Member Info for Megla

Sekforde, I don't agree with your FCF projection, especially as the forward curve for gas continues to weaken. But we are in agreement with ensuring shareholder returns continue, regardless of a bit of net-debt outstanding at year-end. I can't imagine either Retail or Institutional holders would favor cutting shareholder returns just to hit an arbitrary target that no ones asking for.

The $400m should be added to the buybacks though.

$400m of buybacks - a probable meh by the market
$600m divi (near 20% yield) Kabooooom for the share price

Sekforde, Whereas as I agree in an efficient market, the market value would have been $400m lower, I don’t think you can apply that logic to oil & gas shares at the present time.

I actually don’t think the share price would have been lower. The cost of holding the shorts would have been incredibly expensive so I think they would have bailed long before now.

Moreover, a guaranteed higher dividend yield would have brought in a different type of investor.

Obviously there’s no way of knowing for sure, but I would hands down go dividends over buybacks every time. I can always increase my holding with the cash if I think the share price is under fair value.

Anyways, each to their own on this one.

Sekforde, I really don’t get the average retail holder preferring buybacks over dividends, especially in an industry that’s getting shafted in all directions.

Imagine if the $400m in buybacks had been paid in cash, you’d have been paid a juicy 18% dividend. The share price would still be in the doldrums, but least you’d have a few quid in your pocket.

The yearly dividend should be increased to at least $300m and paid quarterly to stabilise the share price. If investors are looking for a share price response, I’m pretty sure that would get one. Moreover, it’d put a lot of pressure on those that are betting against the company to close their positions.

Sekforde, you could be right on the realised prices. I’m very undecided. I believe oil prices will eventually surprise to the upside, but I do think late summer/early autumn will be difficult for Gas prices as European storage levels get close to capacity.

On the flip side of that, if Gas prices do fall, then they’ll be a lot of pressure on the government to tweak the EPL. So maybe that wouldn’t be all bad.

In terms of what the company have said, I believe they’re just saying they have flexibility, which they do. As a holder, I won’t be happy if they massively reduce shareholder returns, just so they can say they’re net debt free in 12months time. I do, however, expect those returns will be less than last year, but still more than just the $200m divi.

As you say, let’s see what guidance the company provides. The key will will be what commodity prices they use for their assumptions and the ins and outs of the various different taxes, that’s where we have differences so will be good to hear from the horses mouth.

Sekforde, probably easier if we just look at 2023 for now.

Some key differences in our numbers.

Revenue = $4.8bln vs $5.3bln - Excluding the hedging, you're using higher commodity prices than the current forward curve. Post hedging, I have a realised price of $67boe. The key difference will be Gas prices, which have continued to sell off due to high European storage levels.

OPEX & CAPEX obviously match.

Finance, lease & GA costs = $0.35bln vs $0.5bln. Lease at $200m, cash interest at $100m and $50m G&A. Not sure why your number is higher.

Tax is very different. I have $1.2bln on a lower revenue number, as opposed to your $1bln on the higher number. I've broken down the tax into the individual components so you can compare. CT & SCT assumes standard tax calculation minus $50%, which takes into account the overseas assets and that not all UK assets will be protected via the tax losses. The non EPL tax charge 2022 was roughly $500m, so should be pretty close to reality?! On your revenue number, I have $1.5bln in taxes.

CT = $360m
SCT = $90m
EPL = $750m

Summary:

Megla
Revenue = $4.8bln
OPEX = $1.1bln
CAPEX/ABEX = $1.1bln
Lease/G&A/Interest = $0.35bln
Tax = $1.2bln
FCF = $1.05bln

Sekforde
Revenue = $5.3bln
OPEX = $1.1bln
CAPEX/ABEX = $1.1bln
Lease/G&A/Interest = $0.5ln
Tax = $1bln
FCF = $1.4bln

Baysil, put the bottle down and grow up.

Yes my forecast will be wrong, oil & gas is practically impossible to forecast correctly. No one foresaw the explosion of US shale and no one foresaw the shutting down of the world for COVID. What I'm trying to do is put numbers against what I see in front of me (mainly due to the introduction of the EPL), which quite frankly, makes a million times more sense than trying to include some M&A that hasn't happened yet.

This is the second time I've seen you trying to shutdown debate and label anyone that doesn't conform to the everything is rosy narrative as a shorter. If you're that insecure in your investment then either stop reading the forum or make better use of the filter button.

Sekforde,

Based on the forward curve, FCF for 2023 will be about $1bln. If you disagree with that, please share your numbers so we can discuss.

I calculate FCF for the following year at about $700m (based on the forward curve). Again if you disagree, please share your numbers. Production is very unlikely to remain stable. I have estimated 185k for next year.

Based on the above, I don’t agree that FCF will equal the market cap over the next 3 years. Moreover, we should be looking at the enterprise value rather than market cap for this type of analysis to be more meaningful.

Secondly, the reduced FCF for 2023 cannot clear the debt, pay a dividend and carry out $400m of buybacks. If the company wants to say its net debt free at the end of year, then there’s $200m available for shareholder returns. In reality, the company shouldn’t obsess over a couple of hundred million in debt, so the buybacks could/should continue, but likely less than 2022. Personally, I would prefer dividends, but unfortunately it isn’t my call.

Thirdly, as I’m expecting shareholder returns to reduce, the total yield doesn’t stand out when compared to BP or Shell.

As I’ve said before, I believe the upside has been capped by the EPL, but I would still view around 400p a share as a reasonable valuation, which would be a huge return on the current price. Obviously that may change based on what happens on the M&A front or if the ridiculous EPL gets tweaked/removed.

“Do you mean you all want to control the narrative where only rampers exist and fool people into thinking theres no risk out there and futures bright oh dear”

Agree with this, it does seem bizarre that most of the posters say the same things, but without actually saying anything. “The company is massively undervalued” why is the company undervalued, on what metrics?! Broker reports?! Your own analysis of PCF/PE ratio?! Something else?! “The poor hedges will drop off” again a common theme without talking about the fact that when they do, the tax losses will be utilised and we’ll be handing over 75% to HMRC.

There’s zero discussion about the utilisation of the tax losses, the impact of the EPL, the high decline rate even with hundreds of millions in CAPEX spend.

Someone posted yesterday that the company was buying shares under NAV, which couldn’t have been further from the truth given the anomaly of the negative balance sheet, yet still the uptick brigade were out in force.

Interestingly, most of the posters seem to support buybacks over dividends, that funnily enough, help the original investors to reduce their holdings rather than put money into their own pockets.

Earnings will drop this year, and earnings will drop again next year (if the forward curve is to be believed). Based on those reduced earnings, the stock isn’t as cheap as it was.

The Conservative Party have massively capped any upside for the company and yet there’s still no real discussion (or anger). If you’re a Labour voter and invested here, you really need to give your head a shake, if they follow through with their plans, they’ll put another nail in the coffin for UK Oil & Gas.

I recall Stevo doing some excellent fundamental analysis, only to be accused of being a shorter. That’s the only shutdown in debate that I actually see.

Anyways, just my observations, happy to be challenged on my comments/views.

Balance sheet NAV is negative (an anomaly due to the poor hedging), so no, the shares are not being purchased under NAV.

No one is proposing rushed M&A.

EIG are the main benefactors of the buyback, as I shareholder I would much prefer the cash to be in my pocket. Moreover, it puts pressure on the shorts when they have to cough up each quarter for the privilege of betting against the company.

Good points Doctordong.

It has allowed EIG to sell tonnes of shares though, so at least they’ll be happy.

The $400m spent on buybacks have increased the dividend from about 6% to roughy 6.6%.

Paying the money in cash would have given shareholders an 18% return into their pocket (based on the current share price).

I know which one I would choose, but each to their own and all that.

Why buybacks and not dividends?

Buybacks have done very little for shareholders.

Fundamentals, sentiment and flow don’t matter anymore. It’s all about Smartie’s gut feeling.

Are the fool as bad as your take from the 27th Jan, Smartie?

“I think we’re going to see a change of fortune today. I have a gut feeling we’re going to fly later. And this move won’t stop”

Filtered.

Newyorker, if Harbour are ‘printing money’ why is the share price so low?!

The problem with a lot of these posts, that go completely unchallenged I would add, is that they simply ignore what is happening in reality.

Post tax earnings & FCF will drop this year due to a combination of the EPL and the *current* significantly lower energy prices.

Next year, once the tax losses are fully utilised, post tax earnings and FCF will take another step down if the forward curve for both Oil & Gas proves correct. Yes the hedges will role off, EBITDA will increase, but we’ll be paying near $2bln a year in tax to HMRC.

This isn’t a doom & gloom post, I’m just trying to add a counterbalance on why the share price is where it is. On an EV basis, by year end, the company will have halved in value since in inception. This is a sad reflection on just how badly designed the EPL is. Investors want to buy companies where EPS are increasing, not decreasing year upon year.

Harbour are probably still a good buy (no one can say for sure), the company has a strong balance sheet and will undoubtedly make an acquisition this year, but there are reasons why the share price is in the doldrums.

Thanks for the reply Stevo.

Very good point on the EBITDA number, I missed removing the international operations from the EPL calculation.

Now adjusted, my estimated EPL charge still comes out significantly more than your own, but then I haven’t assumed any CAPEX will be included in the additional green allowance. Your assumption does seem a touch aggressive, but as a holder, and given how attractive the tax savings are, I certainly hope it’s closer to 50% than 0%.

I believe we’ll get FCF guidance during the year-end results, so should stop the guessing game. I’d probably go a little lower at $1bln for 2023, but that should just about clear the net debt (the company shouldn’t obsess about this) before UK FCF takes a step down next year due to likely full utilisation of the company’s tax losses in 2023.

Not sure about what happens with the EPL going forwards. Once energy bills come down somewhat there might be an opportunity to sort this mess out without it being a vote killer. I’m still surprised a Conservative Party would introduce such a punitive tax rate without a mechanism to adjust for the cyclical nature of the industry, but I guess there’s not much to choose between the two main parties these days.

Stevo,

Just checking your numbers for 2023 FCF.

Using the same numbers, I have $520m lower.

$200m of lease costs - this isn't including in OPEX (FPSO) - You don't have this?
$50m cash G&A - Again, you don't have this.
$770m of EPL - You have $500m

EPL Calculated as $3.4bln EBITDA - Minus $0.2bln lease costs - Minus 129% of UK Capex - Minus G&A Costs = $2.2bln

EPL charge 35% of $2.2bln = $770m.

More than happy to be corrected on this if you/others feel this is wrong.

“If you could rely on Labour not to amend the current tax policy (which I recognise you cannot), the new EPL regime could be considered to be a more attractive regime than the previous one to stimulate investment and improves the return on capital while reducing risk to the operator. Happy to share the maths behind my logic but clearly O&G execs are probably looking more at Labour policy than current tax regime.”

Very interested to see the maths on this Stevo.

Three things can be true at exactly the same time.

One, you can believe Harbours long-term prospects are massively reduced by the government increasing the tax rate to 75%. This is a company that operates in a cyclical market, with zero downside protection from falling commodity prices. Tax losses will reduce the tax take this year, but after that, HMRC are the main benefactor of the company’s UK operations.

Two, you can believe that the current share price isn’t the right time to exit your investment, with a potential run up in the share price (hopefully to £4) as Oil prices firm over the summer months (assuming no collapse in Gas prices, which is debatable).

Three, you can believe operationally Harbour are doing a good job. Linda Cook is arguably the best CEO in the industry, it isn’t her fault that the company needs to hand over the vast majority of the company’s UK profits to HMRC. Obviously Harbour will make an overseas acquisition this year, when that happens the companies prospects may look more favourable.

Lastly, if anyone thinks that people posting on this forum can influence the share price of a £2.5bln company, then I’ve got a bridge to sell you.

Pearls, sadly I agree.

If Gas prices drop in the summer due to the record high European storage levels then we’ll be left picking up the scraps whilst HMRC continue to receive a healthy bounty.

UK investment is now low risk with the relatively attractive investment allowance, but the returns will be pathetic in a low commodity price environment. Moreover, given the bigger risk of fields being a total flop (Solan $2bln hole in the ground as an example) the risk/reward is no longer that attractive. Yes firms should and will continue to invest in the UK, but getting access to new debt & equity will be challenging/expensive.

Personally, I don’t want to be in the position of cheering on extortionately high energy prices just to get a decent return, so I’ll be looking for an exit.

Unfortunately, I need 30% just to break-even, so won’t be anytime soon.

As one lady once said, the problem with socialism is that you eventually run out of other peoples money.