We would love to hear your thoughts about our site and services, please take our survey here.
FCFY,
I'm invested in Ithaca so, I'll attempt to address some of the points you make.
I expect Ithaca to announce M&A soon - though I had expected it to have been by year end. Is ENQ in the frame?
That isn't my expectation. Ithaca already has c. $800m of tax losses which it picked up through acquisitions in 2022. In 2023 Ithaca paid substantial taxes accrued in 2022, but these are expected to fall to low single digit % in 2024. I haven't worked the numbers but the $800m is likely to be used in the next couple of years, so they may be looking for tax loss related M&A.
On the ITH board I've posted my thoughts on possible M&A. Based on these speculative thoughts ITH could become a partner in Kraken, which in turn could lead to Bressay. But until M&A is announced that's as far as I'd take the idea.
I think other ENQ assets such as Magnus (terms with BP) and GKA (costs and possible near term COP) and associated decom may not be worth the associated tax losses. (ENQ has dropped development opportunities around the GKA, e.g. Eagle, which leads me to believe the hub is being run down).
Ithaca has a 37% interest in Alba, so Enquest's 8% interest may be attractive. I don't know it's value but Enquest need the cash for planned development of Kraken in 2025.
On metrics, I use FCF/EV, EBITDA/boe and FCF/boe.
I work these on ENQ, HBR and ITH and ENQ comes out worst on my 2023 numbers. I'm waiting for results and guidance before I look at the 2024 numbers.
In the 2023 interims ENQ posted FCF/boe of $17 (page 7 of slide deck). I expect $12 for the full year 2023. This demonstrates the leverage ENQ stock has to the oil price, or specifically their FCF to the oil price - do the numbers.
For this reason my NS investment is in ITH and HBR - I prefer dividends and lower downside leverage to the oil price. But given an oil price approaching $90+ ENQ could produce a better performance than ITH and HBR in 2024 - it just doesn't fit my risk/reward profile.
That said, a good M&A deal could change the profile.
Stevo12, you say, " I am guessing that it largely relates to BP’s share of future Magnus CapEx "
I said in a previous post that I believed there were no Magnus CapEx payments from BP. In 2019 I came to the conclusion that Enquest must have free reign to fully manage Magnus activities wrt Opex and Capex. This view is supported by a statement in the terms that Enquest are fully responsible for the decom on new developments. BP are largely responsible for the decom of Magnus as it existed before the acquisition with Enquest owning a small share of these original decom costs.
This gives Enquest 'buy-in' to a cost efficient decom of the entire Magnus infrastructure. A process that is already underway, albeit at small scale.
*By the way, thanks for your forensic focus on the numbers.
Correction - $250m.
On a deeper dive into Waldorf assets I see they have substantial holding in the NS including a 40% holding in Catcher, 25.7% in Alba and 50% holding in Enquest operated Scolty - Crathes, and 5 other fields.
A mixed bag and possibly a good deal to be made on a job-lot basis. But that's as far as I'm digging.
The cards are in the air, let's see where they fall.
Waldorf has concluded contingent payment terms with CNE on it's 2021 acquisition of interests in Kraken and Catcher, clearing the decks for onward sale.
To whom?
I don't think ENQ would be looking for 100% of Kraken.
HBR might be in the frame for an additional 20% of Catcher on top of their current 50%.
Many players out there but my interest is in Ithaca as a possible acquirer.
My rough numbers, c. 13K boepd in 2023, c. 11.5K boepd in 2024.
At $60 netback, CT on Catcher, EPL on both, I have c. $100m FCF for 2024. Worth $250?
Rough numbers but interesting.
Tigar, your view is the same as mine.
When I invested in Enquest in 2019 I went to some length to construct an accurate cash flow model. I considered how BP and Enquest would come to agreement on Magnus development. Given that BP are responsible for the decom of existing wells and infrastructure, and Enquest are responsible a % of BP’s liability and, for the full cost of the decom of new development, I concluded that Enquest has free reign to develop Magnus as it sees fit.
Enquest has full ownership of Magnus activities and has paid for it up front and with the continuing contingent consideration at the rate of 37.5% of FCF, to the limit of $1B. If Enquest deploy effective CapEx allocation, then both BP and Enquest benefit. If they make a bad call, then Enquest is fully responsible for the decom associated with the decision. The small % of BP’s decom liability that Enquest carries is ‘insurance’ for BP that Enquest manages BP’s liability to the benefit of both companies. BP does not make any direct cash contribution to Magnus CapEx.
My conclusion was that it was a well-constructed deal.
BP receives a profit share of Magnus FCF, after any Magnus costs incurred, operating or Capex. As for tax due on BP’s profit share that is not relevant to Enquest. I don’t expect the deal to be reopened.
Enquest tax losses have a value that can be extracted through organic investment, in Magnus and Golden Eagle, and in prospective investment at Kraken in 2025, and through in-organic investment in existing production from a 3rd party field, where the existing owner doesn’t carry a (non-EPL) tax benefit – subject to the tax restrictions Stevo12 has highlighted.
Other M&A options are a possibility but given comment/guidance from AB, not my expectation.
But here’s the thing. The possible utilization of these tax losses predates the EPL. The EPL has only cost Enquest c. $60m to date. This suggests much of the poor performance in Enquest stock over the last 18 months is self-inflicted.
Hi luks, thanks for your reply. Interesting to get your perspective.
I can see that trade counters blur the line between Headlam’s distribution model and retail, so I can understand the distaste of traditional retail.
The activities of Jason Maguire in the sector are also interesting and provide additional insight into the competition for both Headlam and Likewise. I understand his group operates as Connection Retail. I’ll investigate this further.
In a previous post I commented that the two quoted companies might account for 50%-60% of the distribution business but another look at the numbers suggests this might be closer to 40%, which implies a 60% share across many smaller businesses, such as Connection Retail.
Given this level of competition and I assume overlap, I still wonder at the extent and reasons for your business relationship with Likewise, given the issues you’ve expressed – leaving aside any investor interest.
I guess bulk/volume of the product versus value means that the product doesn’t move far from the cutting table to the final installation, so competition largely occurs at a local level.
What prompts you to use Likewise rather than another distributor? Is it payment terms, product offering, or something else?
Is there a local alternative to Likewise or Headlam?
(I was going to say, Flooring Superstore, but I wonder if they are retail rather than distribution.)
Hi luxs,
I was impressed by your knowledge of Valley Group operations, so I looked at your earlier posts.
Clearly, you are in the trade, and I thought to ask for any publications you’d recommend for an investor in the sector.
But first, I had a look and came across ‘The Stockists’. Much of it is advertising but I saw a couple of sections of interest to me, a piece on wholesaling and business news.
A takeaway is that there are many different sectors operating within the distribution chain, which I’d define as between the manufactured flooring product to installation. The two listed companies I’m aware of, are Likewise and Headlam, who act between the manufacturers and retail venues or independent fitters, with each operating on gross margins of c. 30%.
The listed companies account for 50-60% of the UK market with private companies accounting for the balance, including Kellars, Floorwise, Carpet Line Direct and independent trader cooperatives like the Independent Flooring Group.
The numbers from the business news section are interesting but confusing to me. Oct trading is described as 16% down on last month, Sept, but only 0.9% down on last Oct. This is revenue based rather than volume.
The ONS has floorcovering inflation 7.7% YTD. HMRC has carpet imports into UK down 6.2% YTD. I know I’m not exactly comparing ‘apples with apples’, but that suggests a volume reduction of c. 14%.
There seems to be a mismatch between trading down only 0.9% Oct (YoY revenues) and the HMRC imports down 6.2% YTD. Perhaps the Oct month is an outlier.
luxs, I’d be interested in your critique of my summarization.
Also, looking at your recent comments on Likewise, these jumped out at me. “I would like to use them more but again and again can’t help to pull my hair out”; “improvements needed in basics stock levels, adequate p.o.s. (?)”; “sampling is poor”.
Given competition in business why do you persist with Likewise? Is it an account benefit, their regional dominance, specific product offering, or something else?
I would appreciate any reply. Thanks, in anticipation.
*For the record, I’ve been in and out of Headlam as an investor several times over the years. I’ve been monitoring Likewise since they came to the AIM market, but my current concerns are around their balance sheet, as indicated in my earlier posts. On the HBR board I have commented on Likewise several months (years?) back – favourably as I recall.
I don't know who you consider to be the Valley boss. I was referring to the Valley vendors (sellers) Stephen Mitchell and Kate Mitchell.
This is from the acquisition RNS:
"Post a one-month transition period following Acquisition Completion, none of the Valley Wholesale Carpets Vendors are expected to continue their involvement with or engagement in the Valley Wholesale Carpets Group's business."
Madtom,
I didn’t mean to imply the payment itself is a surprise, or not priced in. Rather my query is on the implications of the payment to the balance sheet.
Cash at the interims was £4.5m – tight given the expected payment due. When I saw the appointment of WH Ireland as joint broker I anticipated some commercial activity to bolster the balance sheet ahead of the payment. Perhaps it’s happened, e.g., a further loan, which didn’t warrant an RNS.
The Valley vendors are not involved in the current business, but own 5m shares, so further discussions on deferment are another possibility.
I was surprised that today’s update didn’t add any clarity on the matter, then again, it could be that Likewise expect to close the year with free cash flow, and all will be sorted.
Those are my thoughts and I wondered on yours as a regular poster here.
Until we get clarity, I think this deferred consideration is the ‘elephant in the room’.
Sekforde, across my North Sea holdings FCF/EV is my preferred valuation metric, so I was interested in your post.
While I think there is common agreement that the $50m payment to Suncor is an element of FCF. I think including the BP profit share is a stretch too far.
The BP contingent consideration is a balance sheet liability to be repaid over many years. In H1 the $38m payment to BP reduces the contingent consideration, but there are other moving parts. The unwinding discount is a near constant and in the half-year added $28m to the CC. The change in fair value knocked $42m off the CC, a greater sum than the BP profit share, but this component is less predictable and can move in both directions.
However, the BP contingent consideration is just one of many moving parts in the balance sheet. In spite of a reduction in the BP consideration and a reduction in net debt in the half-year, net equity still fell by $20m.
The market valuation will comprise many components of the business but a fall in net equity isn’t a positive for valuation. For these reasons I don’t think it’s legitimate to add the BP profit share payment back into FCF.
On your closing net debt number of $515m for 2023 I see various justifications in your posts, but I think your main argument is extrapolation, i.e., the reduction in net debt in the two months to Oct 30th in spite of a $60m EPL payment. That was an excellent outcome, but I’ve learnt not to extrapolate such results over long periods. I don’t know the profile of CapEx payments through H2, but I do know that Golden Eagle offloads add significant noise to monthly cash flows. At current GE production levels, I estimate an offload accruing to Enquest every 140 days, worth c.$50m for each offload. If an offload occurred between end of August and end of Oct there will not be another before end of year. Another thought occurs – has EnQuest seen a rebate on Kraken FSPO lease payments following the issues last summer?
I estimate the revenue loss to Enquest of the Kraken issues at c.44m (1,500 bo*365*$80).
Adjusting my spreadsheet from last March for the Kraken loss, price of oil and recent updated guidance on OpEx and EPL I have year end net debt at $575. However, I thought the update was more positive than I expected, so and wouldn’t be surprised with a c. $550m outcome, making my 2023 FCF number:
Reduction in net debt (717-550) = +$167m.
Suncor payment +$50m
Rebate of 2022 EPL payment -$33m.
For 2023 FCF = $184m.
Based on these numbers my current FCF / EV metric is (184/(318+550) = 21.2%
*As I post this, I see Stevo12’s response to Sekforde. Deferment of payments is possible to improve FCF but suppliers, at least listed ones, will want to close out due invoices. Most years there are CapEx over runs into the following year – across the sector. But as Stevo12 says, this will show up in the accounts. Our FCF estimates are based on guided OpEx and CapEx numbers.
There some strange numbers being posted here. I suggest you refer back to the RNS rather than poster or broker (UBS) comment.
"In addition to the £10.2 billion of global net PRT premiums written year to date, we have also written £1.2 billion of individual annuities, taking total annuity net premiums written year to date to £11.4 billion.[3]
Indicatively, this creates new business CSM of c£910m, adding to the Group's total CSM balance. This was £12.4bn at HY23 and had grown at 7% over the year. The additional CSM created so far in H2 demonstrates our ability to continue to grow the CSM balance."
L&G posted some excellent slides explaining the impact of IFRS 17 and the operation/contribution of CSM to future profits. L&G are looking towards 6-7% CAGR in UK PRT operating profit over five years. I'm an investor here because I'm confident that L&G's number crunchers anticipate the Boots deal meeting those goals, and the posted CSM number (for YTD deals) beats 7% CSM growth this year - and with 20 deals done last year still time for a few more in 2023.
I'm in with a 9% + dividend yield on 5% p.a. growth to 2024.
LGRI and Retail isn't the whole business but it is the backbone. If CAGR is close to 7% and assuming UK inflation comes back towards 3% that's good real return growth in shareholder returns from a 9% starting point.
Yes there are investment risks but for a 10% stake within my portfolio I'll take that risk against the flat rate 7% L&G would offer me for an annuity.
Lordloadsoflolly, I need to be careful in my terminology.
MMs provide liquidity in the sense that they offer bid and ask prices with a maximum volume of shares. I see a market size of 1,000 shares on this page, but I don't think MMs are tied to this, rather I think its an indicative guide for investors.
The spread represents the best ask and best bid offered by a the participating MMs. To clarify this point, looking at Friday's closing quotes, 472p - 475p, an individual MM may be offering a bid of 472p but an ask of 477p. Another might have a bid of 470p and an ask of 475p. The spread based on the offers from those two MMs is 472p - 475p. Clearly, adding a 3rd MM or a say, a 10th, offers more competition in the market and would likely reduce the spread. The MM whose 472p offer is accepted is at risk of being unable to exit the trade in a fast moving market, though given a wide spread the risk is low.
If you're a quote and trade investor in modest volumes then that's the market your in.
But there is also an order book where investors can place limit orders. In the case of H&T's Friday closing price these orders will be outside the 472p-475p spread or at a volume that is unacceptable to MMs. The order will remain on the book until the market moves in it's favour or the order times out. If you want to trade well above the typical market volume then this is where you can trade with a limit on the price you buy or sell. Incidentally, the spread can narrow dramatically when both sides of the book meet.
That's the market background though with many nuances, such as manipulating the order book with 'ghost' orders which may be used to influence the market but are subsequently pulled. But these are short term influences and of little consequence to investors taking a patient approach to building or selling a stake in a company. (I built up my current stake in H&T between May and Sept with 7 orders)
In my post I was careful to use the phrase 'a relatively illiquid market'. Given the background to the market I describe above, and the low daily volume of trades that are made in H&T shares, an individual or several trades combined, in one direction, and of a size many times an MM's quoted volume while mopping up the order book, which at times may be small, can easily result in a significant move in the share price.
Then there are algorithmic trades that for an oil company may be linked internet comment on the price of Brent, or perhaps for H&T the price of gold. I don't know what if any algorithmic trading occurs in H&T shares. Whether manual or auto trading, I don't think the movement in H&T's share price on Friday was unconnected to Gold hitting a (British Pounds) high.
Lordloadsoflolly, you say, "sales of new jewellery are becoming more significant".
True, but this is only a factor within H&T's retail segment which accounted for just 17% of 2022 gross profit by sector. They address this adjustment to inventory with the following comment:
'Sales of pre-owned products represented 82% (H1’2022: 82%) of total sales by value. Supply of some
pre-owned jewellery categories continues to be constrained, particularly 14ct and 22ct gold jewellery.
This requires us to source higher volumes of new jewellery in substitution. We expect this dynamic to
persist for the time being and ultimately to reverse as the strong recent pawnbroking pledge book
growth reaches maturity.'
However, these are factors affecting H&T's business over the medium to long term, which will be reflected in share price over the medium to long term. In the short term the share price is impacted by short term effects, like the price of gold, which was the point of my post. In a relatively illiquid market for H&T shares it doesn't take much additional buying to raise the share price.
This is what Benjamin Graham meant when he said, “In the short run, the market is a voting machine but in the long run, it is a weighing machine.”
The price of gold is at all time highs (British Pounds), which is good for H&T's business.
From latest latest interims:
'The Group purchases gold, jewellery, and watches from customers. The prevailing gold price has a
direct impact on gold purchasing as it affects customer demand. The gold price has been elevated
since March 2022. The average gold price per troy ounce during the period was £1,566 (H1’2022:
£1,445) and coupled with the impact of inflation on customers disposable income, we have seen a
44% increase in purchase values year on year. Some of this volume is yet to be processed and is
currently held in inventory at cost. '
Kontiki2, Thanks for posting the link to the RS energy storage report.
I'm not invested in this space, but follow energy developments generally and look in on these chat groups for useful info and links - this one being a good example.
In it's relatively short 34 pages this report provides a concise view of the challenges of electricity storage in a wind and solar supplied market. The eye opener for me was the high level of storage required to counter weather changeability that can occur over decades - in the report this leads to stored hydrogen in salt caverns as a leading solution. Though it also bring in nuclear and gas (with CCS) to supply additional baseload.
Much for the decision makers to ponder. I'll continue to follow with interest.
I've no idea how this aligns with the investment case for ITM or CWR, but I'll continue to watch that with interest too.
Well worth a read for serious investors in the Hydrogen space.
Interims next week, Wed 23rd Aug. You'll get your answer on the dividend date.
I'd guess yesterday's price reaction was in response to the latest construction update from the ONS. I think this comment captures the situation:
Clive Docwra, managing director of property and construction consultancy McBains, commented: “After last month’s figures fuelled hopes of green shoots of recovery, today’s statistics will come as a blow to the construction sector.
“Particularly disappointing was that the fall was as a result of a decrease in new work, suggesting that confidence remains low among many big investors.
“It’s little surprise that private housing continues to struggle, and with falling house prices and low mortgage approval rates it will take some months before volume house-building shows a turnaround.”
Fair to say, the market is challenging. Higher interest rates are doing what they are supposed to do. Next month Breedon announce their interims when we'll find out how management are performing in this environment. Does Breedon still have the 'self help' abilities of the Peter Tom days?