Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
I’m sure it will. Gas prices are already at a level where only limited government support will be required going forwards. It’d be inexcusable to keep a hugely punitive tax rate on the industry when there would be no real justification for it.
As Stevo had previously mentioned, this is the 3rd time a windfall tax has been introduced, the other two were eventually rescinded.
Jeffrey,
Prior to the EPL, Linda has built a business that would have generated $2bln of FCF this year. Even with more normal energy prices the company would have been capable of producing $800m on a consistent basis. She’s done a good job, which has been undone by ill thought out tax policies.
I wouldn’t pay much attention to that, it was literally just done by updating my assumptions for oil & gas prices for 2024 with the tax losses fully utilised.
In my view, there’s not much chance the EPL would still be in effect in that commodity price environment.
That said, the very rough numbers do show how absurdly designed the EPL is though. Why it wasn’t based on realised prices is beyond me.
The investment allowance is okay. But flip it on its head. If the government had reduced the investment allowance (increased risk), but also reduced a 75% tax rate to 40% (increased shareholder returns) share prices would be increasing, not getting slammed into oblivion as they are now.
The real problem with the EPL is if gas prices normalise (not sure they ever will) we’ll be burning through the reserves whilst being left with scraps.
Using 70p therm and $75 oil I have $800m of FCF under the old tax regime and $270m of FCF under the new tax regime.
The EPL definitely needs tweaking, I’m sure most of us would accept something that was based on realised price. But the crude design of it is already having an impact on how the industry views investment in the North Sea.
I’m not expecting any changes in March, but they’ll be a lot of pressure come the Autumn from the industry if Gas prices do continue to weaken.
Using the current forward curve, the company would have been significantly better off with the price deck before COVID than we are now, which is utterly ridiculous. Stealing from shareholders would be one way of putting it.
This isn’t a tin pot operation, there’s no need to provide a net debt update for February.
FCF for year is important, but more important is price deck and expected tax charge on those number. FCF projections are relatively easier after that. Well, within a certain margin of error of course.
I don't think the company will provide a net-debt update for Feb. The balance of the now various different taxes gets paid in January, so providing an update might not be favorable and would ultimately just confuse things.
- The key thing for me would be the amount of taxes the company expects to pay on the price deck they provide. Once investors know that, they can play about with the numbers based on their own assumptions for energy prices going forwards.
- When the company expects the tax losses to be utilised - no doubt will be a question in the Q&A
- Progress on international developments and M&A
- Comments that spell out just how ridiculous the EPL is, especially considering the forward curve is now massively lower than those used by the government (from the OBR) to justify the windfall tax.
- Drop the arbitrary net-debt free target for 2023 that no one asked for
- Announce shareholder to be in dividend format only, which would put the cat amongst the pigeons for those betting against the company.
Sekforde, please review page 35 of the half year results. Tax losses at the end of H1 were $1.3bln, you’re using the number that also includes the expected tax savings from carrying out the required decommissioning activities.
Given the current price deck for Gas, I no longer think the losses will be fully utilised in 2023 and instead will likely last into H1 2024. Obviously this is a moving target as energy prices move up an down.
Actually Sekforde, 2024 is where we really start to diverge.
The tax losses will likely be fully utilised this year, so with 185k barrels, £1.25 per therm and $85 oil, I have FCF at $650m. The biggest factor is the increase in tax, which rises to $2.1bln.
Production won’t increase in my view, in-fill drilling just slows the decline rate. The only major asset to come on-stream next year will be Talbot. 185k barrels would still be a very good result though.
I don't think we need to debate this too much, next year will look very different after the expected M&A anyway. But even if they don't close a deal this year, $650m of FCF is still pretty good, provided we're converting reserves from 2C to 2P with the CAPEX spend.
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.