Member Info for londoner7

I hadn’t paid much notice to hedging until I saw the new RBL requirement forced on Enquest – 60%/40%/10% of expected production at respective periods of <12m/12-24m/24-36m. The 60% requirement drops to 50% after bond refinancing, but in the current backwardation profile it is the 12-24m and 24-36m requirements that sting the most.

To understand the merits of the hedging options I looked at three dates, but the patterns were similar. Here is my assessment of the July 2022 contracts using L3’s framework:

Current (Nov front month) Brent $77.5.
July 2022 forward contract $72.5 – this highlights the current level of backwardation in pricing
Put @ $77, premium $10.09
Call @ $68.25, premium $9.96. (The put and call premiums cancel out, hence the term ‘costless collars)
The result is a costless collar for July 2022 with a floor of $68.25 and a ceiling of $77. (Note the mid-price $$72.6 close to the futures price $72.5)

This covers the 3 options for a July 2022 hedge:

Swap @ $77.5
Collar @ $68.25/$77 (this range can be narrowed or expanded around the mid-price)
Put (no ceiling) @ $77 for a premium of $10/bbl. (Higher Puts can be obtained at a higher premium)

Enquest are required to use hedging for 60%/40%/10% for the periods I referred to above. Like it or not, that is a requirement of the RBL which pays for Golden Eagle.

Which is the best option for Enquest?
(Worth noting here, as L3 pointed out, the RBL also places some limitations on the pricing. This prevents Enquest from enacting a very low Put strike at minimum premium, which effectively negates the reason the lenders adding the hedging requirement)

Firstly, it depends on your expectations for the price:
If you believe the price will fall you sell July production today at $72.5 via a Swap – no premium, apart from minor trading costs.
If you believe the price is inclined to rise, oscillating within a narrow range, but not explode upwards, you buy collars – no premium.
If believe the oil price is heading much higher and staying up there for a substantial period, then you buy Puts which will cost a premium.

Secondly, it depends your financial timelines (more later).

Let’s take a closer look at the straight Put option – a current topic on the board.
In my example (other Puts are available), July 2022 Put @ $77 at a premium of $10/bbl.
For 1MM bbls over a one-month period, representing 33K bopd, the cost is $10m.

If the ultimate price that Enquest achieves for their July 2022 production is $77 then collars win. There’s isn’t a hedging loss on the collars, versus a $10m premium paid for the Put.

At $82, it’s evens. The hedging loss on the collar balances the combined Put premium and gain over the $77 ‘strike’.

Above $82 the Put is the better option.

Above $87 the hedging gain exceeds the premium.

romaron,

Subversive? No. Just having a craic. Your game, your rules. Maybe your bolly.

It was tongue in cheek in recognition of the current board commentary on hedging. There’s no doubt the RBL requirements have raised the significance of Enquest’s hedging strategy. I’ve written copious notes to myself on this and worked numbers based around L3’s excellent post on the subject, which I had missed until E121 referred to it. (L3’s post was 31st July 13:19 for anyone that likes to work the numbers).

I don't post much these days because I feel up to speed on my current investments and to be honest not much changes between reports. I appreciate this forum has a variety of attractions, but for me it is about the investment. I appreciate the excellent posts that informed my investment in ENQ and still look in for the excellent research that pops up occasionally. Good to see so many of those early posters still here.

If I get a chance on this busy day of sport, I might edit my notes and post an example or two. I found the pricing exercise around swaps, puts and collars very revealing!

* I’ve lived in many parts of the UK, even circling GB in a sailing boat, calling in a c40 ports along the way. Each part has its own attractions and I’m currently enjoying Scotland’s. But for lockdown I’d be enjoying this coming winter in New Zealand.

Best, Londoner7.

romaron, I'll not going down with a fight for the bolly.

How about using Enquests realised oil price after hedging. After all, that's the price that matters to us!

It will keep until final results in March. ;-)

Therapist, great research!

No doubt the Helium prospect is there. But it was only a whiff that came from Kitty and Magee. Those wells had high Helium concentration but low volume as pressure dropped off within a day.

At least Central are honest about the challenges in the basin:
“Sub-salt prospects are very complex, high risk, and have high exploration, appraisal and development costs.”
I wonder if that comment is targeted at the pure Helium plays, who seem to take commercial success as a given. Their founders hyping the prospects to gullible investors, while they take the listing windfalls and cash in the early low-priced warrants, long before the ‘prospects’ are verified one way or the other. Georgina Energy, are in the pipeline. Though their 2021 Q3 timetable for listing was presumably timed to coincide with expected euphoria from HE1 success. Perhaps, next year.

The Berkshire Hathaway 'boys' addressed this type of pump activity. Charlie Munger summed it up best:
"I don't mind the poor fish that gamble. I don't like the professionals that take the suckers."

Nothing wrong with a little bet but realise this is playing ‘slots’ rather than investment.

After a couple of weeks of seismic some here seem to be expecting an RNS from MSMN with a map and a big ‘X’ labelled drill here! When lots of points labelled ‘£££/???’ is more likely considering the costs and the prospects.

I’m still enjoying the Mosman story. I didn’t expect the recent twist, spending the placings money on increasing the stake on existing assets rather than risking the drill bit – I guess Falcon made them cautious. JB likes to surprise. But they are now using the Aussi money to drill in Texas, so they need to move fast and be successful if they are to recover the funds in time for deployment in Aus. (Hopefully a better prospect than the UK Social Care funding ‘temporarily’ going into the NHS, to be recovered later. Some pits are bottomless.)

Still a page turner!
Good luck.

Hi L3Trader, no doubt something is going on for this much activity in the stock. Maybe one II swapping their holding with another II – it has that look about it. Perhaps something else comes of it but I’m not inclined to react to these activities. Besides, we’ve seen this before and I’m not one for reading tea leaves.

Even the recent pullback in the share price isn’t unusual for Q3, but again I don’t have a read, other than the long gap between the interims and the November update. That’s not to say I don’t take advantage of it when I can.

But I can see headwinds that may be impacting the SP currently. The HGV driver issues are well known, and it was reported that Breedon and other companies have raised ‘franchised driver rates’, whatever they are. (I know we have a Breedon driver on the board – perhaps he could clarify).

Material shortages are impacting the construction activity. The ONS reported on this for July, although Breedon didn’t raise it in their August update. A large builder recently boasted on their ability to use their clout to maintain their material supplies, highlighting problems for smaller contractors without the clout.

Energy and carbon prices are on the up – although Breedon said their 2021 carbon allowances are in the bag. These costs will impact, but Breedon can pass these cost pressures on in time.

As I say, headwinds, and probably short term. On the upside, kiln maintenance is complete for the year so H2 cement numbers could be very good, I’m expecting progress in Ireland after a significant H1 lockdown impact, and the Cemex acquisitions add significant scale. Just have to wait for the November update.

We also had a heads-up at the interims on further bolt on acquisitions expected to close before the March report. But my fear here, is a substantial European acquisition which could require a dilutive placing.

Rather than a biggie in Europe, I’d love to see Breedon bed in the acquisitions to date and achieve the often heralded 15% ambition on aggregate margins. That would really fire up the SP.

Best, Londoner7.

In the couple of weeks ahead of CMD (1st July) the Headlam share price came under pressure, no doubt exacerbated by the typical low liquidity in the stock.

I wondered if the market had got wind of something nasty but something about the extended reaction made me feel it was nerves rather than anything else. In the last week ahead of the CMD the trading numbers indicated there was me and one other buyer of the stock and ten times that number selling out.

In the event, the RNS referred to “documented industry supply issues” but Headlam inventory levels had been maintained. Was that the market fear? Who knows? I checked levels against 2019 interim numbers, and they looked okay to me.

On the event itself, it seemed well attended considering the topic, but the key highlight for me was a well-presented argument for the optimisations which were initiated before Covid and the expected result of 7.5% profit on expanded revenues.

I bought in here last year on expectations of a prompt return to 2019 revenues and margins so confirmation of expectations for something much better are a bonus.

I noted trading volumes have picked up over the last few days so googled for news. No surprise to find that a Mr James Henderson has written up a positive piece for Moneyweek, under the headline, “Three solid stocks to ride the UK’s rapid recovery”. I’d guess that if James hadn’t attended the CMD he’s at least viewed the recording available on the Headlam website. Or perhaps not.

For me, key is that 7.5% profit metric, but James doesn’t mention it in his piece.

OK. It's their 5th and FINAL offer, which I guess puts more pressure on the board.

"The Fifth Proposal follows a further proposal regarding a possible cash offer at 185 pence that was made to the Board of Senior on 14 June 2021 and rejected by the Board of Senior on 15 June 2021."

That's news.

I wonder what makes this 5th proposal different to the 4th that it gets an RNS?

Hi Therapist,

You make an interesting observation on the sale/marketing element. I guess that comes down to the terms agreed between minority partners and the operator, but even then the marketing might be contracted out to a bigger player, a Shell or BP, who will add their own 'stardust' for a percentage.

The only hedging of any concern here is Enquest's so have another glass of wine. But add a hedging loss of a few mil to your spreadsheet if the squid has called it right. Though, in that event it's a win win so you could make it champagne!

Ironpyrite, it’s a good question.

The sale/marketing of oil production is entirely separate from the hedges.

The hedges are effectively dated options on the oil price fixed at the time of purchase

The commentary states there are options over 6.2m bbls for the remainder of 2021, but we don’t know the schedule. All we know is that the weighted average price across remaining months is 63-72, but we don’t know if the contracts are to, say, end Q3 or end Q4.

Currently, the cost of backwardation over 6 months is equivalent to c.$3 so oil bulls will be hoping the bulk of hedges are weighted to the near term.

Costless – rather than pay a premium for an uncapped hedge above $63, Enquest used a returned premium for capping the price at $72 to net off the premium costs to zero.

Golden Eagle – although the GE purchase hasn’t been closed there is nothing to stop Enquest taking these barrels into account when determining their hedging strategy. Suncor may have a hedging strategy in place too, but the ‘economic date’ of Jan 1st means the value of GE production - price realised against costs - will be the adjustment to the sale price. Any hedging by Suncor or Enquest isn’t a factor in the adjustment.

You might be on to something!

As I recall Altera Wave and Tide Spirit had similar outings before making Kraken their first commercial offload. That's more than random.

"And where is my frikkin boat!!"

Moored off Feistien.

Altera Wind is due into Orkney Harbour 2nd June, via Kraken.

Hi StoneRoses, I remember you were early to the board raising these issues. I recall your suggestion that haulage could be a profitable element in the supply chain., but this element surprised me.

Last week, Hanson announced a reduction in allocations. The Hanson Packed Products director said, “cement shortages are not the only issue”.

“In the longer-term we face issues on the availability of packaging (paper and plastic) due to global demand. We have been notified by our suppliers that they could have difficulties sourcing polymers and kraft paper to manufacture cement bags. Pallet availability is also a concern given the increase in demand across all timber markets affecting availability and pricing.”

wonder if Breedon has a good stock of cement bags. Will it get a mention at the interims?

Hi Tarmak,

When the last batch of NS licences were awarded I researched those awarded to ENQ. This is from my notes:

"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."

The Tiger license got a mention somewhere, I think it was during a recent audio web cast. It left me with the impression ENQ are reviewing it, presumably as a possible tie-back to Magnus.

I could have dreamt it, but I doubt it.

Correction:

Magnus drills in 2022 haven't been quantified

Hi L3Trader, on CAPEX you outline a very busy 2022.

I go by what has been said, and I recall a clear comment that any drilling on Kraken would not be in 2022.

Magnus drills in 2021 haven't been quantified, but I was going for 2 rather than your 4. I'd guess the decision will depend on the performance of the existing well stock. There are no spare slots so new wells will be replacements for current wells, rather than additions, which is why I'd expect a more conservative development.

You raise the prospect of a response to possible changes in licensing - it reminds me of the annual warnings from the pension industry just ahead of each budget. The recent report from IEA certainly introduces the questioning of new production approvals, which I'm sure will become a consideration in time. But I don't expect a change of UK government or a Socialist Republic of Scotland anytime soon so I'd guess such policy changes are still a few years off in the North Sea.

We have seismic in prospect for Kraken and the Tiger license near Magnus but these are low cost activities compared to a drill. On Bressay the next stage is an FID, but I'd guess a full assessment of the Kraken field needs to be determined before a Bressay FID can be completed.

Hi L3Trader, thanks for the generous billing but it prompts me to question your "$250M in CAPEX and ABX" for 2022.

Guidance for this year is $120m which I break down to $50m for what has been described as minimum spend on licenses, and $70m on ABX.

In 2019 ABX guidance was $30 p.a. for the next 3 years so disappointing though not surprising, given the COPs, to now be at $70m p.a. this year through 2023. But that's where we are.

CapEx guidance for 2022 is new wells at Magnus and PM8, and seismic at Kraken. Using 2019 drilling costs I have an additional $70m to cover these activities (refer to the 2019 CMD, these are cheap drills), for a total of $190m CAPX and ABX. Much less than your $250m. The extent to which production volumes hold up in another question.

For the following year, 2023, I've used a same again addition $70m in my projections, for the drilling on Kraken and a drill on PM408 (?). Again a total $190m.

Those are my projections but happy to be corrected.

Hi romaron,

"Taconic Capital, CQS and Kite Lake Capital are among funds backing Noreco". You'll know as well as most that shareholder lists are often out of date. I don't know the percentages but they've taken two seats on the Noreco board.

I don't like to cut and paste subscribed material because I recognise the ownership and distribution rights. I'm old fashioned on such matters. But I've seen other routes to FT material.

I spent about about 20 mins reading the FT and the Q1 presentation with my knowledge of Enquest in mind. I see it as positive news for Enquest and investment in the sector generally, but I don't plan on interpreting the differences any further. Bottom line, I view it as positive for my investment.

Incidentally, the FT provides excellent coverage of the climate debate, EV, hydrogen, subsidies, oil, etc. I follow these areas very closely and IMO the FT subscription is worth this alone. For those that subscribe, I use the Brent summary page as my FT home page because the bottom of the page has links to most if not all of the FT articles on the wider climate debate.

No, not Enquest but Noreco, a similar sized North Sea operator.

My inital read is that the valuations are not very different, but I've only taken a quick look - I might have missed something.

Key is that these funds have taken key positions on the board. A new RBL just completed this month. From an article in the FT - subscriber.

It all helps to raise the profile of the sector.

Latest Q1 numbers for those interested. You'll need the translate page function.

https://www.noreco.com/reports-presentations