Member Info for londoner7

HMHn, I second romaron, good to see you back.

I've seen yours and others comments about the negative assets on the balance sheet and the likely impact. I don't profess to be any sort of expert on credit but I do have observations.

I held shares in a company, not in the oil sector, which had negative assets for years, during which time the share price flew. It had a large long term debt structure (bond type), which was fixed with amortization payments due over more than 20 years. In support it had very strong and consistent cash flows which supported those repayments. Essentially, if the market considered cash flows to fully cover repayments, all was good. Let's turn to Enquest. They have cut costs to meet the new oil price environment. This year FCF break even (excluding PIKs - I like to keep those in sight) $33 this year and $27 this year. If you believe that those prices will be challenged by the price of oil from here then you should not be invested. The downside is that fields decline and CapEx does need to return at some point to maintain production. But I think c$200m p.a. does that. This needs more than $45 oil, but $50/$55 and we're there.

My second observation is that in Moodys reports on Enquest the focus is on cash flows and reserves, i.e. the ability to maintain those cash flows. I haven't seen Moodys reference net asset values.

To be clear, this isn't the investment I bought into during 2019 at <20p which went to 30p last Jan on $1B EBITDA and with $65 oil in prospect for 2020. I largely bailed when oil went below $60. I stated my views here at the time on Enquest prospects below $60. I like following the company - there is a train spotters hobby element to it - so I maintained a small stake. But I was not tempted to load up again at 7p. The market was full of better opportunities. Today I like the risk / reward profile for Enquest. Not as much as I did in 2019, but what I saw today was a good update combined with (perhaps) an oil related pullback, prompted me to add to my stake as I have done over the last month or so.

As a rule I don't talk trades. I have no interest in anyone else's dealings so why should anyone be interested in mine. But this morning's posts on the frustrations of the price not going up by 15%, or whatever struck a cord. I'm building a stake here for hopefully a 2-3 year leg up. If the price had jumped 15%, I would not have sold. In the event I took the opportunity to add to an investment at a cheaper price today with better prospects, than was the case yesterday. In my book that's a good deal.

To be clear, I'm an aggressive trader in terms of top slicing and bottom adding, but I follow clear rules to limit these trades. If I haven't top sliced I don't add at the 'bottom'. That could lead to over weighted positions in ****e stocks, and sleepless nights. If a stock troubles my sleep, I sell it. There are thousands of stocks out there to choose from.

chilting, I don't know how you measure loads.

I put together a simple spreadsheet based on draught which seems to work well. I allow a large margin around a 500K load which I think 9/10 are, but this one looks very light. I'm going with c400K. I also think the different destination supports a possible change in the usual offload profile.

But this offload size and timing still supports a c40K bopd (gross) run rate.

FCF break even points – Hit
Confirmed.

Production target, and H1 – Hit
Upper end of target. 66K in H1.

Credit facility – Miss
Apr 2021 repayment not made but in hindsight, this is their lower interest borrowing. Good PR to pay off but financially other repayments make better sense. Tanjong loan paid ahead of schedule with c$30m to be returned over H2, and $31m off the Oz loan – better than I expected but L3Trader and PRDaynes seem to have it covered. (I’m going to bin the fag packet and take a closer look at this one later)

Bonds – Hit
Continuing till Oct 2023. Once the credit facility is paid off Enquest can pay off the bonds ahead of time. I like the indication that Enquest will target c$500m on bonds and c$500m on bank credit. The challenge is getting back to $1B EBITDA.

Malaysia – Hit
I’m not going to quibble over a 3% reduction, which included a shutdown completed in June

Kraken – Hit
But an easy target given the tanker visibility we have. However, surprised to hear the extra detail on DC1 downtime, which I equate to c3Kbopd off the July or Aug number. Shutdown this month – will we get another tanker in first? Confusing Q&A but did AB suggest another 30-35K Kraken target for 2021? Good if he did.

The Dons – Hit
Interesting to hear the loss of gas from Thistle had a part to play in Dons problems. One of today’s licence block awards, 211/18j, might be linked to this hub. A possible casualty.

Magnus – Hit
The report said it, “Production optimisation activities are continuing “. I had two bites at the Q&A cherry on this morning’s call, and I’m none the wiser on water injection. I’ll check the transcript.

EP & NP – Hit
Open to all options. Sounded like a decision could come as late as back end of 2021.

Bressay – Miss
Much more information than I expected. Tie-in is the development route but can’t be certain it’ will be Kraken FPSO. The FPSO selection will frame the ownership question. If Kraken chosen, I still see Enquest upping their stake to c80% for an extra $15m paid to Equinor.

Score 8/10, in old money an A-

I've just come off the call, which I found very informative and positive. Like many companies impacted by Covid I draw a line under H1 with my focus on the future. Much to digest, but in brief:

A V-shaped recovery in very much in evidence. I had anticipated 'normality' in terms of revenue and margins would return later in 2021, but revenue in July and Aug has already bounced back strongly as evidence in the presentation slides and in commentary "Sept has started well", but the biggest surprise for me was that they had maintained gross margins even through H1. Bodes well for H2.

I was struck by the operational improvements available, some of which were learnt in dealing with Covid. Although it made we wonder 'where has management been for the last decade', and it was explained that they operate in an 'old fashioned industry', it suggested to me that Headlam should come out of Covid stronger than they went in - although many of the key incentives had been started last year. These initiatives will take time to rollout across the group.

Clearly looking to get back to a progressive dividend policy with those special dividends that were a feature a few years back. I'm unclear when. I thought strong hints for H2 as a possibility, but then felt some pullback, so maybe its a wait till 2021 for a resumption of dividends.

Prep for any 2nd Covid wave this winter and a following recession next year as a consequence, but that's a factor across the board. Interesting to hear the very clear lessons they had learnt from their handling of the initial shutdown, which they confess wasn't ideal.

As if we didn't know, housing transactions will be key to future growth.

All in all, I'm happy with my investment here.

Interesting to see what I take to be day traders adding some life to the share price and volume. I suspect that activity will pass soon and we'll return to what is an illiquid stock with the resulting volatility, but for me it will be the cash returns that matter, next year and beyond.

A very informative , and I thought, positive call. Much to digest but I've another call to attend to.

However, a point I picked up at the end is that the hedging levels quoted relate to minimum levels with exposure to the top side - I think I heard $48. There may be more detail in the report, but perhaps not as bad as some earlier posts suggest.

Later!

Jan, "I see Brent at $76 tomorrow, by around 10.42 am."

Is that GMT or BST? I'd like to get my timing right.

Hi PRDaynes, I hadn't seen your post before my comments on Oz.

I agree, some of the niche financing has proven to work out well in a crisis. I'm thinking of the Oz related hedge required by the terms of the contract, and the PIK in lieu of interest payments on the bonds.

On Oz, you'll know that the repayment to end April was $16m. Getting my fag packet out again, I have another c$6m, so just shy of your number. But!

Have you taken the costs of developing Worcester into account? Payments towards the Oz loan are from FCF. The drilling rig left Worcester/Kraken in the last week of H1. When do payments come payable?

If Enquest provide detail on CapEx expenditures we might get a clear handle on the Oz number. Failing that any H2 CapEx due will largely be related to Kraken - I think. A noisy number, but I know L3Trader will be watching closely, and likely will have input.

Yeah, I know that to some posters here this is as interesting as a poke in the eye. But if we have to put up with your daily ramblings and speculation on the future price of oil then we deserve some slack. ;-)

Therapist, the devil in me was thinking ‘hedging’. I’ve posted on hedging recently, and in some detail, so don’t want to go back to it, but on balance (fag packet stuff) I see a net gain of $15m, on the profitable $65 hedges against the loss making $31 hedges. I view the Oz contract related hedging separately, directing an additional c$12m (above the unhedged position) towards repayment on the Oz loan – that’s over the whole of 2020.

On EP and NP I suspect the prepared commentary will be light. News would probably come down to whether a question is asked in Q&A, but I suspect the answer will be, “all options are being considered”.

Bressay is interesting. I didn’t comment because I don’t have a view beyond what was released in the RNS and discussed on this board. That was only one month ago, and the deal hasn’t closed. But the Bressay development is key to medium term prospects so analysts will be considering ways in which they can get insight even if Enquest don’t want to talk explicitly about Bressay. I can imagine several questions to get there that don’t include the ‘B’ word. If the analysts are up to the task Q&A could be interesting, but I was disappointed by the calibre of some of those on the last call.

To complete the picture there’s GKA. The devil on my shoulder is mimicking the PM talking to the press, saying, “I have every confidence in my minister”, the day before he gets the boot. I have the Dons in mind. But that’s just being whimsical. While the injection from Scolty/Crathes is in decline it still has a significant beneficial impact on the per barrel operating costs for GKA. If the oil price comes good GKA still offers optionality on further development in the area. I don’t think AB is close to giving up on it.

On net debt, it is what it is. I think the other numbers provide a fuller picture.

*Looks like offload #75 has begun. I guess Kraken and Worcester are flowing well – I wonder if the OGA numbers will separate out the Worcester field.

January2, I think boring would be good. But to put some meat on the bone.

I’d like to hear confirmation of the FCF break even points, $33 this year and $27 next – those metrics make the maths so much easier. One rider on this is that next year is subject to CapEx plans and perhaps there might be some relaxation – I would interpret any relaxation as positive.

Confirmation (or better) of the 57K-63K production target – I have H1 on 66K.

Credit facility – the April 2021 payment made ahead of schedule. With the statement, “we remain fully committed to the repayment of this facility by Oct 2021”, made in a clear and strong voice.

Bonds – clarify one way or the other whether any restructure event is planned before 15th Oct 2020. I see an extension of these bonds to Oct 2023 as useful, but I don’t have insight into Enquest spending ambitions over the next couple of years. The current interest rate, 7%, is good. The PIK arrangement on oil below $65, is also good, equating to a $70m p.a. additional loan to support whatever CapEx plans Enquest may have.

Malaysia – maintained production would be good. Although planned new wells were deferred, I took comments to mean that well re-entry activities might be enhanced to maintain production levels.

Kraken – averaged 38k-39K, above the top end of guidance. Planned maintenance 1-2 weeks in Q3/Q4. I’m hoping for something more positive on Worcester than, “the new wells on Worcester are ‘supporting’ Kraken volumes”.

The Dons – confirmation of the Ithaca statement.

Magnus – I’m expecting to hear, “Magnus continues to operate strongly, production optimisation plans are ongoing”. I hoping to hear, “the 2nd DA tower has been successfully re-installed”.
Planned maintenance 1-2 weeks in Q3/Q4.

I'm sure I've missed something but it isn't coming to me.

Therapist, you ask, “Is "Maintenance complete" actually "drilling complete" for Kraken?”

In my book these are different activities. For clarity I’ll expand and explain in simple terms.

The two new wells on Worcester (Kraken) have been completed and in production for at least one month.

There is usually a planned shutdown of production facilities for maintenance once per year for typically one to three weeks, depending on the level of work required. (Assuming you drive, think of it as the annual service you have done on your car). In my query to Frac, this is the maintenance activity I’m asking about. My understanding is that this maintenance period is still scheduled for later this year. I wondered if Frac knew something different.

Outside of this scheduled maintenance period, which typically requires the complete shut down of production, there are other planned maintenance activities and unplanned ‘repairs’, which may or may not impact production. (Think of these as the checks you make on the car’s oil and water levels – yeah, now showing my age - or a breakdown such as a flat tyre).

It isn’t clear to me if you use the term ‘outage’ to cover all of these maintenance and repair activities. The industry uses the term ‘production efficiency’. In the North Sea a production efficiency (PE) of >80% is considered good. A PE >90% is in the top quartile (A-grade). To be meaningful a PE is measured over a full year including any scheduled shutdown. The PE relates to the performance of the facility, not the sub-sea field performance.

In a recent report Enquest referred to, “continued strong performance from Magnus, where production efficiency was over 80%”. They reported 81% PE for Magnus averaged over 2019.

In May Enquest reported. “The (Kraken) FPSO vessel continues to perform well, with production efficiency remaining high at above 80%”. Previously, Enquest reported 95% for the period around Nov 2019, so clearly there has been ‘challenges’ in the period between as reflected in the lower OGA production numbers for March and April – fortunately during the period of lowest oil prices. As you noted, the May and June numbers were back up to c40K (gross).

I’d guess that in the North Sea, extracting Kraken crude is as tough, operationally, as it gets. I doubt that adding the Worcester wells into the mix was ‘plug and play’, so if the cost turns out to have been a 2-3 day delay in offloads #70 and ‘#74 I’d call that a good result. You can call it a 5 day ‘outage’. ;-)

Frac, I've no issues with $30m+ for Kraken premium, but "maintenance complete". Why do you believe that?

Looking again at this, I don't see the logic in AB or Enquest being involved in a merger with Ithaca.

hitman1a, a very interesting find.

I have no real thoughts on this other than the piece points to a company below Ithaca CapEx. Ithaca isn't listed so hard to judge but Enquest could be a candidate. Another point occurs to me, Delek were looking for a listing for Ithaca at the turn of the year, clearly events have changed so the story has logic in terms of Delek wanting to release value. Interesting!

But it was January's response that prompted my reply. I too was a shareholder in Ithaca and felt Ithaca was being sold on the cheap. In hindsight I was wrong. The big hope Stella didn't perform as hoped. I think Delek bailed shareholders out at a better price than the market would ever have offered. Thank you Delek.

Another point that might be related is the the CEO of Ithaca at the time, Les Thomas, was replaced at Ithaca a week or so back. In the interim call last week it was clear Ithaca didn't want to talk about it. They knew it would come up but essentially just blanked it.

I'd imagine there are many merger candidates, but on the long shot it is Enquest I'd trust AB to get us a good deal. It sounds like it is Delek looking to exit.

As I say, good spot Hitman1a.

steve305, I referred to Fidelity reducing their holding, but I got then mixed up with Franklin. Fidelity has maintained their holding throughout the year at 5.44% (2nd largest holder in Headlam). Franklin were the largest holder with c12% last year but has been reducing, with that significant drop to 3.99% in June, which I think was a factor in the drop below 300p.

But to be honest, when it comes to these stock changes i struggle to 'read the tea leaves'. The reasons are not always clear, but I think much of these transfers occur off market. As noted by the previous poster, volumes have been high for Headlam over recent days. Again, I find it hard to interpret but I take it as a positive and it seems to be more retail. Let's face it, Headlam isn't a well known name within the retail investor community. Let's hope they have maintained their previous policy of regular and special returns to shareholders. When business is good they throw off heaps of cash. That might get them noticed.

I don't know if Headlam separate their segment margins, but all segments matter to the bottom line. I suspect there will be some pent up residential demand to replace flooring, but I think a more lasting factor is an increase in housing turnover. For several reasons I'm optimistic on this front.

A key commercial period is the schools holiday. I'd expect comment on this in their interim report due this Thursday, alongside the comment of current trading generally versus 2019. I'm holding off a closer look till after the report.

Hi Squif, just to qualify my last post. I'm not a big fan of this debt metric for comparing companies. My original post was to draw attention to the idea that Enquest could initiate a restructuring with dividend payments in mind. Particularly, if, as we hope, Enquest are coming to the table from a position of strength, i.e. amortization of the existing credit is on path towards Oct 2021. No certainty here, but something I now see as a possibility.

These debt metrics are useful to assess progress over various time periods but their precise application to what might be considered a 'tolerable' level of debt is more nuanced. The published Enquest Net Debt:EBITDA ratio doesn't fully reflect the Magnus BP payments structure - a point Moody's has emphasized in their reports, and so I guess something that would be a consideration in any credit discussions.

Hi Squif, the numbers I quoted are Ithaca numbers. I was using them as an example of the level of debt that Ithaca are able to carry but still pay out dividends. And making the point that if Enquest were to restructure say, next year, with a view to increasing debt for any purpose (Breesay or anything else) then the debt metric target/limit, Net debt:EBITDA, would probably be <2. If that metric can't be achieved then the remedy could be additional equity.

I'm lower on EBITDA for 2020H1 but x1.6 sounds okay. At the moment I think <2 for the full year will be tight. But we'll get better insight next week.

If there is infrastructure sitting over the Bressay field in support of the Kraken FPSO, I think it will look more like the Northern Producer Floating Production Facility, than the EnQuest Producer FPSO.

Just saying!

Today's RNS has the long term share awards for the EPS performance period for 3 calendar years from the 2019 number 5.08p . The performance measure is after inflation (RPI), which in principle aligns with share holder interests but for one thing. If a placing is made for say acquisitions, recently Hope and Lagan, retail shareholders have had their holding diluted by the issue of discounted shares to Institutional shareholders and directors. The long term share awards are 'adjusted' to remove the impact of this dilution. Seems unfair when it is the directors taking these decisions but by various mechanisms avoid the resultant dilution.

I wish retail investors had a greater say over this loss of pre-emptive rights. One good thing about the recent Cemex deal is that it didn't require a placing - discounted or otherwise.

The last award published (implemented 3 years ago) had an EPS threshold of +25%, and a maximum vesting level of 59%. I'm guessing these are more generous than previous years, as the growth rate has declined from the heady days of 3-7 years ago.

Perhaps of greater interest is the fact that the remuneration committee has agreed a target metric, which I guess now means Breedon has a handle on their near and medium term growth prospects, post lockdown.

A trading update coming soon?

Other points of relevance to ENQ and any restructuring they are expected to do within the next year or so.

Ithaca's RBL facility is for $1,650m, and was issued in support of an acquisition made last Nov. Alongside this, the parent company Delek increased their subordinated shareholder load from $100m to $250m - look at it as an increase in equity. The outstanding balance on the RBL fell from $1,055m (Dec 2019) to $820m (Jun 2020). The RBL has a provision allowing the payment of dividends to the parent, Delek, (I think limited to $130m) subject to reserves valuations and debt leverage metrics. A valuation was recently concluded which allowed the payment of a $20m dividend to be approved.

I mention these details to highlight that Enquest dividend payments could be a part of any debt restructure if AB wants it and the debt metrics allow it. But also note that an effective equity raise was a part of Ithaca's debt restructure to keep the debt metrics <2x range, currently x 1.6.

As the partner on Dons, they provided the following update.

"As previously announced, work is on-going to secure the necessary regulatory approvals for cessation of production from the field at the end of Q1 2021. This will enable removal of the Northern Producer ahead of executing the full field decommissioning programme in the years to come."

Yes, some interesting parallels. The hedging was key to c$230m reduction in net debt in H1, impressive when you consider gas makes up c40% of their production. The UK gas price is currently c20p / therm, about a third it's average price in 2018.

Last year they initiated $500m Senior Bonds and a c$1,500m RBL facility. The bonds were priced at 9.375%, but the RCL pricing was not disclosed, at least I haven't found it. However, based on their H1 interest charge suggests c6.5% on the RBL. (My rough calc. based on my interpretation of the numbers, which might be wrong. )