The latest Investing Matters Podcast episode featuring Jeremy Skillington, CEO of Poolbeg Pharma has just been released. Listen here.
tornado10, my interpretation is that there will be 3 payments of c.$133m making a total of $400m for 2023 paid as follows:
1st payment next week
2nd payment after the 2023 interims
3rd payment after the 2023 finals - that would be Mar 2024, so 2x cash payments this year.
For the 2024 financial year, (1/3 of $420m) $140m paid after the 2024 interims, and the final dividend of $280m paid after the finals are announced Mar 2025.
Hi Stevo,
Your 1st paragraph - I don't agree.
The current lease liability of $137m shown on the balance sheet account is the amount Enquest expects to pay over the next 12 months on leases. The capital and interest components are split out for the P&L account.
The Kraken FPSO is hired at a day rate of $447,352. Enquest's share is 70.5% = 0.705x447,352x365 = $115m p.a.
The balance of lease expenditure is for offices and (I'm guessing) standby support vessels. (Incidentally, the day rate drops mid 2025 to $36m on a 12 month contract. Unsure of the precise date because of delays to the start of contract)
I've just scanned your recent post but I think you've captured the correction. If you disagree say so and I'll look closer.
2nd paragraph - I'm nit picking.
I think the OpEx of Magnus is closer to $40 boe than $25 boe. The current contingent for 2022 was c $30m, which points to a high OpEx even after CapEx. This month's results will reveal more.
3rd paragraph - I agree. From memory your numbers for ENQ and HBR are similar to mine. However, the benefit of leverage for ENQ diminishes after the first year, assuming ENQ use FCF to pay down debt rather than pay dividends. (I added that last point without much thought so stand to be corrected)
Hi Jan, I'm almost afraid to ask how you extrapolate '600' from my post.
I try to assess the FCF of the various NS companies I follow for comparison purposes. As Stevo says, there is more to a valuation than the simple FCF yield metric I use. Leverage is also a factor - the amount of EV going to Mkt Cap - but so to is how the FCF is distributed. Having made that assessment I leave the share price in the lap of the gods, politicians and the market.
I want to be on the winning horse for my chosen investment period - whether its a fast circuit time or a slow one isn't in my control.
I don't make SP predictions so I guess that disqualifies me as a broker.
Strictly, I think your comment, "Kitchen sinking it again", nails it.
Perhaps I've been around this game too long, which has made me cynical, but executive teams tend to come out of turbulent times with returns well ahead of the long term investor.
Lower expectations ahead of the 3 year bonus plan that will be determined by a compliant renumerations committee, then boom!
Stevo12, an interesting approach to valuation. As Jan says, always good to see numbers.
Of course the balance sheet is important, but , call me old fashioned, I prefer to track the cash. My preferred metric in FCF yield versus enterprise value. It's a more short term measure than yours appears to be but in my limited experience of investing in this sector too much unexpected stuff happens for me to have confidence in predicting a long term outlook.
But going back to your numbers, the bit that jumped out at me was your expectation that $300m of lease and deferred consideration would be paid per year. I'm sure $50m will be repaid on the GE acquisition and c$120m on the Kraken lease, but beyond that I don't have a clue.
Perhaps key, is that I don't view the Magnus contingent as debt, rather the payment of 37.5% of Magnus production / free cash flows, to BP for the foreseeable future - beyond 10 years - unless something dramatic happens to the Magnus field or oil prices.
“Barclays forecasts a net debt reduction from $1.1bn (£910mn) at the end of 2022 to just $193mn by the end of this year.”
Really?
That would imply FCF for 2023 of net debt reduction (1,100-193) + Dividends (2x $133m) = $1,173m.
I suspect an error in the Barclays forecast or the reporting.
Ithaca’s net debt at the end of Sept 2022 was $1,100m. I’ve pencilled in a further $300m reduction in Q4 for an end of year debt of $800m.
This correction to the Barclays number points to FCF for 2023 of $873m, which is ahead of the $845m I’d anticipated. However, until Ithaca release their 2022 result and guidance for 2023, these are rough estimates.
I’m new to Ithaca 2.0 but I like what I’ve seen so far. I’m looking forward to the results release 29th March. Later than most, but Q1 will be largely known, and pricing will benefit from their gas hedging in Q1. It will be interesting to see if Ithaca captured the August bounce in gas pricing with additional hedges for 2023 Q4.
Interesting to read the comments on financing Cambo, but I suspect the challenge to the development will continue to be political. As the Barclays analyst says, if Ithaca achieve the debt reduction expected in 2023 they'll be "well positioned" for the capital costs of development. An impending sale of Shell's stake may also be a factor on the timeline.
On a near term PE measure Senior still looks overpriced.
But my view for the last couple of years was that Senior has the production capabilities and markets to recover to previous highs. Nothing flashy, perhaps more bid interest along the way, and in my experience of the post 2008 recovery, very hard to trade. I'll simply hold my stake unless I see a significant problem flagged in the trading updates.
I expect a bumpy ride but to look back on a good compound annual return on my investment by 2025-26.
I don’t think AB sees Bressay or Bentley as large-scale developments, rather extensions of Kraken, perhaps with local supporting infrastructure.
During the FDP process I’d expect all options to have been considered including a large-scale development, which might have been more to Equinor and Harbour's liking. If an extension to Kraken looks the obvious option then the smaller-scale might have been a deterrent to Equinor and Harbour. Hence their withdrawal. The terms with Equinor mean Enquest would have got their share for free. I suspect the same will be true for Harbour’s share.
What next?
Waldorf with a 29.5% share in Kraken would be the obvious partner for an extension to Bressay.
The job advert is interesting, but, say, a £100k salary is a small price to pay to keep the options in play. I won’t hold my breath for first oil in 2025.
Ordinarily, I’d expect some clarification from Enquest at its finals in March on its plans for Bressay, but my experience with Enquest communications leaves me feeling we’ll be fed scraps at best.
Interims should be out 9.30 pm UK time.
Production volumes and pricing are know. The cost of the recent acquisition is known.
The market will be looking at the level of ongoing debt BHP want to carry - c$10b from memory.
I don't expect the dividend to be maintained as BHP has moved from the progressive dividend model to a capital allocation model. But the analysts will be attempting to 'read the tea leaves' of the announcement for clues to further M&A activity.
Tonight's CNBC Asian coverage normally gives better insight into BHP and analyst views than your likely to see on tomorrow morning's coverage.
A net debt of zero may have some appeal but I agree with comment that it is somewhat arbitrary.
If/when HBR hits zero net debt metric they will still have a level of cash on the balance sheet balancing gross debt in the form of the Retail Bond - $500m with a 5.5% coupon. A great rate on Senior Notes and I can't imaging HBR are planning to give it up. That's $500m available for acquisitions and/or shareholder returns, above any level HBR might run up on the RBL.
On the timing of achieving any particular level of net debt it's worth remembering that H1 will include a c. $150m cash payment for the 2022 EPL charge, an H1 dividend of at least $100m, and I'd guess, other UK and international tax cash payments.
If HBR provide guidance on their 2023 FCF expectation that will provide great clarity on prospects. For me the profile of those cash flows is a secondary issue, but it will be relevant to HBR in the timing of any acquisition and/or buybacks.
Stevo12, you say, “Ithaca still looks expensive compared to harbour based on existing 2P, production and profitability.”
I’m invested in HBR, ITH and ENQ. As the news comes in, I assess various metrics, near term prospects and revise my investment allocations accordingly, so I feel I have a good handle on the relative measures. No sweeping changes and not too frequent as the swaps cost me about 2% in charges.
Your comment prompts me to ask what metrics are you looking at?
I see ITH on 8 years 2P cover based on 80K boepd. I see HBR on 6 years based on 192K boepd.
On profitability, using EBITDAX I have ITH on c. $77 / boe (YTD, still to report Q4). I have HBR on c. $53 / boe. HBR is handicapped by its hedging which continues into 2023. My assessment for 2023 Q1 is that ITH realised pricing (oil and gas) will be c. $100 and HBR c. $70. This is based on disclosed hedging positions, and oil @ $85 and gas @ 155p / therm ($110/boe). Gas pricing has come off, but my calculations indicate the $30 differential holds in Q1.
My preferred valuation metric is FCF yield against EV. For HBR I have a prospective 32% FCF yield for 2023 against 28% for ITH, so on valuation I see HBR ahead but ITH coming up on the rails. My estimates for 2023 FCF are $1,200m for HBR and $845m for ITH.
My FCF forecasts are rough, particularly with ITH still to report on 2022 Q4. Credit to HBR management for providing FCF forecasts – we should get one for 2023 with the finals next month. In spite of the introduction of the EPL, HBR beat on their original forecast for 2022.
Both companies have interesting exploration and development opportunities, and I’m happy to be invested in both. But there are significant unknowns. I’m undecided if Cambo and Rosebank will be a curse or blessing to ITH. I’m expecting HBR to make an acquisition this year – the terms and prospects will be key.
I should add that I have lowest confidence in my understanding of Ithaca's business, which makes me wary, and highest confidence in my understanding of Enquest, because I've been following it longer, but their management is the most secretive of the bunch. I like Harbour's disclosure of their FCF forecast.
On 13th Jan I posted my views on the Helium ‘sell’ to potential investors.
Today, I’ll offer some insight into the challenges of commercialising a Helium discovery in Australia.
Gas was discovered at Magee 1 in 1992 where a test at a depth of 2,340 m flowed gas at a stabilised rate of 63 Mscfd, comprising natural gas, helium and nitrogen from a 6m zone of Heavitree Formation.
The well was considered a technical success but not a commercial success. 63 Mscfd (thousands of standard cubic feet per day) equates to 11 boepd.
In 2010 Central Petroleum conducted a ‘desktop’ study, titled, “Low Volume Helium Extraction and Commercialisation”. The report was based on the assumption of a field producing at 20 MMscfd of similar gas composition to Magee-1, i.e. 6.2% Helium.
20MMscfd equates to 3,448 boepd, or 314x Magee-1 wells.
Central, with its Joint Venture Participant, He Nuclear Ltd, planned conditionally to drill at least one well during 2010 (The Magee 2 well) targeting gas, condensate and helium.
Magee-2 was subsequently deferred. The following text is from a CP drilling update:
“Central Petroleum (ASX:CTP) has decided to change its planned 2010 drilling programme to enable the company to prioritise its pursuit of oil targets in the Amadeus Basin and maximise the opportunity of short term cash flows, rather than the longer term and more capital intensive Helium/gas targets.
The current inability of Oil and Gas Exploration Ltd (previously He Nuclear Ltd) (OGE) to pay 50% of the funding needed for the Magee 2 drilling programme has also contributed to the decision.
OGE owes approximately $1 million in unpaid cash calls for both the Magee and the Mt Kitty joint ventures”
Within the Amadeus Basin CP’s focus turned to the Dukas-1 well for conventional gas, working with Santos as operator. (The pressure and rig issues during drilling are well known here). Santos lost a % of their interest when they passed on a deadline to commit to return to Dukas-1.
After a 3 year delay a private company, Peak Helium, revived interest in Magee, Mt Kitty and Dukas in Feb 2022, when they agreed a JV with Central Petroleum and Santos for 3 drills in 2023. Peak is carrying the full well costs (100%) to a max (gross) $20m per well on Magee and Mt Kitty, and WI costs on Dukas.
The JV was due to close June 2022 but has been held up while Peak progresses “various approvals with the Northern Territory Government in order to facilitate completion of the remaining conditions precedent”. Both CP and Santos have agreed to extensions almost monthly – latest 31st Jan 2023 now extended to 28th Feb 2023.
I’d guess both Mosman and Georgina Energy are awaiting the next move by Peak Helium. However, while Mosman can sit back awhile GE has to move ahead with its IPO to cover the increasing costs of their loans. A $5m placing to re-enter Hussar-1 is tomorrow's problem. Chance of a commercial Helium find at Hussar-1?
There's no doubt that Ithaca compares unfavourably to HBR and ENQ on a enterprise value versus production volume metric. I'm in both ENQ and HBR and that simple metric has kept me out of Ithaca.
However, there's a lot of operational stuff I prefer with Ithaca - their near term exploration and development which alleviates the EPL to a greater extent and the potential of Rosebank or Cambo getting clearance. While there's political concerns on NS development, it's my working assumption that if either field gets clearance it will not be reversed by an incoming Labour government.
Near term the gas hedging works in Ithaca's favour, particularly during this quarter (2023 Q1), which I estimate will beat their 2022 Q3 EBITDAX number, producing higher FCF and a good reduction in net debt, which will lower the EV and improve the EV v Prod metric to some degree. I see Ithaca's Q1 realised oil & gas price c.$100, about $30 above HBR's and $15 above ENQ. How much that changes my preferred metric, FCF yield on EV, will be clearer in a few months, as will the impact of the EPL on all three companies.
The near term outlook has prompted me to open a relatively small position here. Nice to be back after being kicked out by the bid in 2017.
Hi Pelle, I don't agree.
I still have a 2-3 year investment horizon, though it is reviewed at each update.
The planned Capex last year was $160m, but this came up short largely because of Fx but also (possibly) because of the 2nd GE drill moving into 2023, but certainly due to reduced works on Magnus.
Expected 2022 CapEx is $120m.
I can see a CapEx spend in 2023 of up to $200m including any deferred 2022 spending.
If AB chooses to increase CapEx close to my number then I'd expect that to include the advancement of Kraken works from 2024 and perhaps development of another licence.
I'd trust AB to make the right call.
If 2023 capex comes out at c$120m -$160m then Yes, returns to shareholders are in order.
Sorry, I don't know how to write that in Swedish! But I'm guessing you're all smart bi-lingual types. Unlike us dummies this side of the channel.
ironknut, thanks for the heads up.
This comment is interesting, “It has a good ‘moat’ and is well managed. A mooted shift to America freaked the market but is now off the agenda. If the share price stays like this, someone will snap it up, perhaps private equity with the support of the founders.”
The moat and the management are reasons I invested and continue to hold.
Talk of a move to the American market freaked me out too. The valuations are much higher than UK. I'd see it as an overpriced buy similar to Lagan, which at the last interims wasn't showing the growth anticipated but I'm reserving judgement on Lagan till the finals. I'd be delighted if Breedon has backed off from America.
I don't buy or hold a stock on the basis of a potential bid. But this is an interesting observation. The founders launched a cash shell BAY to repeat the trick they've pulled off with AI and Breedon. I have a small holding in BAY, just to monitor events, but I hadn't considered they might make a bid for Breedon with private equity backing. Not the daftest idea.
mrc, thanks for the link to the Eagle environment statement. I'd lost it.
My recollection of events is that the regulator rejected the farm in. Odd, considering a key remit of the O&G regulator is to encourage development. I also noted that Eagle wasn't mentioned in the CMD just two months after it appeared to get the go-ahead. However, Enquest was going through a rough time with lumps falling of Thistle and a fire on Heather, which permanently shut down both platforms. Given the situation perhaps Enquest opted for the no risk farm in maintaining a 15% WI in any production.
My understanding of the NS licencing regime is that if Enquest has completed work requirements on Eagle with the drill, they can hold the licence with a yearly fee, which increases over time.
Perhaps the Scolty and Crathes rework provided the breathing space to the GKA hub, and Eagle's time has come.
Or perhaps I'm giving Eagle more air-time than it warrants. Time will tell.
Tarmak, hang onto that hope!
Hi romaron, I’m not sure there was a question in there, but I'll make a general comment.
Ahead of the EPL’s introduction I didn’t expect Enquest to be significantly impacted because of their tax position. In hindsight I thought the EPL was cleverly structured – cash in the coffers now with an incentive for further NS development. However, as a rule, increased taxation adversely impacts investment, so I’d expect NS production decline to accelerate over the medium to longer term.
The public are influenced by self-interest not common sense, and politicians know how to manage the mob. Linda’s (HBR CEO) appearance in front of the Energy Select Committee was easy meat for politicians like BG and CL. They got the headlines with Norwegian tax equivalence and the cost advantages of green energy. (I think Harbour’s CFO would have handled the Norway question more effectively, but from that single exchange I now see EPL @ 38% baked in).
Within the next two years we’ll have a general election. Recently I posted my working assumptions on near term policy as it impacts UK O&G. AB will have his own working assumptions and I’d expect each prospective Enquest activity in the NS to be assessed against his working assumptions. What else can he do!
I’ll manage my investments in a similar fashion. However, I don’t have to be invested in the sector, so I have more options than AB.
* I’m long past being concerned about the ‘public verdict’ or the outcomes of the democratic process. I simply deal with outcomes as they present themselves. I’d guess you’re familiar with Plato’s views on the natural order – over 2,000 years old but still relevant today. A current movement is towards coalition government. David Deutsch, in his book ‘The Beginning of Infinity’ raises strong concerns about such a movement in his chapter ‘Choices’.
In Scotland I see the overweighed influence of the Green Party in coalition. I’ve no issue with moving towards a cleaner planet, but I do have an issue with socialists! That said, I also have an issue with conservative ‘Nimbism’. However, I don’t have an influence on outcomes, so better for mind and soul to simply adapt.
Rant over.
Hi Tarmak, I took up Eagle based on the 'widening opportunities' comment made by AB in relation to the EVT.
Outside of the known plans to tie backs on GE, Magnus and Kraken, the only other UK opportunities that come to mind are Eagle and Tiger (211/12b).
As you say, Tiger is a larger opportunity, but it isn't as advanced as Eagle. The Tiger licence conditions require seismic by Dec 2023, with a drill within the following 2 years.
For newbies, here are my notes on Tiger:
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.
From 2011 “The Tiger prospect is a direct analogue to the Magnus Field, which is located 5 kilometers to the West. All of the play components, being source, migration, trap, seal and reservoir have been demonstrated to work at Magnus. The most likely, unrisked recoverable resource for Tiger is estimated to be approximately 90 million barrels.”
In Sept 2019 it looked like Eagle was going to proceed. (I've views on why it didn't, but will leave them out of this post)
This describes the status in 2019:
https://www.energyvoice.com/oilandgas/north-sea/207708/enquest-outlines-plans-for-landing-eagle-field/
At $65 oil I could see $200m of operating cash over two years in 2019, which implies a development cost <$100m.
A bit higher today, but now there is a 54% EVT allowance on the investment.
Another factor is the benefit of an Eagle tie-back to the economics of the GKA hub.
I'd be delighted to hear news on Tiger but I think Eagle is closer to generating returns. I'm hopeful of news in the coming updates on any licence developments but see it as a long shot. I think the last Enquest licence development that went into production was Scolty and Crathes in 2016. That didn't go to plan and had to be reworked - I suspect Enquest has grown cautious of such developments. Their purchase of producing assets has been more profitable - though the EVT now changes the tax/allowances component in favour of development.