clarity on prospects. For me the profile of those cash flows is a secondary issue, but it will be relevant to HBR in the timing of any acquisition and/or buybacks.

Stevo12, you say, “Ithaca still looks expensive compared to harbour based on existing 2P, production and profitability.”

I’m invested in HBR, ITH and ENQ. As the news comes in, I assess various metrics, near term prospects and revise my investment allocations accordingly, so I feel I have a good handle on the relative measures. No sweeping changes and not too frequent as the swaps cost me about 2% in charges.

Your comment prompts me to ask what metrics are you looking at?

I see ITH on 8 years 2P cover based on 80K boepd. I see HBR on 6 years based on 192K boepd.

On profitability, using EBITDAX I have ITH on c. $77 / boe (YTD, still to report Q4). I have HBR on c. $53 / boe. HBR is handicapped by its hedging which continues into 2023. My assessment for 2023 Q1 is that ITH realised pricing (oil and gas) will be c. $100 and HBR c. $70. This is based on disclosed hedging positions, and oil @ $85 and gas @ 155p / therm ($110/boe). Gas pricing has come off, but my calculations indicate the $30 differential holds in Q1.

My preferred valuation metric is FCF yield against EV. For HBR I have a prospective 32% FCF yield for 2023 against 28% for ITH, so on valuation I see HBR ahead but ITH coming up on the rails. My estimates for 2023 FCF are $1,200m for HBR and $845m for ITH.

My FCF forecasts are rough, particularly with ITH still to report on 2022 Q4. Credit to HBR management for providing FCF forecasts – we should get one for 2023 with the finals next month. In spite of the introduction of the EPL, HBR beat on their original forecast for 2022.

Both companies have interesting exploration and development opportunities, and I’m happy to be invested in both. But there are significant unknowns. I’m undecided if Cambo and Rosebank will be a curse or blessing to ITH. I’m expecting HBR to make an acquisition this year – the terms and prospects will be key.

I should add that I have lowest confidence in my understanding of Ithaca's business, which makes me wary, and highest confidence in my understanding of Enquest, because I've been following it longer, but their management is the most secretive of the bunch. I like Harbour's disclosure of their FCF forecast.

On 13th Jan I posted my views on the Helium ‘sell’ to potential investors.

Today, I’ll offer some insight into the challenges of commercialising a Helium discovery in Australia.

Gas was discovered at Magee 1 in 1992 where a test at a depth of 2,340 m flowed gas at a stabilised rate of 63 Mscfd, comprising natural gas, helium and nitrogen from a 6m zone of Heavitree Formation.

The well was considered a technical success but not a commercial success. 63 Mscfd (thousands of standard cubic feet per day) equates to 11 boepd.

In 2010 Central Petroleum conducted a ‘desktop’ study, titled, “Low Volume Helium Extraction and Commercialisation”. The report was based on the assumption of a field producing at 20 MMscfd of similar gas composition to Magee-1, i.e. 6.2% Helium.

20MMscfd equates to 3,448 boepd, or 314x Magee-1 wells.

Central, with its Joint Venture Participant, He Nuclear Ltd, planned conditionally to drill at least one well during 2010 (The Magee 2 well) targeting gas, condensate and helium.

Magee-2 was subsequently deferred. The following text is from a CP drilling update:
“Central Petroleum (ASX:CTP) has decided to change its planned 2010 drilling programme to enable the company to prioritise its pursuit of oil targets in the Amadeus Basin and maximise the opportunity of short term cash flows, rather than the longer term and more capital intensive Helium/gas targets.
The current inability of Oil and Gas Exploration Ltd (previously He Nuclear Ltd) (OGE) to pay 50% of the funding needed for the Magee 2 drilling programme has also contributed to the decision.
OGE owes approximately $1 million in unpaid cash calls for both the Magee and the Mt Kitty joint ventures”

Within the Amadeus Basin CP’s focus turned to the Dukas-1 well for conventional gas, working with Santos as operator. (The pressure and rig issues during drilling are well known here). Santos lost a % of their interest when they passed on a deadline to commit to return to Dukas-1.

After a 3 year delay a private company, Peak Helium, revived interest in Magee, Mt Kitty and Dukas in Feb 2022, when they agreed a JV with Central Petroleum and Santos for 3 drills in 2023. Peak is carrying the full well costs (100%) to a max (gross) $20m per well on Magee and Mt Kitty, and WI costs on Dukas.

The JV was due to close June 2022 but has been held up while Peak progresses “various approvals with the Northern Territory Government in order to facilitate completion of the remaining conditions precedent”. Both CP and Santos have agreed to extensions almost monthly – latest 31st Jan 2023 now extended to 28th Feb 2023.

I’d guess both Mosman and Georgina Energy are awaiting the next move by Peak Helium. However, while Mosman can sit back awhile GE has to move ahead with its IPO to cover the increasing costs of their loans. A $5m placing to re-enter Hussar-1 is tomorrow's problem. Chance of a commercial Helium find at Hussar-1?

There's no doubt that Ithaca compares unfavourably to HBR and ENQ on a enterprise value versus production volume metric. I'm in both ENQ and HBR and that simple metric has kept me out of Ithaca.

However, there's a lot of operational stuff I prefer with Ithaca - their near term exploration and development which alleviates the EPL to a greater extent and the potential of Rosebank or Cambo getting clearance. While there's political concerns on NS development, it's my working assumption that if either field gets clearance it will not be reversed by an incoming Labour government.

Near term the gas hedging works in Ithaca's favour, particularly during this quarter (2023 Q1), which I estimate will beat their 2022 Q3 EBITDAX number, producing higher FCF and a good reduction in net debt, which will lower the EV and improve the EV v Prod metric to some degree. I see Ithaca's Q1 realised oil & gas price c.$100, about $30 above HBR's and $15 above ENQ. How much that changes my preferred metric, FCF yield on EV, will be clearer in a few months, as will the impact of the EPL on all three companies.

The near term outlook has prompted me to open a relatively small position here. Nice to be back after being kicked out by the bid in 2017.

Hi Pelle, I don't agree.

I still have a 2-3 year investment horizon, though it is reviewed at each update.

The planned Capex last year was $160m, but this came up short largely because of Fx but also (possibly) because of the 2nd GE drill moving into 2023, but certainly due to reduced works on Magnus.

Expected 2022 CapEx is $120m.

I can see a CapEx spend in 2023 of up to $200m including any deferred 2022 spending.

If AB chooses to increase CapEx close to my number then I'd expect that to include the advancement of Kraken works from 2024 and perhaps development of another licence.

I'd trust AB to make the right call.

If 2023 capex comes out at c$120m -$160m then Yes, returns to shareholders are in order.

Sorry, I don't know how to write that in Swedish! But I'm guessing you're all smart bi-lingual types. Unlike us dummies this side of the channel.

ironknut, thanks for the heads up.

This comment is interesting, “It has a good ‘moat’ and is well managed. A mooted shift to America freaked the market but is now off the agenda. If the share price stays like this, someone will snap it up, perhaps private equity with the support of the founders.”

The moat and the management are reasons I invested and continue to hold.

Talk of a move to the American market freaked me out too. The valuations are much higher than UK. I'd see it as an overpriced buy similar to Lagan, which at the last interims wasn't showing the growth anticipated but I'm reserving judgement on Lagan till the finals. I'd be delighted if Breedon has backed off from America.

I don't buy or hold a stock on the basis of a potential bid. But this is an interesting observation. The founders launched a cash shell BAY to repeat the trick they've pulled off with AI and Breedon. I have a small holding in BAY, just to monitor events, but I hadn't considered they might make a bid for Breedon with private equity backing. Not the daftest idea.

mrc, thanks for the link to the Eagle environment statement. I'd lost it.

My recollection of events is that the regulator rejected the farm in. Odd, considering a key remit of the O&G regulator is to encourage development. I also noted that Eagle wasn't mentioned in the CMD just two months after it appeared to get the go-ahead. However, Enquest was going through a rough time with lumps falling of Thistle and a fire on Heather, which permanently shut down both platforms. Given the situation perhaps Enquest opted for the no risk farm in maintaining a 15% WI in any production.

My understanding of the NS licencing regime is that if Enquest has completed work requirements on Eagle with the drill, they can hold the licence with a yearly fee, which increases over time.

Perhaps the Scolty and Crathes rework provided the breathing space to the GKA hub, and Eagle's time has come.

Or perhaps I'm giving Eagle more air-time than it warrants. Time will tell.

Tarmak, hang onto that hope!

Hi romaron, I’m not sure there was a question in there, but I'll make a general comment.

Ahead of the EPL’s introduction I didn’t expect Enquest to be significantly impacted because of their tax position. In hindsight I thought the EPL was cleverly structured – cash in the coffers now with an incentive for further NS development. However, as a rule, increased taxation adversely impacts investment, so I’d expect NS production decline to accelerate over the medium to longer term.

The public are influenced by self-interest not common sense, and politicians know how to manage the mob. Linda’s (HBR CEO) appearance in front of the Energy Select Committee was easy meat for politicians like BG and CL. They got the headlines with Norwegian tax equivalence and the cost advantages of green energy. (I think Harbour’s CFO would have handled the Norway question more effectively, but from that single exchange I now see EPL @ 38% baked in).

Within the next two years we’ll have a general election. Recently I posted my working assumptions on near term policy as it impacts UK O&G. AB will have his own working assumptions and I’d expect each prospective Enquest activity in the NS to be assessed against his working assumptions. What else can he do!

I’ll manage my investments in a similar fashion. However, I don’t have to be invested in the sector, so I have more options than AB.

* I’m long past being concerned about the ‘public verdict’ or the outcomes of the democratic process. I simply deal with outcomes as they present themselves. I’d guess you’re familiar with Plato’s views on the natural order – over 2,000 years old but still relevant today. A current movement is towards coalition government. David Deutsch, in his book ‘The Beginning of Infinity’ raises strong concerns about such a movement in his chapter ‘Choices’.

In Scotland I see the overweighed influence of the Green Party in coalition. I’ve no issue with moving towards a cleaner planet, but I do have an issue with socialists! That said, I also have an issue with conservative ‘Nimbism’. However, I don’t have an influence on outcomes, so better for mind and soul to simply adapt.

Rant over.

EVT = EPL

Hi Tarmak, I took up Eagle based on the 'widening opportunities' comment made by AB in relation to the EVT.

Outside of the known plans to tie backs on GE, Magnus and Kraken, the only other UK opportunities that come to mind are Eagle and Tiger (211/12b).

As you say, Tiger is a larger opportunity, but it isn't as advanced as Eagle. The Tiger licence conditions require seismic by Dec 2023, with a drill within the following 2 years.

For newbies, here are my notes on Tiger:
211/12b (exploration) - Tiger prospect east of Magnus
Conclusion on relinquishment March 2013
Elixir has fulfilled the PART I work commitments by obtaining and reprocessing 633 km2 of 3D seismic data. On the basis of this data and new biostratigraphic and fluid inclusion studies, Elixir has mapped the Tiger Prospect, which whilst economically attractive, required a farm-in partner to commit to drilling the contingent exploration well. Elixir has not been able to find such a partner and has elected to relinquish the Licence.

From 2011 “The Tiger prospect is a direct analogue to the Magnus Field, which is located 5 kilometers to the West. All of the play components, being source, migration, trap, seal and reservoir have been demonstrated to work at Magnus. The most likely, unrisked recoverable resource for Tiger is estimated to be approximately 90 million barrels.”

In Sept 2019 it looked like Eagle was going to proceed. (I've views on why it didn't, but will leave them out of this post)
This describes the status in 2019:
https://www.energyvoice.com/oilandgas/north-sea/207708/enquest-outlines-plans-for-landing-eagle-field/

At $65 oil I could see $200m of operating cash over two years in 2019, which implies a development cost <$100m.

A bit higher today, but now there is a 54% EVT allowance on the investment.

Another factor is the benefit of an Eagle tie-back to the economics of the GKA hub.

I'd be delighted to hear news on Tiger but I think Eagle is closer to generating returns. I'm hopeful of news in the coming updates on any licence developments but see it as a long shot. I think the last Enquest licence development that went into production was Scolty and Crathes in 2016. That didn't go to plan and had to be reworked - I suspect Enquest has grown cautious of such developments. Their purchase of producing assets has been more profitable - though the EVT now changes the tax/allowances component in favour of development.

In the 1970's the Rolling Stones were paying 84% tax but still lived in big mansions.

The O&G sector is exploiting the UK's natural resource to mutual benefit. Nothing wrong with paying taxes. (Though I admit the step up was a shock)

If the tax bill is $6b in 2024, then whichever party is in power at the time will be hesitant about taking actions which risk that tax income. There's a big public sector to pay for. Seems to me that in rough terms a $6b tax bill translates to $2b of FCF p.a. A nice return on current valuations.

Every sector has its risks. Be it policy/tax changes or technology disruption.

Worth keeping things in perspective.

The Eagle field has become something of a hobby horse for me. Last year I asked AB about Eagle but formatted my question poorly giving AB an easy exit which he took. "No current plans". I'll be wiser next time.

I listened again to parts of the Q&A session following the latest interims. A couple of comments jumped out which are relevant to current discussion.

AB said that the allowances under the EPL has widened the net of development opportunities - I had missed that on my first hearing and suggests we may hear a bit more about these 'wider' opportunities at the finals update, if not before. Come on Eagle!

He reined back on any change (due to the EPL) in the development program at Magnus because this development is constrained by the available well slots. Meaning, you don't side track a current producer for a marginal improvement in production.

There is an acceleration in the assessment of seismic acquired at Kraken last year. Will that bring forward further development of the Western Flank.

Referring to the (then) backstop of 2025 on the EPL allowances he gave some indication that something could happen on Bressay (within the timeframe) to take advantage of those allowances. It seems early to me, but that's what the man said.

I'd better hold on to my stool during the next updates.

A corollary of the statement, “In 2023, Enquest will cash fund 54% of every $1 spent on allowable UK capex due to the EPL”, is, “In 2023, Enquest will cash fund 100% of every $1 spent on allowable UK capex without the EPL”.

It’s natural to focus on the impact of the 35% EPL on cash flows from existing production – it’s a big whack. But there was also a motivation behind its introduction to maintain development in the North Sea to support UK energy security.

When the EPL was announced at 25% I tried to make a positive argument here for the allowances, but it didn’t gain much support. (I recognise Stevo12 has recently been supportive of the EPL allowances regime)

Last night I ran some numbers on a fictious large scale tie-in. (I decided to cut my numbers from this post as they are a distraction from the main point) The compound return on investment over the 5 years of the project was higher under the EPL regime. The difference wasn’t large, but it was positive. Obviously, more attractive at $100 oil than $70 oil, which of course is a key risk.

The politics to NS development are challenging, but the numbers can be made to work under the EPL.

On the politics. My working assumption is that Labour will be in power from the end of 2024. No new field developments will be approved after that date. Those already approved, which might include Rosebank as the last biggie, will be allowed to continue. The development of existing fields, e.g. tie-ins, will be permitted. The EPL will go to 38% (driven by politics), unless there is a collapse in the oil price, but no changes to the EPL will be applied retrospectively (Jan 2022 has been mentioned by Labour). The additional allowances relating to the EPL will cease on new projects, but again no retrospective action taken. The existing Ring Fence allowances will continue.

* Harbour’s decision not to be involved in the current licencing round, given the level of NS infrastructure they already have in play, has confused me. They qualified their stance with a comment that they already have sufficient opportunities to pursue. But another thought occurred to me. I suspect that several of the licences will depend on infrastructure linked development and the regulator has powers to compel certain activities. I wouldn’t be surprised if Harbour becomes involved in new licensed developments even though they may not be the primary/initial licence holder. Just putting it out there!

L3Trader,

Repeating your worked example (Sun 21:44):
“Suppose that after I deduct all the costs I am left with £250M, and that I have to pay £50M in interest.
For the ring fence corporation tax this means that PBT is £200M, after which I pay tax of £60M (30% tax rate).
But for the EPL, since interest is not deducted, I will pay tax of £87.5M (35% times £250M).”

The maths is correct but your follow up to frame EVT as a tax on interest is more of the gibberish you started with, “keep an eye on gross debt because interest expenses are effectively taxed at 35% (as they are not an expense for EPL purposes)”

To close the maths in your worked example, the total tax paid, Ring Fence plus EVT is £60m + £87.5m = £147.5m.

Let’s go back to your example and add another $50m interest making £100m in total, because we haven’t been keeping a eye on gross debt. As you would put it.

Under Ring Fence deduction this interest is deducted from £250m profit leaving PBT of £150m. Tax at 30% is £45m.
But for the EPL, since interest is not deducted, I will pay tax of £87.5M (35% times £250M).

In spite of the higher ‘gross debt’ the total tax paid is lower, Ring Fence plus EVT is £45 + £87.5m = £132.5m. The Ring-Fenced tax is lower because of the higher interest deductible, but the EPL tax is the SAME.

You close your post with a valid comment (supported by the calculations above), which appears a common theme in your posts when your looking for a deflection from your gibberish.

In summary your latest post is, valid maths, gibberish, followed by a valid comment. An improvement on the complete gibberish you posted 18th Jan.

As I said, I was happy to end the exchange. When I described your Jan 18th post as “your reply wasn’t very clear” I was being polite. But the way you now try to twist the argument rather than own up to your confusion or at least let it go is disappointing.

Good luck with your investments.

Hi Stevo12, thanks for your clarifications but let’s not lose sight of the key point:

In 2023, Enquest will cash fund 54% of every $1 spent on allowable UK capex.

Hi Stevo12, thanks for your reply.

On your 3 points I just have a couple of minor queries.

On 2), only the principal element of the Kraken lease (c$70m) can be offset against the EPL. The interest component c. $53m isn’t. This is a P&L computation. I tend to focus on the cash flow number, a c$123m cash cost for the Kraken lease. (Note: this lease charge drops to about half from 2024/5)

On 3), I assume you are focused on the P&L component of Magnus, and your numbers may be correct, but I suspect Magnus profits for 2022 will be lower than expected. Again, my focus is on the cash flows. The cash payment to BP will be based on net cash flows from the project after OpEx and CapEx.

I haven’t followed the detail of your calculation of taxes, because I’ve already made my own assessment on EPL (posted here in various forms) and we’ll get the 2022 EPL numbers in a couple of weeks. I can wait for those.

But you say, "EPL payable of £278m which will be payable in quarterly instalments during the relevant tax year." During which tax year do you expect $278m (I assume £ is a typo) to be paid?

I was expecting an EPL charge for 2022 of <$100m and an EPL charge for 2023 of <$200m. I know roughly 45% of the 2022 charge will be deferred to a cash payment this month. As I write this, I can see an EPL cash payment approaching $278m in 2023, so I guess that is the tax year you refer to but appreciate confirmation.

Getting to the crux of the ‘91% funding before spending’ statement. You, say, “Accordingly for every $1 Enquest spends on post FID Capex it will reduce EPL payments by 46 cents and add 45c to losses carried forward.” Therefore, in Enquest’s case in 2023 it is ‘46% funding before spending’ with the balance of 54% to be covered by debt. (As you say, 45% of the investment can be added to losses carried forward, but a small detail. 6.25% of the 45% can only be added once the investment starts generating income.)

I wasn’t explicit in my reason for asking your views, so now I’ll be explicit.

There will be a capital cost for any investment which is eligible for tax allowances. We agree that for Enquest in 2023 the net cash cost will be 54% of every $1 spent. That isn’t close to negligible, considering Enquest’s debt position. But there may be opportunities within the portfolio whose development aligns with the new tax regime. No doubt Enquest is studying these. But I struggle to see much change in 2023, other than a possibility that further development of the Kraken Western Flank could be brought forward from the currently anticipated 2024 spend.

I’ll ‘fall off my stool’ if the words ‘Tiger’ or ‘Eagle’ are introduced by Enquest in the coming updates.

* I don’t mean Golden Eagle but the Eagle field next to the GKA hub – 8K bopd potential.

Stevo12, your post (10:42) is illuminating on quarterly tax payment accounts – I mean that.

This is an Enquest board. I find posts relating the specifics of Enquest more useful and debateable that generalised comment that might be presented to a class on tax. Some posters might be able to extract the relevant specifics, but most can’t. You seem to have a clear opinion on the relevance of the EPL and associated allowances, on North Sea capital investments. You also seem to have knowledge of Enquest’s assets and tax position.

Given Enquest’s CapEx expenditure of $120m in 2022 – I estimate c$80m spent in the UK, with an additional c$15m on the 2nd Golden Eagle drill extending into 2023 – would you expand on the CapEx options (incl. anticipated cash spend) you see available to Enquest from 2023 onwards, that would utilise the ‘91% funding before spending’ you describe?

Hi L3Trader, I’ve just seen your comment from a few days ago to Stevo12, “thank you for commenting on to my earlier reply to Londoner7. You made a valid comment, and i will get back to it in my further exchanges with Londoner7, at some point.”

It implies you are expecting a follow up from me.

I queried your comment, “keep an eye on gross debt because interest expenses are effectively taxed at 35% (as they are not an expense for EPL purposes)”. Also posted as, “Cost of debt is taxed at 35% (interest expenses are deemed "profit")

Your reply wasn't very clear but satisfied me that your comment, as I understood it, is wrong. I was happy to let it drop, rather than continue the exchange.

If I query a point, I appreciate any reply, but I’m not out to reach a consensus on every discussion point. That’s why I didn’t follow up.