Member Info for londoner7

Plethorus, your methodology is similar to mine. Start with 2019 FCF then add/deduct the changes in cash flows. But two lines jump out at me.

'no more Malaysia oil prepayment ($20m)' - I've missed this one. Can you point me to a reference in the accounts?

'higher kraken output ($175m)' - my assumptions are currently based on same again (overall) production, Brent pricing and operating costs, but just taking Kraken your estimate points to an additional 10.5Kbopd (gross) over the 35K production now expected for 2019.

Is this your expectation?

Da_Gee, I don't recall the detail of your posts but I suspect it was the message thread that was removed.

The original post referred to a 'Billion dollar asset', which is completely OTT. Regular readers here would see through it but perhaps admin or even the MSMN board, who I believe read this BB, also considered it OTT.

The character limit caught me out. My final comment was, My current expectation is that 2020 FCF will be higher than 2019, largely due to a reduction in CapEx.

Another thought just occurred to me in relation to the interest charge on the outstanding $116m (1st Dec 2018). I wondered what was meant by 7.5% on the base consideration. This is an incentive for Enquest to pay off the outstanding balance, but I'd guess that if Magnus FCF turned negative and was added to the loan these additions would NOT be subject to a 7.5% interest charge.

This is my own assessment. There are plenty of posters here with good insight into the Magnus deal who can correct any errors I may have made.

Tom8080, I agree with you that the payments due to BP are not included in the debt number and wrt the outstanding vendor loan payments in particular, this complicates future cash flow calculations. The slide in the CMD presentation stating the 75% Magnus acquired for $100m cash has been paid back, doesn't help without reference to the Vendor Loan. But the CFO did made reference to the Vendor payments in his commentary. Repayment maybe accelerated.

It might help to split the Magnus acquisition into its two parts, 25% and 75%, and consider where we are today.

On the 25% share, a final (Vendor Loan) payment of $10m was due in 2019H2. I don't know if it was confirmed but my interpretation is that it has been paid and ENQ now has full ownership of cash flows accruing to the 25% holding.

On the 75% share, a consideration of $116m (the balance of the original $200m after adjustments), was due at 1st Dec 2018. This represents the Vendor Loan repayments which I understand are to be repaid at circa $34m p.a. over five years. The $100m cash loan has been repaid, which was due after repayment of the first $34m Vendor repayment. Therefore, in cash terms, over the next four years $34m is deducted from cash flows accruing to the 75% holding and paid to BP before the balance is spilt 50:50.

Based on information provided at the CMD a couple of posters, including myself, have calculated FCF for Magnus in 2019 of circa $250m. I anticipate $300m in 2020 (I gave my reasons in an earlier post). ENQ's share would be (25% x $300m) + ((75% x $300m)-$34m) x 50% = $170m.

That's the cash. On the balance sheet the full value of the Magnus asset is recorded under 'Assets', and as you point out BP's share of future cash flows is recorded as a balancing item circa $600m under 'contingent consideration'. The operational risks are now with Enquest. If free cash flow turned negative then these would be 'absorbed' into the Vendor Loan agreement to a maximum of $500m. If I thought that was likely I would not be invested. Conversely, if Magnus performs better than expected at the time of the acquisition then BP's consideration, which is limited to $600m (after tax concessions) would be paid off sooner than expected. A key take out from the CMD is that potential developments beyond the current two wells being drilled should accelerate repayments to BP and ultimately higher cash flows will fully accrue to Enquest - ramp over!

On your other point, 'Is the figure of $210m in free cash flow on page 33 of the deck after lease payments and finance charges i.e. levered cash flow? I would say yes, supported by the comment that net debt will close the year at <$1500m. That represents circa $280m of FCF. However, a chunk of this may come from deferred CapEx which would ultimately impact 2020 cash flows., so I would deduct the difference between the $275m forecast and the CapEx actually spent in 2019 - perhaps $30m. My current expectation is that 2020 FCF will be higher tha

L3Trader, to the 2nd point. You said, ‘Unlike you, I expect the contingent consideration of 75% of Magnus to go up at the end of 2019.’

This is a wrong interpretation of my comment which is full was, ‘A few days ago I ran some numbers on Magnus accruals, a mix of cash and reductions in balance sheet provisions. I might have it wrong but it pointed to some decent net asset improvements in addition to the FCF numbers - perhaps a slow but decisive build in value.’

I was not thinking 2019 but rather several years out.

You’ll recall that the 75% Magnus contingent consideration increased by about $27m at the interims, because, as Enquest put it, an out performance at Magnus. E121 posted a very good clarification of why this would increase the consideration, basically earlier repayment impacts the time value discount you refer to.

My confusion was that nothing I saw in production numbers up to the interims pointed to out performance at Magnus. This is confirmed by the CMD slide showing current performance below the 2018 line. However, Enquest has now raised production guidance over the next few years with the 2 well per year plan. Was it this improvement that prompted the revision to the contingent consideration at the interims?

Back to BP’s 50% share going forward. With the $100m loan paid off on a same again basis BP’s share would be 22+50 = $72m in 2020. With the new Magnus wells and a water injection fix I’m expecting better. At the CMD there was talk of paying down the Vendor Loan ahead of schedule. Combined, these payments are taking a sizable chunk out of the contingent consideration.

* I’ve just seen your response to Squif on Magnus Vendor loans. I’m sure newbies here will appreciate your clarification.

Hi L3Trader, you directed two points to me which I’ll answer as best I can.

Magnus cashflows:
Given the news and timing on the $100m repayment I agree with your methodology. Coincidently, I did a similar exercise last week but using a more conservative expectation that the repayment would be made by year end. You’ve included more detail than I had on the interest payments, which look correct. However, I would add $7m for CapEx (Idle costs, but no drilling costs). I’ll add this small adjustment and work the numbers to their conclusion.

100+7.5+34+7= $148.5m over 10 months, annualized to $178m. This is for the 75% element so $238m for the entire Magnus asset.

Cashflow on the 75% over remaining 3 months 178/4 = $44m, so BP 50% share in 2019 is $22m.

Using OAG oil numbers for the 9 months to August, $20 boe OpEx, 95% sales factor and $65 brent leads to:
15000*(65-20)*365*0.95 = $234m. Add un-adjusted gas number calc below of $14m = $248m.

As one would hope, the two methods lead to similar numbers, $238m and $248m for the free cashflows on (100%) Magnus.

Expectations – using the numbers from page 203 of the RI doc, ENQ sales forecast (2019) 15,950bopd oil and 1,950 boepd gas, at $17 boe OpEx. Using $65 Brent price and $36 gas price leads to
((65-17)*15950*365) + ((36-17)*1950*365) = 279 + 14 = $293m

You were expecting 210/0.75 = $280m. This looks fair based on Enquest guidance, but Magnus production has come out well below expectations. The year started well at c18K oil, with a 3 week planned maintenance window supported by additional wells Q4. But the 3 week window became roughly 4 weeks and the attempt to activate a 2nd tower failed. I don’t know the current status but oil production was bouncing between 13K and 16K Jun – Aug due in part to water injection issues.

In Enquest’s defense I fully understand their reluctance to detail issues at individual fields, preferring a general comment that some fields are performing below expectations and some are above. Note they didn’t crow about the recent good performance at Kraken. I also support their decision to maintain 63-70K guidance. There’s 40 days to year end and as someone said, ‘stuff happens’. AB wants to close the year reporting above mid-point guidance. It adds to believe in next year’s forecast. Why risk it by tightening guidance now?

I’ll cover the 2nd point in a follow up post.

It looks like the gamble paid off.

My interpretation of the licence renewal activity is that MSMN held off on the required spending on seismic last year, about $150K if previous years are a guide, in the hope of the adjacent well coming good. When progress on the well was delayed MSMN were left hanging with their licence in peril.

It looks like the situation has been rescued by the activities in China and the subsequent JV talks. Let's see what MSMN do with the 12 months grace they have won.

That's my read. Anyone read it differently?

Hi romaron, as I wrote the 'sober' comment thoughts of a Sound Energy jamboree came to mind. I know you're a fan! ;-)

Yes, I'd forgotten about the 32nd round. But I wonder about the chances of another Magnus transaction. A few days ago I ran some numbers on Magnus accruals, a mix of cash and reductions in balance sheet provisions. I might have it wrong but it pointed to some decent net asset improvements in addition to the FCF numbers - perhaps a slow but decisive build in value.

Hi Pelle, thanks for your comment.

The '2P reserves assumption' in the average production chart describes the target level through 2019 to support the 2P reserves assigned to Kraken. The dip in Sept aligns with the scheduled maintenance which was subsequently postponed. The lower water cut adds further support to the reserves number. (IR confirmed this interpretation). I guess we're getting some insight into how 2P reserves are monitored.

I think there's too much noise currently to provide clear guidance for 2020 production, what with issues at Thistle and Heather. We should get guidance at the trading update that usually comes out first week in Feb. But I'm not as optimistic as you on the number. I think the impact of Thistle, Deveron and Heather is greater than most here are anticipating. Based on June production data I see the impact around 10K boepd extending at least 3 months into 2020. This takes up most of any improvement at Kraken. Improvement at Scolty/C might cover field declines elsewhere. Magnus needs to get back to 18Kbopd fast to have any meaningful impact, although the new wells will help. All told I would not be surprised by 70K -72K boepd as top end guidance.

On CapEx I think we have some guidance. $50m base, $65m net Kraken and $15m on PM8. I'm calling it $150m for 2020 excluding any deferment from 2019. A $125m reduction in CapEx accounts for 70% of a $180m extra FCF I see for 2020. (These are old workings which I'll go back to when I see the full year accounts for 2019)

Not quite the ‘wiz bang, check out Kraken’ presentation I was expecting. A rather sober affair but on reflection I think it met its purpose of highlighting Enquest’s attractions to the institutions and analysists in the following areas:

Kraken 2P reserves – Cairn alarmed the market earlier this year with their downgrade so ENQ used the graphs on slide 24 to justify their unrevised stance. If I have a quibble it is that the average production chart wouldn’t look so favourable if the planned maintenance for September had gone ahead. But taking one year at a time, Kraken 2P looks safe for another year assuming other factors are unchanged.

Net Present Valves – my eyes glaze over when presented with NPVs. The market invariably applies a large discount. I’m a free cash flow guy, but most analysists include this metric in their valuations so the step-up on PM8, Magnus and GKA should be seen as a positive. (I’m surprised we didn’t get a NPV for Kraken to complete the picture)

Reserves – FCF of $200-$300m p.a. sounds good but doesn’t last if your reserves run out, so I was encouraged by the range and scale of potential additions. However, these will not be taken into account by analysts until ENQ adjust their own 2P and 2C numbers. This was highlighted by the question on booking new Magnus reserves year end.

Financial structure – I had an image of AB spitting tacks at the suggestion of distributions to shareholders. The message is clear, de-lever, de-lever and de-lever. The repayment schedule on the RCF is intact. There’s some consideration to repaying the BP Vendor Loan on Magnus ahead of schedule with a view to bringing the asset into consideration for an RBL worth ‘hundreds of millions of dollars’. Confirmation too that the $100m loan on the 75% has been paid off. All pointing to a desire to take out a bank loan (RBL) to cover the bond repayments due in 2023, and sooner rather than later.

Production – opportunity for low cost additions to production at the three main assets (Magnus, PM8 and Kraken) over the next five years, with net production increases at PM8 and Magnus, albeit against field declines elsewhere, including Kraken a year or so out although this wasn’t quantified.

So that's the long view.

The big unknown was Scolty. No direct number but the commentary looks good. Yes, initial flush factor to consider but that's normal.

Breaking out the 68,501 number to end Oct I have an average of 78K over Sept and Oct.

The net debt looks good with year end <$1,500m forecast but I was hoping for a CapEx number too. One without the other doesn't tell the whole story. Maybe they'll say more about CapEx this afternoon.

Hi L3Trader, an interesting post. Your H2 Kraken WI cash flow number ($175m) caught my eye.

Assuming you have deducted the OZ 15% interest I get to a similar number. Here’s my maths:
38500 (bopd) x 184 (days) x 55.5% (WI) x $45 (Netback) = $177m (My biggest assumption is a continuation of current Kraken performance through Dec)

But why stop there? Taking your $1.49bn net CapEx number (does it include DC4?) and interest @ 8% for the half year leads to interest of $60m, 2019 CapEx $0, so FCF $115m. (Okay, maybe over simplified but ball-park) You’re right to highlight the production profile so we should be wary of extrapolating these numbers too far into the future. But as you say, ‘not bad’.

I don’t remember the detail of our earlier assessment of the OZ loan but (based on your number) the 15% WI cash flow covering their $175m loan plus 8% interest is ((175m/55.5%)*15*) = $47m in H2. This leaves some change for ENQ. It might come close to covering the H1 repayment deficit on the OZ loan.

Is that in accordance with your OZ workings?

DiveCentre, you're right, 32 days. 31 days hath Oct. Tomorrow I'll modify my spreadsheet to work date and time but not before selling my HUR holding. 10.936 bopd - shocking! ;-)

Hi DiveCentre, I'm being lazy and copying from my file. Hope format is okay.

6 13/11/2019 14:45 14/11/2019 11:00 31.0625 20.5 Navion Oceania 350,633 11,288
5 12/10/2019 09:00 13/10/2019 09:30 25.66 24.5 Navion Oceania 428,631 16,704

I agree, all in-accordance with the guidance HUR provided in the 20th Sept update. The 31 days is disconnect to disconnect - generally easier to determine than hook-up times.

My draught number points to a 350K offload equal to 11,250 bopd for the last 31 days. I don't take offload duration into account but this offload took 20.5hrs against typical 24.5hrs offloads so supports a lower volume compared to recent offloads.

Spary1, of course we all hope for the break even at the corporate level alluded to at the conference in June. But the two wells in mind at the time were S3 and Falcon - S2 had already been drilled.

I don't recall the detail on numbers other than that the expected net production from the Falcon well was significantly above the level of a single Stanley well so I don't expect S4 to represent the breakeven point. The latest update guides S4 drilling before end Jan 2020, but I'm looking out for the more significant news on Falcon.

I'm not familiar with the detail on PMO's numbers but I am impressed with the headlines. Only up 3% - I must be missing something.

This comment caught my eye, 'Summer maintenance programmes were successfully completed and production has returned to previous levels'.

Sounds like the rooster crowing ahead of Enquest's update. Sad to say, Enquest can't say the same with recent Heather, Thistle and Magnus difficulties, but these issues are already in the market - I was impressed by the resilience of the SP.

Next week's news will be around progress on these issues and comment around what appears to be a step up in Kraken performance - why the improvement and can it be maintained? Not forgetting current, year end and 2020 guidance production numbers. On the latter, while 2020 production guidance would be welcome I wouldn't be surprised if Enquest passed at this point in light of the noise around current production, or at least, put out a wide range.

Sweatysock, good work with the fag packet.

I don't know how you come by 300 days but your number ((100/(300/365))= 82.2 is very close to my workings based on Q3 and Stanley 3 updates, ((6265-360)/92)+17.2= 81.4 bopd going into Q4. But note warning at the 1st Nov release, ' at Stanley 1 a new separator is required and this has caused a loss of daily production over the last few weeks. It is planned that this will occur in November 2019. '

But you seem vague on arguably the most important metric, 'money in the bank'. We had Au$825K at 30th June 2019, but it's the current cash balance that matters. I think we can all agree it will be less than the 825K in June, but what is the rate of that decline? The notes to the accounts provide useful guidance.

Good spot Yobbo.

ETA is 6am tomorrow. She's a big girl and can take anything the AM is holding.

Hi HMNn, thanks for your reply.

I now see the point you are making with the timing of Capex. I hadn't picked up on it in your original post. Perhaps the payment of some Capex will be deferred to 2020. Otherwise I don't see how you get >$100m FCF for the last two months.

Assuming full Capex expenditure in 2019 I expect a net debt reduction for 2019 of £200-$220m for the full year so yes, $80m for H2 sounds about right if Scolty comes good.