Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
The way I read the somewhat cryptic announcement is that the $15m will be spent before 30th June 2024 and that is the first phase. It will be followed by a second phase which is justified because of the huge amounts of cash being generated at $87 brent. $15m buys around 73m shares at the present price. So we will see the buying crank up as we have only around 40 trading days to spend the $15m. But who would be a seller at these levels when the FCF in 2025 could be around 12p a share?
Stupmy. Harbour is a case in point. Since April 2022 after which it began its buy backs its shares have fallen from around 500p to just under 300p. In contrast Enquest has fallen from 35p to 16p. In addition Harbour has paid around 30p in dividends. So Harbour has hugely out performed. Both companies have of course suffered because of the EPL. But the impact on Enquest should have been more muted because of its tax losses. There are many factors at play. But I think Harbour has performed relatively well in part because of its bold buyback programme. It comes down to mathematics in the end. It would be possible to purchase every single share of Enquest using the FCF over the next two years IF the sp did not rise. Quite obviously that could not happen as most holders will refuse to sell at anything like the current price. But we will have to see.
The announcement should not come as any surprise as that is precisely what Craig Baxter said would happen before the end of the month. However, what is new is the reference to the period of buybacks ending on 30th June. If what it means is that 4% of the share capital will be purchased in just 40 trading days then that is quite something. More than 50% of the stock is held by institutions (and AB) which appear to be long term holders. I suspect that the company will complete the programme and then add to it in the autumn. Harbour did something similar. The key thing is that this is very small beer in relation to FCF.
AimOil It is grossly unfair to target an important industry. But there are no legal challenges available. All one can do it to campaign for the law to be modified. The Oil and gas industry is an easy target for taxing politicians. It has few political champions. I myself think one has to emphasise not just the jobs, the tax revenue and the energy security but the transition that is being made to a carbon neutral future. I am a big advocate of reducing carbon emissions more drastically. But that has to be done in a sensible way without wrecking the economy. Enquest are part of the solution as indeed are Harbour and a host of other companies who produce oil and gas do not ignore the science of climate change.
We have been over this before. What legal challenge could be mounted to primary legislation? The Finance Act 2022 which brought in the EPL was passed by both houses of Parliament. Parliament is sovereign. It makes the law of the land.
Stevo agreed. It is all a function of gearing which does as you point out favour Enquest with Brent at these levels. A $120m uplift for Enquest holders is around 30% non taxable return. A $120m dividend for Serica holders is 12% taxable return. I do not like taxes. I do not like dividends. I love share buybacks.
Stevo. Bressay clearly has a current value to Enquest in that 15% has just been sold with 15% of that rust bucket which is Enquest Producer for $58m of net of tax upfront cash. It is soon to produce gas which will save $30m a year. Once we ascribe a value of say $400m or so to these assets alone we have already exceeded our current market cap. You have suggested FCF of $180 -$200m for 2024 and $234m for 2025 at more or less current Brent with no further deals. I am wondering if you have made similar forecasts for Serica? I do like the latter and it is an obvious candidate for a merger.
I also keep wondering whether we will have a few years of Magnus being 100% ours. This must particularly be so if production does increase (as forecast) and we have Brent at around $90 of more. We could clear the outstanding consideration to BP quite quickly. But I am bored and I want a big deal to happen. A merger with Serica is my dream solution. They have the cash we have the tax losses.
He is right to point out that BP in effect retains 37.5% of the Crown jewels which is Magnus. But I prefer just to look at the profit payments to BP as a cost just like interest or opex or tax. What to me makes Enquest so exciting in terms of the potential future SP is the likely FCF which of course takes all these costs into account. It is the advent of $87 Brent which may be sustainable which enables us to project forward an extraordinary daily wall of money which is retained by the company and is being used (or should be) to smash expensive debt. Stevo has also made the point that in January and February 2024 we were negative FCF if you ignore the farm down payment. That will be to do with the timing of deliveries and sales. That should mean that March and April will have been two golden months and we will see large reductions in net debt which be reported at the shareholders meeting in May.
Stevo it is true that EV of Serica and Enquest are similar. But what really matters for valuation purposes is prospective FCF. After all , that is money that is available for distribution to shareholders. Using your own figures carefully calculated assuming $86 Brent for 2024 and 2025, Enquest FCF is around $180m for this year and $270m for 2025. I would imagine that Serica will be similar. Moreover, I do not see this as a two year wonder. In the case of Enquest it is sustainable over 20 or 30 years from existing proven reserves, the development of Bressay and Bentley and of course Veri Energy. Although FCF could simply be paid over to shareholders, management is using it to pay down debt which of course will enhance FCF in the future. I do not see Serica as having anything that competes with Enquest's tax advantage, its ownership of two huge oil reserves and its potential for carbon capture and renewable energy. It is these assets that will enable FCF to rise over time.
I think they would deal with the junior loan first before worrying about the bonds. This is the most expensive debt (13 %) and unlike the bonds it is secured. But nothing should be paid off if there is a two year pay back investment. High time the board announced a deal. Insane not to accelerate use of tax losses.
Can the valuation of Enquest be justified as against Serica Energy? The latter has a market cap of $956m as compared to Enquest's $375m. This is wholly absurd. First and foremost Enquest generated $300m of FCF in 2023 against Serica's $242m. Second Enquest has 175m of 2p reserves as against 140m for Serica. Third the production guidance for 2024 is remarkably similar 41k - 45k for Enquest 41k -46k for Serica. There is of course an important distinction. Serica has net cash of $96m as against Enquest's net debt of $410m. But the value of Enquest's tax losses alone are $500m. And the effect is that even after servicing the debt and paying BP for Magnus Enquest will achieve superior FCF to Serica for the foreseeable future. Serica has nothing to compete with the potential of Bressay and Bentley or the extraordinary long term potential of Sollom Voe. So I conclude that if the market were entirely rational and analytical it would award a much higher market cap to Enquest. I would say it ought to be at least $1.2bn. But let us put things a little differently. In 24 months time Enquest will also be essentially debt free. It will look remarkably like Serica except it will have the advantage of its still unused tax losses and almost certainly a large increase in 2p reserves as Bressay moves towards production. As it happens I think Serica is substantially undervalued by international standards (particularly the US) as well with its dividend of 12% and the commencement of share buybacks. It is only a matter of time though before the market recognises the completely unjustified differential between these quite similar companies. The far too modest share buybacks will commence before the end of April. The commencement must be announced by the company and the daily purchases must also be announced under stock exchange rules. So they clearly have not started yet.
Exxon has a market cap of $476bn on FCF of $36bn in 2023. Enquest has a market cap of $375m on FCF of $300m in 2023. The market cap of Exxon is 1269 times greater than Enquest and yet its FCF is (only) 120 times the size. If Enquest enjoyed the same ratio of market cap to FCF it would have a valuation of $3.965 bn. I would not mind so much if Exxon had greater growth prospects. But it does not. FCF in the end is all that matters. That is money that is available for distribution to share holders. Either Exxon is absurdly overvalued or Enquest is absurdly undervalued or both.
Stevo what would be the impact of a sale at a loss on the EPL payable in October 2025? Could the loss be used to reduce taxable profits subject to the tax? No sale sensible unless part of a grand bargain. Days away I suspect.
Stevo,
As you often say we have to always calculate FCF over the whole year and not worry about the odd month or two. I also guess that oil could go a lot higher. I think the present price is really all about current supply and demand and I rather doubt the claim of some sort of middle east uncertainty premium. Also in real terms Brent is not high. Brent averaged $108.56 in 2013 and that in inflation adjusted terms is over $160.
Stevo Craig Baxter also confirmed that the net cash advance on the 15% farm down deal was $58m. Add that to the $180m FCF you have forecast for this year with $90 brent and we get a massive retiring of net debt - even before the 2025 golden year. The conflict in the middle east and the possible blocking of the Strait of Hormuz should remind the Labour Party how important the North Sea is in terms of energy security. Frankly I think we have nothing to fear from Labour. It has always been more pragmatic in Government that it signals in opposition. Do you agree that with Brent rising from $80 to $90 per barrel and all the forward prices rising as well, that the company is worth a heck of a lot more than $406m using ordinary valuation metrics? May be something like $250 - $300m a year FCF is sustainable for the next 40 years or so if Bressay and Bentley come on stream and we get Veri Energy going properly.
No one can justify a market cap of $400m. Moving from 17p to 25p implies only an increase in market cap to around $600m. That is still far too low. The FCF for 2025 alone could easily be around $400m if $90 oil holds and we achieve the promised increase in production. I invite everyone to listen again to Craig Baxter's comments on M and A. It is quite obvious the board is in intensive discussions, but he was constrained to talk only in generalities about publicly available information. The logic of doing a deal to acquire late life assets for very little up front money is completely compelling. We have talked on this board about the massive drop next year of leasing costs ($80m) but CB also seemed to imply that a lot of the decommissioning costs would also fall away next year.