Member Info for londoner7

'The government said that it will reduce its investment allowance plan for spending on new oil and gas extraction to 29% of all investment expenditure.'

L3, my focus was on the hedging impact relative to WFT as introduced by Wellintervention's post. Not the absolute level of the WFT in 2023.

*On the nstauthority numbers, have you forgotten Magnus had a 3-week shutdown in Sept, 'expected' to complete by end of Sept. It's the Oct number I'll be looking for.

Closing out my earlier posts.

A correction:

I should have added the additional WFT on the ‘hedging advantage’ in 2023 to the baseline of $932m, for a total of $1,174m WFT in 2023, assuming 35% rate.

In determining this I also concluded that the comparison should be made to 2022 FCF before the 2022 WFT is applied. (Nothing like a couple of pints of Abbot to clear the head)

Therefore, the correction is:

Another way to consider this is that the combined impact of the WFT and the change in hedging is a reduction in FCF of c.$725m compared to 2022 FCF before the 2022 WFT of $400m is deducted.
(The clarification of ‘before’ is a positive – it was a blonde moment on my part to have considered anything else)

Notes:
This is following my same again methodology – the same 2022 factors occurring in 2023, except for the WFT and hedging changes. ($2.0-2.2b + $400m - $725m)

I note Sekford’s comments on changes to CapEx and lower finance charges in 2023, which could benefit the FCF position in 2023. In 2022 non-WFT taxes were c.$500m, and changes to these taxes in2023 could also have a significant impact on FCF.

The 2022 cash tax payment is expected to be c$700m, against a tax accrued figure of c.$900m, so this difference will carry into 2023.

On a 2nd read this line jumped out at me
'Another way to consider this is that the combined impact of the WFT and the change in hedging is a reduction in FCF of c.$483m compared to 2022.'

Is that compared to 2022 before or after the WFT is applied to 2022?

The answer isn't immediately clear to me. I'm getting my supper then heading out for a beer, so might look at this later.

Anyone else have a view on this?

Wellintervention, an interesting post (12:06). You didn’t post numbers but invite us to DYOR.

I’ll restrict myself to 2023 and assume the WFT goes to 35% for 2023. The following is a copy of some notes and calculations I made on the fly. It’s single pass and may have obvious errors so I’d appreciate any feedback – numbers please. My reference is the hedging positions shown in the latest trading update.

Gas hedging in 2022 and 2023 is c.50p/therm.
In 2023 gas hedging is 2.3m boe lower than 2022.
Assume same again production and gas 200p/t and oil $100 bbl.
The difference between 200p/t and 50p/t is $106 boe.
Therefore, additional revenue from change in hedge position is 2.3m x $106 = $244m

Oil gains
11.0m x ($74-$61) = $143m
(18.8m-11.0m) x ($100-$61) = $304m

Adding these, 244+143+304 = $691m.

Impact of 35% WFT on $691m leaving $449m.

HBR has guided to $400m @ 25% WFT for 2022 (from 26th May 2022)
Extrapolating for full year c.$666m in 2023.
But increase from 25% to 35% is a 40% increase. WFT in 2023, 1.4 x $666m = $932m.

In summary, the change in HBR’s hedging position in 2023 covers 449/932 = 48% of the 2023 WFT.

Another way to consider this is that the combined impact of the WFT and the change in hedging is a reduction in FCF of c.$483m compared to 2022.

Notes:
I’ve assumed a same again position. I recall Sekforde guiding to over $1b WFT in 2023. I can see that too given perhaps higher market pricing, CapEx changes and a few barrels more production. But if say WFI is $100m higher due to higher profit then that implies c.$186m additional FCF.

Wellintervention raises an interesting point to consider given HBR’s hedging position, and the numbers are better still in 2024, but this isn’t a free ride. The 600p-700p analysts price targets earlier this year were before the introduction of the WFT - though also before some good trading updates. It will be interesting to see where Barclays come out after Thursday. However, HBR will still be paying c. $1b in WFT in 2023 that would otherwise have been available to shareholders.

Trencherpilot, reading my post again I think I've underplayed the point you make about diesel prices.

Managing diesel pricing through the pressures mounting on that particular oil component this winter will be a challenge for the industry. I understand Breedon's hedging activity operates on a rolling basis so that might provide some relief, particularly in competition with smaller players who may not have a hedging strategy. But ultimately, it will come down to the level of price increase they can implement.

In the coming update we'll get revenue numbers, but I'd be disappointed if there isn't some commentary on pricing and margins too.

Hi Strictly, thanks for your comments and the invitation to join your blog. I understand your point about 'reinventing the wheel' - I'm familiar with that feeling on these boards, but I thought I'd try my luck.

I'd like to take a rain cheque on your blog invitation - I might follow up later. I've a small holding in the house building sector - Vistry, as a legacy of my holding in GFRD - but given the current economic climate I'm looking to increase my weighting in the sector over the coming months. Hence my current interest. Given previous cycles, getting into the sector anywhere near the bottom should prove a good investment, and I suspect getting the timing right, rather than the specific company will be key - at least in the early stage of any recovery.

In the meantime, you've given me good insight into your ROE metric. I plan to develop my own ROE database using Bellway as a benchmark against Vistry alongside a valuation metric, probably around Mkt Cap and Enterprise value (to capture debt effects). My interest in Vistry is based around their focus on partnerships. I want to explore that aspect further.

Best, londoner7

(Born and raised in the home counties and currently living in Scotland. But I had a wild and memorable year living in the West End - 200m from Bond Street Tube Station - which is my link to London)

Trencherpilot, good to hear you're busy in concrete, but I suspect that might be a local (East Midlands) effect. Across GB mineral product sales have been in decline for the last 5 years (MPA link below). The fact is that in spite of the political noise we don't build much in the UK.

Your post prompted me to lookback to the 2017 results presentation because I remembered it included a breakdown of Breedon's internal supply chain. In 2017 41% of Breedon's cement production went into their concrete production of 3.3M m3. This cement would have come from their Hope plant, with the balance going to other concrete producers and other uses, bagged, mortar, etc.

But I noticed that in 2021 GB concrete production was 3M m3, down 10% on 2017. Clearly, Breedon's business wouldn't have grown on those numbers - the shortfall has been made up with c. 60% growth in asphalt and aggregate. In acquisitions Breedon has been required to sell or shut-down RXC plant to satisfy the CMA's competition concerns.

The lower demand for concrete is largely due to the reduced building of commercial office space, although in areas like the East Midlands that may be offset by the growth private industrial buildings, e.g., logistical centres, which has been growing at over 50% p.a. for the last 5 months.

I'd be interested to know what mix you see and any recent change in your concrete supply to infrastructure, house builders and industrial or commercial buildings.

On fuel increases, roughly 50% of the increase over the last year is due to the change in the rules on red diesel (47p/Lt), which was at least known about by Breedon.

Going back to mineral volumes I was surprised by Breedon's comment that H1 volumes were down by 6% compared to last year. I guess it highlights the bounce back from Covid early 2021, which subsequently tailed off into this year. However, in spite of the decline in the recent Q3 volumes, the decline is much less than it was in 2021 Q3. I might be over reading it but given the 2021 H2 improvement in financial terms in 2021 H2 if not in volumes, then we might see something similar in the current half, 2022 H2.

The trading update on the 25th should answer some of these queries.

https://mineralproducts.org/News-CEO-Blog/2022/release35.aspx

Hi Strictly, thanks for the detail of your ROE calculation. I'd have struggled without the reference to the cladding reserve.

I thought the easiest place for me to start would be with the 1/1/21 BVPS baseline. I worked it by multiplying it by weighted average shares in 2020(220.9m), which results in £1,456m and went looking for that number in the balance sheet.

The closest I could get was Net equity minus goodwill minus intangibles = 2,195-547-144 = £1,504m. Although this is only 3.3% higher than your number, I know it matters when we're essentially considering the difference between two large numbers.

I was good on the BVPS 2021 number, and I see you've used £50m from the guided range of £35-£50m for cladding, (I note this was revised to £71m at the recent interims, but I've stayed with £50m here).

Your 60p dividend number is declared dividends for 2021. I've used 40p for dividends actually paid out in 2021.

My numbers lead to (771.61-22.49+40-680.85)/680.85 = 108.27/680.85 = 15.9% ROE

The main difference with your 22.7% is my starting number for 1/1/21.

Your reference to Bellway 2020 and Covid threw me until I realised Bellway has a different accounting year.

Given the recent release of Bellways FY to July 2022 and Vistry's interims to Jun 2022, I ran ROE for both. In this instance the cladding reserve has been incorporated, as I said earlier, Vistry increased theirs to £71m.

I guess you've worked the Bellway number. I have 7.2% ROE to July 2022. (We can compare detail if yours is very different).

For Vistry June 2021 to June 2022 (interim to interim) I have 14.3%.

The difference between Bellway and Vistry seem to me to be largely due to Bellway's higher new cladding provisions. If I back these out the ROEs are similar, so Bellway is holding its ROE average while Vistry is currently punching above the old Bovis ROE average.

Looking at Countryside numbers I suspect the acquisition will have an adverse impact on Vistry's ROE, and any synergy from the deal would have to be significant to make up the difference. On this basis I doubt Vistry will be joining your 'splendid' list anytime soon. But even quality companies can be over priced.

The next question is having established your quality list of Bellway, Redrow and Persimmon, how do you assess market valuations, and what is the criterion for switching between these companies shares?

Extending your ROE metric, I assume you compare the change in equity to the market capitalisation or enterprise value, to determine a valuation. I recall from our earlier conversations you maintain a database over several years. I'd be interested to know what valuations for, say Bellway, flagged highs and lows and the degree to which the valuations of your list of quality companies varies to a point you would switch - staying invested in the market. (As you said, Covid being the exception)

Hi Strictly, a few years back we exchanged posts on GFRD before Bovis acquired their building business and renamed themselves Visty.

I recall your focus on the house builders and your preferred measure of ROE on tangible assets. At the time your metrics put you in Bellway, although I have Redrow also in mind. M&A can cause hic-ups in metrics and perhaps that's behind the wobble you noted in 2021 between Bellway and Vistry.

But I've three questions following your recent post:

I don't see the ROE of 22.7% for Vistry. Could you simply list the numerator and denominator of your sum. That should be sufficient to get me on track.

Was there any specific reason for Bellways drop to 6,7% ROE in 2021?

And thirdly, what do you see as the impact of Vitry's greater focus on the 'partnerships' model, both before and after the recent acquisition of Countryside, on your comparative assessments of the housebuilders? I guess this question is around the 'partnerships' impact on your ROE metric.

My initial attraction to the 'partnerships' model was that it should offer some protection during the cyclic downturns' housebuilding follows - something that might be tested soon. But the public buildings response to Covid restrictions and their slower recovery than the private sector isn't a good sign, which leaves me wondering if the model would offer much protection in the current downturn.

Your thoughts would be appreciated.

Best,
londoner7

Da_Gee, JB and AC are the founders of Mosman. Without them Mosman wouldn’t exist. Some early investors made good gains but fair to say most investors since c.2016 probably wished Mosman didn’t exist, but nobody forced them to invest in Mosman.

If you are investing in individual stocks then you should be able to analysis the business and risks, and invest accordingly, or not as the case may be. If you can’t make that assessment then you are gambling, and no doubt there are a few of those on Mosman’s shareholder register.

I’m a casual poster here, so for the record I am not currently invested.

JB and AC are employed by ‘Mosman’ under contracts which are described in the annual reports. Basically, they are paid a fixed fee for a set number of days (I think per month). Since I started following Mosman in Feb 2017 I don’t think JB or AC have been paid a bonus, and in recent years I don’t think they have worked more than the defined hours, which limits fees to the basic levels.

About 5 years ago options were awarded to JB and AC (and others) at a 2p price, which expire Feb 2023. At the time of the award, they were well out of the money and needless to say they haven’t been exercised. It seems reasonable to me for these options to be replaced, which will be put before the AGM, and I think it’s a given that they will be approved.

If I was a shareholder, I’d approve the options on the basis that key management should have an opportunity to participate in any surprise development in Mosman’s fortunes, much like any passing trader. My read is that the options represent c2% of total shares and are priced at c0.15p (in Aus$) like the 0.15p warrants in the recent placing – this seems a reasonable size and price.

The likelihood of a surprise development is for investors to assess. Though, IMO, it is weighted too highly, and focus should be on the producing assets in the US. Perhaps a JV on EP145 is a possibility, reversing the basis for last year’s placing – see RNS 19th Mar 2021. There is a potential (again) for drilling in the region, but there is also no shortage of licences in the basin. If Mosman fails to complete seismic by Aug 2023 then they will not have met the terms of the licence – I think seismic has been due on EP145 for the last 7 years.

However, if 2023 is ‘the year’, then it seems fair for JB and AC to have a piece of the action via the options.

Therapist, a brilliant post.

It captures the supply chain issues facing any oil/gas operator looking to spend capex in the next couple of years.

Any serious investor here wanting to understand the current issues should listen to the call, or just take note of the key message Therapist has highlighted:

“We (Transocean) are seeing longer-term opportunities that have not been typical in the U.K. in recent years, including programs longer than one year in duration for Ithaca, Equinor, and EnQuest”

We await news on the program Enquest has entered but given my earlier comment that Kraken activity pencilled in for 2023 wasn’t mentioned in a recent update, it suggests that Enquest, along with other companies, missed the boat for 2023, and Enquest are now looking at Kraken drilling activity in 2024, or at best late 2023, and perhaps have options extending further out. I’m not critical of Enquest on this position, given the clear need to focus on reconstructing their debt position, but emphasising the point Therapist makes in highlighting the real-world position – you can’t turn on Cap Ex at the press of a button, there is a tight supply chain. (Something Sunak should consider in his timelines for the EPL and associated allowances. The allowance doesn’t count for much is you can’t spend CapEx.)

Note that Harbour wasn’t included in the list. In a separate comment Transocean said that Harbour already has a rig with options out to June 2024.

Other comments:
“An increasing propensity towards multiple year programs”
>100% increases in drill rig rates over the last year.

Something Enquest will be factoring into the Bressay FDP..

In Enquests favour, they have ‘on rig drilling’ capability on Magnus and PM8, and the partners are looking to add ‘on rig drilling’ to Golden Eagle.

Dumbly, in note 14 to the interims ENQ provided provisional guidance on the current and deferred impact of the EPL. ENQ could have provided a layman’s prediction for the 2022 EPL charge based on expectations, but that isn’t their MO. HBR did provide a layman’s prediction for their EPL charge in 2022, subject to oil/gas price expectations, but HBR had narrowed their production guidance significantly. EMQ left their production guidance at 44K-51K, which makes an EPL prediction more challenging.

In their recent update Enquest gave good indications of CapEx expectations for 2023. It sounded to me like same again drilling on Magnus and in Malaysia. No drilling on Kraken, and drilling on Golden Eagle in 2022 Q4 completing in 2023 Q1. That gives me a basis for a reasonable estimate of CapEx for this year and next. It would be great if Enquest provide guidance for 2024. In its absence my expectation is a step up in CapEx for 2024 with Kraken drilling and PM409 Malaysia. The Bressay licence requires an FDP by end 2024, but I’m hopeful for it next year. My crystal ball turns cloudy further out.

The UK government might like the NS taps turned on in an instant, but in the real-world CapEx plans need to take account of cash flows and supply chains.

I have no interest in Shell’s tax position.

Consider Enquest’s position prior to the EPL.

In 2021 Enquest paid c$18m tax on its Malaysian assets, and nil or negligible on its UK assets.
2021 ended with c$700m of deferred tax assets, which will protect Enquest from UK income and production taxes over the medium term.

Continuing allowable capital investments attract 46.25% tax allowances, which adds to the deferred tax assets. Profits declared will reduce the deferred tax asset.

In May 2022 an EPL was introduced. In the public discourse, the EPL transfers windfall gains made because of exception events from the fossil fuel producers to the government purse.

To avoid perceived ‘loopholes’ to paying the tax, the EPL was constructed to circumvent the existing tax structure which allows companies like Enquest to not pay tax on declared profits made in the North Sea. To achieve this deferred tax assets built up under the current tax scheme can’t be offset against the new tax and the tax applies before the deduction of decom and finance costs.

To alleviate a possible negative impact on future investment in the North Sea an ADDITIONAL tax allowance was introduced which is allowed BEFORE the EPL 25% tax is applied.

The additional tax allowance is 45%, which can be claimed in the year of investment expenditure.

Any allowable capital investment made after May 2022 attracts a combined tax allowance of 91.25%. But it is important to understand that in Enquest’s current tax position the CASH IMPACT is an allowance of 45% until the deferred tax asset is exhausted. For a company without a deferred tax asset investing in the North Sea any new investment attracts the 91.25% headline allowance.

In assessing the impact of the EPL on Enquest a good starting point is the ‘Operating profits before tax & finance‘ component.

Deduct the non-UK component.

Add back the decom component

Deduct the EPL investment component - the tax relief under the EPL is 45%.

Apply the EPL tax (25%) – might be 30% for 2023.

This should give you a good ‘ballpark’ figure for the EPL impact on Enquest.

First EPL payment for 2022 is due in Dec 2022, with balance due in Jan 2023 (I base this on HBR guidance)

Sipp10, an interesting idea. I don't know the sum of all the profits generated in the UK, but I do know the quantity of oil and gas produced (NST Authority data - other sources are available).

Over the last 12 months 526.5 million boe (oil and gas) was produced on the UK continental shelf.

For 2022 the government was looking for £5B (starting 25th May 2022) and for 2023 £12m - those are the numbers I've seen but stand to be corrected.

So, let's apply £12b to the last 12 months of production:

£12b/526.5m = £22.8/boe, or US$26/boe

At the interims ENQ had 43,422 boe UK production, or 15.8m boe.

Therefore, if the £12b was solely due to production Enquest's share of contributions to the UK tax coffers is 15.8m x $26 = $410m. Ouch!

Of course, the £12b due to the EPL in 2023 will come from production, refining and other value-added components, but I thought it would be interesting to compute it back to the produced barrel.

(This was a 10min exercise so apologies for any obvious or gross errors)

* For the record I do not agree with the common view expressed on this board that the EPL charge to Enquest will be, nil, negligible, or not a major issue. IMO it will be substantial, though, thankfully, well below $410m.

e121, great work all round. It isn’t about right or wrong. You introduced the topic and within a couple of hours we had good input from other posters. That’s the power of the board.

Back to the RBL detail. Do you know the interest rate? Probably expressed as US Libor plus a margin. Perhaps with other conditionalities.

This would represent Enquest’s marginal interest rate.

Thanks, e121. That’s exactly the level of detail I was looking for.

And yes, hedging obligations are less onerous than under the old RBL.

I guess the hedging obligation is from today – utilisation of the RBL – but there might be some phasing allowed rather than a rigid implementation. Either way Enquest would know ahead of time and have a remit to pursue hedging ahead of any RBL obligation if they wished. So, largely detail I can ignore.

I see ups and downs in production from the various assets through 2023, but rather than get into the detail I ran two very different processes to get to my hedging expectation for 2023. One resulted in a 6.4m hedging requirement for 2023 and the other 6.5m, so I’ve confidence in my numbers.

Subtracting 3.5m ($57-$77) already in place for 2023 H1 leaves 3.0m for 2023 H2.

In a recent call HBR stated that in the oil futures market they saw straightforward swaps as a better option than costless collars. However, Enquest has shown a preference for the latter so I’m going to assume they stick to costless collars.

Today, I see an Oct 2023 (midpoint 2023 H2) strike at $83, so I’m going with a costless spread of $73 floor and $93 ceiling. (Pricing isn’t this simplistic but a balance around strike is a good working assumption).

In the Feb update we should get guidance on 2023. Assuming 48K boepd midpoint on production I expect hedging as follows:
2023 H1 – c.3.5 MMbbls $57 floor and $77 ceiling
2023 H2 – c.3.0 MMbbls $73 floor and $93 ceiling

2023 total – c6.5 MMbbls $66 floor and $86 ceiling (This is now my spreadsheet number)

* This assumes current oil pricing, costless collars, and Enquest don’t go above RBL hedging obligations.

Hi e121,

Interesting detail on the covenants.

I assume it is the Bonds prospectus you're reading. Anything on hedging? I'd assume that is one for the RBL. Do you have access to the detail of the new 'revised and amended' RBL?

Reading the Moody's report reminded me of my end of term school reports.

I particularly liked this bit, "Moody's acknowledges that EnQuest's financial performance will continue to be influenced by industry cycles as well as by consequences arising from global initiatives to limit adverse effects from climate change, such as the gradual constraint in the use of hydrocarbons and the acceleration in the shift to less environmentally damaging energy sources. Once these initiatives begin to change the trajectory of future oil and gas demand, Moody's expects EnQuest's future profitability and cash flow to be lower at future cyclical peaks and worse at future cyclical troughs. Nevertheless, the rating agency also expects this shift to occur over a period of decades and that global oil demand will continue to grow through at least the latter half of the 2030's, thus limiting to some extent the impact of these risks to EnQuest's credit profile in the short to medium term."

Moody's, in the long term I'm dead, in the medium term of outa here!

* The numbers around gross debt looked odd against my normal metrics but I'm guessing Moody's include non-current liabilities such as Decom expenses within their gross debt figures.

smidtol,
Mosman is one of several stocks I follow out of interest rather than for any expectation of an investment case developing, though I don’t exclude the possibility. In some cases, I have small holding for ‘skin in the game’ as I had in Mosman a few years back.

Other examples include PMG which I follow to see if Tom Cross can replicate his early oil success in Dana – was it luck or skill, the jury’s out, and BAY where UK aggregate legends Peter Tom and David Williams have initiated a cash shell looking for acquisitions. I don’t doubt their skill and experience, I’m interested in how they proceed, particularly as I’m invested in one of their early creations. BAY is a good example of early enthusiasm, which I worked in my favour resulting in ‘skin in the game’ on a free carry.

I log my thoughts on each, but rarely post them.

On the specifics of your question, what would get me to invest in Mosman again? I don’t know, but any investment would be small. The small scale of Mosman and the high risk doesn’t align with my usual investment criteria. Twenty years ago, I had a different approach.

But expanding on my ‘better entry point’ comment. I’ll describe what I see as the likely extremes of the next steps.

A cautious route would be to allow cash to build so a 2nd Cinnabar well can be drilled 2023 Q3, or earlier if farmed out. IMO this follows the model that has largely been pursued to date. It pays the bills keeping Mosman solvent but does little for LTHs.

At the other extreme, assuming C1 flows at c120bopd (gross), funds are raised to pursue a more aggressive build out of Cinnabar (2+ wells) (though other high impact opportunities might be available). If successful, this could get Mosman to more critical scale, which would benefit LTHs. Of course, this comes at higher risk.

Botham raises the possibility of funding another well via warrants (I'll pass on commenting on GE). The nearest warrants are those released last May @ 0.16p. I don’t see it. Those warrants are a long way out of the money. If I was an investor in last May’s placing, as an example, I might be holding 10m shares purchased at 0.08p, albeit at a discount to the 0.11p price before the placing, with 5m warrants @ 0.16p. Today, I can only sell those shares for 0.06p. If my assessment of cash balance, cash flows and the path forward are correct then if the price rose towards 0.1p I’d be selling into it on an expectation that either I have an opportunity of another placing at discount, with more warrants on top, or my existing 0.16p warrants come into the money.

I don’t believe 120bopd (gross) confirmed from Cinnabar is a catalyst for such a pop in the SP. Double that might be, so anything is possible.