Member Info for londoner7

romaron, you say, "I agree that we have organic options and EnQuest is a BUY if you follow this option and open no NEW fields. "

I'm confused by your comment. Are you inferring that Enquest isn't a BUY if they open NEW fields?

For clarity, my list of organic NS options includes new fields - Bressay, Tiger and Eagle.

I appreciate that lobbying is part of the business process, but ultimately AB has to manage Enquest in the best interest of the stakeholders, in accordance with whatever policy is in place. My post reflects my late realisation that within the recent trading update AB was explicit about accelerating capital investment in response to the new allowances.

However, I fear there is still scope for further changes in policy, regardless of the outcome of the next election. I like the idea that a 91% capital allowances can be utilised over the next few years and the returns enjoyed after the 25% tax is withdrawn. That seems a very favourable outcome - unless I'm missing something. Probably too good to be true. Hence my fear that there's scope for tinkering to Enquest's detriment.

I agree with your central premise that the public's attitude to O&G expansion may turn more favourable after the upcoming freeze this winter.

Drill for Britain!

Best, L7

in light of the additional investment allowances available under the levy"

AB could not be more explicit about accelerating investment plans.

What are the organic NS options?

Bressay - a requirement of the licence is to submit an FDP by the end of 2024. Given commentary even before the tax levy my expectation is for an FDP in 2023. Consideration of the new allowance might steer plans towards a larger development than previously being considered. If so, will it include utilisation of the Kraken FPSO?

Kraken - new wells are already planned for 2023, but there may be scope for more aggressive development. Questions on how this ties in with Bressay. Expect c50% reduction in FPSO fees around 2024 - I'm not clear on precise data.

Magnus - I expect a continuation of a couple of in-fill drills each year for the next 2-3 years, to complete the 10 outlined in the 2019 CMD. But in parallel with that the Tiger prospect might come into the picture. (I understand Enquest has been reluctant to mention Tiger, but why did they apply for the licence just a few years ago?)

Kitti Hub - surely the Eagle prospect is being considered.

Golden Eagle - 3rd party operator, not within Enquest's direct control.

It seems to me that Enquest has good organic options for near term investment. These decisions take time, but I'd expect 'new' news by the finals next March.

Perhaps there's a NS acquisition play out there, but it isn't my base case expectation.

(Follow on from my post on Interims)

I was encouraged by Rob’s comments on current business activity. (I recommend you listen to the presentation and the following interview posted on their web page) But July construction PMI points to headwinds and the Q2 MPA release is a grim read and seemingly at odds with positive (to May) ONS construction data – perhaps the June ONS number due in a couple of weeks will show a decline.

https://www.mineralproducts.org/News-CEO-Blog/2022/release28.aspx

It wouldn’t be the first time that Breedon has advanced against headwinds. But will we see headwinds or a full-on hurricane. Place your bets.

Hi spogbat, you ask for my take on the interims.

A few months back I posted my expectations for the full year. Much has happened since 16th Mar when I worked my numbers but in the absence of hard data, I hadn’t revisited my numbers. A key line was, “I expect revenue growth of c10% largely due to pricing, and a 12.0% to 12.5% EBIT margin.”

At the interim stage it looks like I’ll miss on both counts. While revenue will be higher than my forecast, it will include little if any volume growth, and the lack of volume growth will be a challenge to margins. Anyone familiar with the implications of fixed costs will understand the challenge of maintaining margins on reduced volumes, so for Breedon to have increased margins on reduced volumes implies very favourable pricing over costs. The CFO inferred a 6% reduction in blended volumes. All other things being equal I calculated this level of reduction to impact margin by c0.5%, assuming fixed costs in the 30-70% range. That’s a wide estimate but sufficient for my needs. The fact that margin increased by 0.8% is a good outcome, though I’ve no idea if this is due to pricing or efficiency gains. That lack of clarity will extend into H2, but CFO guidance was for 49%/51% H1/H2 split on revenue and better profitability in H2.

My base case is now for a slight beat on the guided top end of EBIT forecast range (in interview the CFP explicitly referred to £149m as an expectation) EBIT is the key metric to the EPS outcome, which is 6.8p on associated analyst forecasts, and implies a margin c.10.8%. With a following wind I can see margin on a 11% handle and EPS on a 7p handle.

You refer to a hike in debt. I think the CFO covered this well in his presentation. The big changes were working capital and CapEx. The increase in working capital surprised. This is a seasonal item largely unwound by the end of the year, but the CFO indicated a c£35m increase at year end. However, his explanations seemed reasonable – the impact of inflation and the cash purchase of future carbon credits given the poor pricing on financial instruments.

Rather than a debt number I prefer to focus on free cash flow generated by the business. Definitions vary and I adjust depending on sector, but for Breedon here’s my expectation for the full year.

Net debt position – the CFO guided £145 so a reduction of £67.5m on the 2021 YE number.
Dividend cash payments - £18.6m+£11.9m = £30.5m
Organic growth CapEx – previously Rob has guided to 50% depreciation to maintain the business with the balance organic investment. Using this I have £100m-£42m = £58m
Acquisitions – none were made in H1 but £10m was spent ahead of the results. Does the CFO account for this in his £145m guidance? I’ll assume no.

2022 FCF = £156m. A 14% yield at today’s price (I’ve excluded debt given the relatively low interest charge)

No doubt the founder’s path to riches looked easy in the fall of 2019. This from sept 2020, “When the firm finally gets its hands on the licence it is likely to have a queue of buyers looking for any new supply of helium, as well as a long line of investors looking to take advantage of the high demand when it executes its upcoming initial public offering (IPO).”

Georgina Energy were jockeying with the likes of Helium One (HE1) to capture the cash of investors buying into the Helium story. HE1 passed the IPO post in Dec 2020, while GE never seemed to get out of the stalls.

Over the last eighteen months the reality of commercialising a Helium prospect has hit home. Mixing my sporting metaphors, it isn’t the slam dunk portrayed. This line from GE’s strategy exemplifies the founder’s optimism, “Georgina Energy plans to re enter & deepen existing wells to produce Helium Hydrogen & natural gas production.”

Simples!

Nearly two years on from an expectation that an IPO could simply come via the acquisition of a licence that “analysts say has ‘significant helium potential”, the current position described in the recent listing document is, “The Hussar Prospect has a native title agreement in place and is currently the subject of an airborne audio electromagnetic survey, following the results of which the Company intends to, prior to September 2022, exercise its right to apply for an exploration permit over all or part of the area of SPA 36”.

Not so simple.

An application for an exploration licence would include a work schedule. Will the schedule include land seismic? That prospect might be giving potential IPO investors the jitters. One expert’s view, “Land 2D seismic is very expensive, may involve considerable surface disruption and has the potential, unless very closely planned and supervised, of environmental and perhaps even heritage site disturbances.”

Mosman has been talking of additional seismic on EP145 for several years. Most recently last March when placing funds were raised to progress EP 145 with one of the objectives: The acquisition of seismic in September/October 2021 aimed at defining a drilling prospect.

How’s that going? It isn’t. The CLC heritage clearance survey seems to have stalled and the money raised has been spent.

The GE investor play isn’t about commercialising the extraction of Helium but finding someone to bail out your position leaving you in profit. IPO launch investors will be looking to close out their cash positions quickly, while maintaining free warrants, subject to the terms.

In June 2020, shortly after the farm-in agreement to EP-155, GE secured a ‘GEM commitment’ to £50m capital, subject to GE listing and the right to warrants over 9.9% of issued capital at the 1st day closing price. The AU$ 15K paid to Mosman for the farm-in looks good value.

It looks like the GEM agreement has now lapsed, which begs the question, is £50m still required to fund plans?

Is Sept the 5th IPO attempt?

There, I've done it.

In expanding on my thoughts I've side-stepped some options. Enquest may choose to allow the current RBL to expire and arrange alternative funding. A potential funding of Bressay could be part of the mix.

All options are on the table, until eliminated.

Voiceofreason1, it may be simplistic, but you raise a good question. One I asked myself when I saw yesterday’s update, which for me was the first confirmation that open market repurchase of the HY was an option, and what I see as an ongoing hedging obligation beyond the Bond refinance. Particularly, when the interest cost on the HYB is higher than the RBL.

I looked at this briefly but quickly gave up when I saw the degree of optionality available to Enquest. As an invertor here I’m comfortable with AB managing the position in the interests of Enquest shareholders, without understanding the nuts and bolts of the process. As the saying goes, “it will come out in the wash”, and I look forward to seeing how it plays out.

However, for the sake of discussion let’s consider some elements of the process.

“during July, the Group has bought back and cancelled $14.4 million of its 2023 7% high yield bonds, leaving $813 million outstanding.”
Buying and cancelling HY Bonds is a one-way process.

“RBL facility, with drawings at $115 million at 30 June 2022, significantly ahead of the required amortisation schedule.”
Until 30th Sept 2022 the RBL limit is $300m so Enquest has headroom. I assume, Enquest could drawdown on the RBL if needed. Stuff happens!

The RBL facility drops to zero on 1st July 2023, and ‘matures’ (expires) if the Bond hasn’t been refinanced by 1st Oct 2023.
My interpretation of the commentary is that a ‘material’ repayment of the HY Bonds is an option, but other options might suit maintaining a significant portion of the HYB until a route to ‘freedom’ is chosen.

At the finals Enquest made it very clear that the release of accounts – interims and finals- marked an opportunity to refinance the bonds. That makes this Sept and next March important milestones. We might see news on the date of release or perhaps weeks later. I’m confident the Bonds will be refinanced well ahead of the 1st Oct 2023 deadline. I’d guess that AB will also have achieved his dream of <0.5 debt: EBITDA . Attention will then turn to the RBL, with Enquest in their strongest financial position for many years.

RBL terms, including hedging obligations, are likely to be revised in Enquest’s favour.

AB’s recent share purchases give me confidence that Enquest will be stronger this time next year. But I don’t expect a smooth path.

Stuff happens!

Hi ukbbbb, thanks for your response. I’ll pull out some key points from your post.

“There is no requirement to hedge beyond the RBL end.” What is the RBL end?
If the Bond is refinanced before 1st Oct 2023 then it could run for several years. The idea that the hedging condition ends with Bond refinancing is refuted by this element, “If Bond refinancing has occurred, the 12-month requirement drops to 50%”

“The hedging level is set at 6 monthly intervals”
RBL terms refer to quarterly periods, “a minimum of 60% of volumes of net entitlement production expected to be produced in the 12 months following the relevant quarter date”

“This time last year it was 60% for 12m plus 40% for the last 12 months.”
Your statement, which I accept nicely supports the numbers you post, doesn’t align with the documented RBL conditions I’ve reference above.

“Enq statement yesterday was 'c3.4mmbls' for next 6 months and 'c 3.5mmbls' for the following 6m.”
True, but Enquest could have made the same statement last Feb. They said, “EnQuest has hedged 8.6 MMbbls of oil, primarily using costless collars, with an average floor price of c.$63/bbl and an average ceiling price of c.$78/bbl. In addition, for 2023, the Group has hedged a total of 3.5 MMbbls with an average floor price of c.$57/bbl and an average ceiling of c.$77/bbl”
Hedging is placed on a fixed expiry date. These are likely to have been placed at monthly intervals throughout 2022. Yesterday we learnt that 5.3m barrels had been utilised in H1 leaving 3.4m barrels hedged for H2 expiry. (There is a 0.1m discrepancy in the numbers, but perhaps that is a rounding effect).
Last Feb Enquest could have said, 2022 H1 5.3m, 2022 H2 3.4m and 2023 3.5m, so 7 months on, nothing has changed.

Hence my speculation that the secondary clause is acting as a limit on hedging activity.

Hedging is a requirement of the RBL. It is clearly stated as 60%, 40% & 10% of net entitlement production for the next 12 months, 24 months & 36 months respectively. If Bond refinancing has occurred, the 12-month requirement drops to 50%.

The RBL will only be extended to 7 years after the signing day (I think it was 2021) if the Bond has refinanced by 1st Oct 2023. Otherwise, the RBL will ‘mature’ on 1st Oct 2023.

Yesterday, Enquest reported, “For 2023, the Group has hedged a total of approximately c.3.5 MMbbls with an average floor price of c.$57/bbl and an average ceiling price of c.$77/bbl”. On the 3rd Feb Enquest reported, “for 2023, the Group has hedged a total of 3.5 MMbbls with an average floor price of c.$57/bbl and an average ceiling of c.$77/bbl”.

Over the last 7 months there have been no additions to 2023 hedging. Why?

At a previous update I recall a management comment that Enquest were continuing to conduct hedging in accordance with the RBL requirements.

Under the hedging conditions I’ve listed above I don’t see how the hedging for 2023 has remained fixed - if you do, please explain- unless either net entitlement production is expected to collapse in 2023 or there are further conditions on the hedging requirement.

There is a further condition:
“In all cases, minimum floor protection will be equal to or above the lower of 90% of the prevailing bank price deck and 90% of the forward price curve at the time of hedge execution.”

I don’t fully understand this clause, but earlier this year I speculated that given the very high level of backwardation in the forward curve this clause might prevent Enquest having to accept the poor terms provided by the futures instruments given general expectations for the oil price over the medium term. Yesterday’s update adds some credibility to my speculation.

Looking at data on historic Brent futures curve I note that in Jan 22 it was 88.6% over the next 12 months and more recently, in Jun 22 dropped further to 82.2%.

Saved by the small print?

* An unexpected but welcome trading update yesterday. Looks encouraging through H2, in spite of Magnus reminding us, stuff happens!

The bond refinance plot thickens. Clearly, the additional cash flows are increasing Enquest's options. But that's for a different post.

Hi spogbat,

first, thanks to you and AI for highlighting these acquisitions.

To your question. My take from the latest update is that there is a good pipeline of potential acquisitions from small, like the three we've seen recently, to some more substantial. I'm guessing perhaps c£50-100m. I'd guess rather than RNS acquisitions which are c£5-10m cost and each relatively inconsequential to the bigger picture - though combined they become significant - Breedon will RNS the big ones with more detailed financials than we are seeing reported for these smaller ones.

Key, is that the current focus is on GB/ROI tie ins, rather than a move into the US. I guess a US move is 2023 earliest.

I note that this latest acquisition is reported on Breedon's website news section. The inconsistency is that the one you spotted wasn't.

From the latest Annual Report:

" We reopened dormant quarries in both GB and Ireland including the Shap quarry in Cumbria which is rail-linked and provides high quality materials to regions where upcoming projects will generate incremental demand"

News yesterday:

https://www.theconstructionindex.co.uk/news/view/aggregate-starts-arriving-for-38bn-gigafactory

To close my previous post:

The phrase, “Breedon’s local business model and entrepreneurial culture”, is becoming something of a slogan. In these inflationary times pricing of material is key to margin and allowing teams to adjust pricing to local demand might give Breedon an edge over larger nationally run groups. Less than 3 weeks to the interims.

Hi L3, while I agree with your preference for small in-fill acquisitions rather than a large overseas acquisition, I disagree with your concerns about CMA restrictions on these activities.

The CMA is tasked with maintaining competition. In the context of Breedon activities that largely relates to RMX plant and quarries whose activities are conducted over relatively short distances. Much less so, Breedon’s activities in asphalt and surfacing.

I think the Cemex acquisition in Jan 2020 was a great addition to Breedon’s UK footprint. This is a comment from Cenkos at the time, “The £178m cash acquisition of 100 active UK sites from Cemex is classic Breedon doing what it does best; buying good regional assets that currently yield poor returns that Breedon can restore to more appropriate and enhanced levels using a combination of operational, investment and strategic levers, alongside its more focussed and dedicated management supervision. It is not a ‘transformational’ deal like Hope or Lagan, but is potentially more accretive long-term (especially versus the all cash consideration) and with less risk.”

I mention it here because it is a good example of the CMA’s activities. (Going back to my notes) Cemex brought in 55x RMX plant, 41x quarries and depots, and 18x asphalt sites, across 3 main regions, SW Wales, Scotland and NE England.

The result of the CMA’s deliberations was the divestment of 10x RMX plant, 2 quarries, 1x asphalt site and Breedon’s Dundee cement terminal. Not a significant number and I suspect many, particularly the RMX plant, would have gone in Breedon’s own rationalisation anyway. The Cement terminal is interesting because Breedon chose to hold onto the Cemex cement terminal at Lieth (Edinburgh) and divest their own terminal in Dundee in its place.

There are parts of the news on the Thomas Bow acquisition I find confusing, not least the comment that it was acquired from Nottingham City Council - an RNS would be more rigorous. But I found the following piece most interesting, “TBL, an East Midlands asphalt, surfacing and civil engineering business that delivered annual revenue of c.£29m in the year to March 2022, is a natural fit with Breedon’s local business model and entrepreneurial culture.”

Little to concern the CMA. I wonder if the civil engineering business will go the same way as Whitemountain’s. TBL’s c£29m revenues is significant in relation to GB surfacing in 2021 of £105m, but small in comparison to Irelands £159m considering the much larger GB market. Lots of scope for expanding the UK surfacing market through acquisitions. I wonder if retaining Alistair Bow and his team is part of the strategic push by Breedon into Highway’s England frameworks.

The Company has been notified that Jude Lagan, Managing Director - Breedon Cement has purchased 74,625 ordinary shares of no par value in the Company ('Ordinary Shares') at a price of 0.67p per Ordinary Share on 16 June 2022.

I'd like to think that Mr Lagan knows more than most about the current performance of Breedon's cement business- at least up to last Thursday - than most. He might even have some insight into other parts of Breedon's business.

Correction:

compared to 2021

Nothing Breedon specific.

In a trading update on Friday Kingspan Insulation reported a deterioration in orders for May and June compared to 2020. This appears to have been the spark for some algorithmic trading sells in UK construction stocks.

“Kingspan will report its results for the first half of the year on 19 August and we expect to report a record H1 2022 trading profit in the region of €415m, strongly ahead of the €329m reported for the first half of 2021.
We have seen the mood in most end markets deteriorate over the last two months with order intake volume down significantly on the May and June period in 2021 although ahead versus the same period in 2019. Our global backlog of orders on hand in Insulated Panels is down 2% in volume at the end of May having been 19% ahead at the end of March.
Kingspan is positioned strongly overall for medium term and beyond given the global focus on energy efficiency, our high performance product suite, our distinctive Planet Passionate agenda and diversity of our end markets.”

Embrace the volatility!

AB buys shares ahead of talking down impact of windfall tax at AGM.

Obvious, innit.

Seav, your post 22:12.

I note the reference to 'energy transition' and 'green energy'.

The new allowances target oil and gas extraction. There is nothing green in these objectives. The government has a clear objective to increase UK fossil fuel supply.

I believe this stark distinction will dawn on the general media over the next few days. Just wait till Labour the BBC tunes into it!

I await the detail in the bill, but at first sight this new levy looks to me a neat structure in meeting government objectives.

I agree with romaron’s comment (18:53) that today’s actions are the ‘right thing to do’. Help is needed with energy bills and oil/gas companies are best placed to provide some of that help. I think Enquest has rightly been put top of the target list. I understand someone invested in Enquest in 2010 @100p might see things differently but I see today’s additional tax as a tax on an unearned windfall The timing of investments in the likes of A/G and Kraken, and lumps dropping off Thistle are misfortunes we as investors should take on the chin. (Though my chin has only been in play since 2019 ;-) We do, and will continue to, enjoy the benefit of accumulated tax losses resulting from those misfortunes.

Some sums on this year’s impact – I’m assuming 12 months from today:
Pre tax profits on UK operations between $500m and $600m, so the ‘profits levy’ takes $125m - $150m of cash flows.
$165m minus c$40m (Malaysia) = $125m UK Cap Ex with 45% allowance, adds $56m to cash flows.
Combined negative impact on cash flows over the next 12 month = $71m - $96m. Or $3-$4 to each UK household – well done you!

Today the energy industry leaders are complaining to the cameras. But behind the camera there may be ‘high fives’.

While I agree with many parts of L3Trader’s comments (18:27), particularly on the profits levy impact on a reversal of impairments – something I’d add to my sum above if I had a clue on the numbers – I disagree with the negative impact on IRR and resultant case for North Sea investment. L3, I invite you to work the numbers:
Assume $300m of UK CapEx. before today’s levy Enquest cost is $300m net. From today, with a 45% allowance the net cost is $165m. Choose any IRR taxed at 25% and the yield on net cost is higher after today’s changes. (I chose $300m capex because that it roughly the amount Enquest would need to spend to negate the tax levy, but that still leaves the benefit of the improvement to IRRs) The benefit to Enquest on investment would be greater but for the availability of accumulated tax losses.

To any company paying close to full tax and able to fully utilise the 91% tax relief the IRRs will blow your socks off! Albeit, there is a delay in seeing the supplementary charge element.

Today’s changes have been constructed to quell the socialist demands (even if only temporary), meet some of the needs of energy bill payers, and encourage additional and faster investment in North Sea oil and gas extraction. I suspect we’ll hear more on this last point as the days and weeks pass – unless I’ve goofed in my assessment.

Ukbbb, makes a valid point on the difference between ‘tax relief’ and ‘investment allowance’. Raising an interesting question on the scope of qualifying CapEx.

I like to refer to 2P and 2C. If the activity extracts 2P, e.g., work overs, then it’s OpEx. If the activity converts 2C to 2P, e.g., new wells, including the wells on Magnus, then it’s Capex. (Refer to page 12 of 2021 Finals presentation)

All IM

kentio, if you go back to my original post (10:58) you'll see I'm referring to stock valuations not the number of shares.

If it's the number of shares that interest you then rest assured, if you have 100 BHPs shares today, you'll still have 100 BHP shares after Wednesday. But not withstanding market volatility they will be priced closer to £24 than the current £27.