Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
I do not rule out 2024 being very like 2022. In that year we generated $519M of FCF on 47259 barrels per day and an average realised price of $88.9. How might 2024 be different? First production will not necessarily be any lower at all. The top of the range for this year looks like being achieved (46,000) and Craig Baxter confirmed that the company intends to keep production within the range absent M and A. But there is still plenty of time for something on that front being announced. So I am looking for at least 2022 levels of production. Second Brent could easily average $88.9 for 2024. Third capex and opex will be higher but leasing and finance costs will be lower. The average net debt in 2022 was around $1bn and it may be around 50% of that in 2024. Ok we have the wretched EPL but even if that is $150m we would still have around $370m FCF. That hugely reduces risk and interest payments for 2025. I say buy more. Crazy to sell. What was AB doing when he bought 4m in December 2023 when Brent was at $80 and the price was 21p? Bargain then. Super bargain now.
Ignoring the $50m golden eagle payment net debt came down by $27m in the period 30th June to 31st August. Brent averaged around $83 during that period. Since end of August it has averaged around $90. Production should be higher than in July and August. We have the $76m EPL payable this month. Overall I see debt being around $580m year end. Assuming production maintained and with no tax until October we should be able to get net debt down to below $300M by October 2024 assuming $90 brent and no dividends or share buybacks. Both leasing costs and finance costs should be lower. Just not sure that the EPL will be as much as $150m in October 2024. Must find a way of leveraging the tax losses soon.
The reasons for delisting were completely sound. But the best advice for Swedish holders is to do nothing. No one is going to take away your shares come the end of the year. Delisting may make it more difficult to trade. But why sell? They represent a fantastic long term investment with earnings in 2024 and 2025 not far off the present market cap. There will be dividends and share buybacks soon. In due course a device will be found to enable you to sell your shares easily. Perhaps the company will offer to buy them. Relax. Everything is going well with production. The price of Brent is in the goldilocks zone. Plenty of potential M and A coming soon.
Stevo
At the risk of being a complete bore, there is nothing which can be agreed that binds a future Parliament. The state can enter into any contract with any company and then Parliament can legislate to change that contract or to cancel it. Equally Parliament can pass a law which confiscates property without the payment of any compensation at all. This very rarely happens however. There would be opposition in Parliament itself to passing laws which are fundamentally unfair or confiscatory. But talking about binding guarantees misunderstands the notion of Parliamentary Sovereignty.
Dumbly this subject keeps coming up as to whether there could be some sort of guarantee which would bind another government or more strictly a future Parliament. As a matter of constitutional law there can be no such thing. Any Parliament is free to pass legislation determining the rate of taxation and there is nothing preventing it passing a law that has retrospective effect. It is of course in fact the case that Parliament very rarely passes taxational law which have retrospective effect. But this was in fact precisely what the labour party were threatening to do by promising to pass a "proper" windfall tax that took effect from May 2022. They seem to have gone a bit quiet on that idea. I do think it is interesting that they have not condemned the Rosebank decision. It is a very real dilemma for all of us, how to transition away from burning harmful fossil fuels without damaging the economy or the need for some form of national energy security.
I do not think there is any chance at all that the Labour party would have given any private reassurance to anyone that it will not alter investment allowances nor increase the EPL to 38%. That is its stated policy and it is just not going to contradict that in some private meeting. All investment decisions now will be based on the likelihood that the Government will change in October 2024 and that a more punitive tax regime will be implemented. We have to live with that and factor that in to all our forecasts of future earnings. For Enquest it is just crucial that this period of high oil prices is used to clear most of the really expensive debt. It will then be able to cope with its tax rising from 35% to 38%.
No need to worry about the Sp. In the end it is all about maths and probabilities. The company has to first deleverage and remove expensive high interest debt. That could take another two years or so. When that debt is removed it enables shareholder returns of at least 30% of present market cap. It is much better that these take the form of buybacks as most of us are nursing large losses. But dividends are possible too. Once the market perceives the company will be paying $100m a year in the form of buybacks or dividends in two years at that is sustainable for the next 20 year or so, the sp should rise.
I still think there is a good chance Harbour will bid. An agreed take over at around $600m could result in a saving of that sum in a year by Harbour. It has the cash sitting ready and its borrowing costs are much lower,
But the more likely is the purchase by Enquest of producing assets in the NS on the basis of deferred consideration. The Magnus deal is the right sort of structure.
The present sp is such an opportunity for the brave. Everything is coming right. Production is at the top end of guidance, the problems with the transformers at Kraken were a blessing in disguise because it brought forward maintenance when Brent was relatively low, and we now have sterling weakening just before the sterling bond is due to be repaid. I still have net debt at between $520 and $550m at year end after payment of the EPL and then I hope for steady reductions until October 24 EPL of the order of $30m to $40m a month causing a huge reduction in financing costs. I do not want to see share buy backs start until 2025 when I think $100m a year is affordable. I do not want to see dividends paid before the market cap is above $500m again.
Oh and I head the last post November is coming because we will then learn about the two key components in this golden out look: Actual production figures for 2023 and net debt after paying the October EPL. If that debt is still coming down rapidly despite the additional expenditure in the second half then happy days are around the corner.
I continue to be fixated by the market's valuation of Enquest. I am intensely opposed to those who imagine that the world does not need to transition away from fossil fuels. It does and the sooner the better. However, the plain fact is that that is going to take at least another three decades and companies like Enquest and Harbour have a hugely important role to play in that transition. Both will be around in 30 years and probably not producing any fossil fuels at all. In the meantime, Enquest has a market cap of around $350m. One way of valuing any company is as multiple of its forward FCF. After all FCF is essentially a sum available for distribution to share holders. By the end of 2025 I think we will be essentially debt free. For the following year 2026 we will be saving at least $100m in finance costs and around the same sum in leasing costs. Our effective rate of tax will then really be 33% and not the almost 50% we are paying now (as a result of the non deductibility of the finance costs.) Moreover, an end to the EPL will be in clear sight (2028). It is perfectly conceivable that by 2026 our FCF will be matching the $518m figure achieved 2022 even with (say) $200m EPL. What is a realistic valuation at the beginning of 2026 for a debt free company with projected FCF of say $500m, then $500m then $700m and then $700m. Certainly $3bn would not be crazy. Many Us oil companies trade at around 8 times FCF. A $3bn valuation would imply a share price of just over 120p. Of course an even better situation could be produced by the company not paying off all its debt but using some of the FCF in say 2025 to purchase its shares. I think that will happen.
The price of Brent is now $20 higher then it was in July. With that higher price all the forward prices have moved higher. At 45000 barrels a day, $20 extra yields an additional $328.5M (per annum) or close to the entire market cap in just one year. ( I have not adjusted for the additional payments to BP for Magnus) It was not as if the company was anywhere near insolvent at $74 Brent -It paid off a huge chunk of debt in 2021 when prices averaged around $74. There is no bad hedging and all the extra money is pouring into the company's bank account...... The SP represents an absolute steal.
Stevo the presentation was on 13th September 2023. Although they will not say it is in fact obvious that production will be very near the top of the range. This is because we produced 45480 in the first half despite all the transformer issues at Kraken and the first two months of the second half saw debt being eroded at $13.5m a month which suggests to me it did not dip much during July and August despite most of the non Kraken maintenance work taking place. The arrangement in Malaysia is not comprehensible to me. But never once has the management mentioned the payment of such tax in its guidance on calculating FCF. Apart from the Malaysia figure I agree with all your figures. But oil is now trading at $13 a barrel more than when AB bought all those shares at 21p in December 2022. He knew by then all about EPL 2.0. It is more than $15 extra per barrel than the forward price then suggested. $15 extra per barrel translates to an extra $249m at current production rates if maintained over a year. (I am ignoring extra payment to BP and the interest savings.)
Stevo the answer starts at 37.18 in response to a question about FCF over 5 years. Craig Baxter said in the absence of M and A "we are looking to spend capex that helps maintain production in the current range". That implies that any M and A should enhance production above the current range. He also made clear that the $76m EPL was due in October 23 and relates to the period 26th May 22 to end of December 2022. He said "it stands to reason" that EPL should be more than $76m in 24. But we are now up to a current price of $94 a barrel. If we use an all in costs figure of $65 a barrel which includes payments to Bp and the Malaysian government and assume that total production is 44,000 a day in 2024 and assume only $90 a barrel in 2024 and ignore anything obtained from gas sales, the FCF should be 44,000 x 25 x 365 or $401m before whatever turns out to be the EPL. However there would be a saving of interest of around $30m which gives us a FCF of around $280m after payment of the EPL using you $150m figure. For the second half of 23 If taking into account the payment of the $50m for golden Eagle, the payment of $76m in EPL, the much higher opex, but also the much higher prices, we merely end the year with the same debt as at June 30th 2023, that would still mean our net debt falls to around $300m by the end of 24. In 25 we should save a further $30m in interest costs, and $70 m plus in leasing costs which will cover most of the October 25 EPL. Most if not all of that $300m should be paid off in 25 as it is expensive and does not qualify as a deductible cost when calculating EPL.
Hi Stevo
Craig Baxter said in terms that the $160 m capex was enough to maintain production in the current range without m and a. It was clearly a planned remark.
We reduced debt by $13.5m a month in July and August if you ignore the exceptional and last payment for golden eagle. Oil averaged $80 a barrel over these two months. It is now almost $94 and averages about $93 in the forward market until December. We should have higher production than in July and August - 2000 extra a day? We only have the one exceptional item which is the EPL of $76m so we definitely should reduce debt in the last four months.
I do not think you can simply double first half EPL to arrive at $150m for October 2024. Most deductible opex will be incurred in the second half.
Why does not the US government sell into the current market using its reserves and buy the futures to exactly replenish the oil sold. Where is the flaw in this no risk money making strategy?
Papegoya, I have just used the approach that Baxter took when he answered a question from me last May about FCF for 23. He did not answer the question directly because he did not want to give a profit forecast. But he outlined the approach one should take. (He clearly forgot interest and leasing costs). But I agree that actual turnover would appear to be even higher than the sums my approach produces. I am supposing that Brent averages $96 for 2024 which is above the forward price but I cannot for the life of me understand why, say, the US does not sell into the current market using the Strategic reserves and then buy into the futures market to replace them at a lower cost? Logically price should be higher in the future to account for the constant devaluation of the buying power of money.
The tax rate for Enquest is 35% before adjusting upwards slightly for non deductible finance costs and decommissioning. But here is my logic. Year end debt should be $520m. Assume $96 Brent for 2024 and 45000 a day production we have $96x 45000 x 365 = $1.576 bn revenue. (I have merely adjusted Brent for inflation and the 45000 a day is taking at face value the Baxter comment about maintaining current production)
Less: opex $450m capex $170m leasing $120m, Bp magnus profit share $90m finance $50m (collapses as debt repaid) EPL $100m = $596m FCF. At end of 2024 we should be debt free and have no EPL to pay until October 2025!
Smart move. I have also topped up selling down Harbour to do so which I hated as it is also undervalued. The Swedish thing is just so temporary. What matters is $93 Brent. Once the October EPL payment is over (paid for by September and October's earnings), at 45000 a day we deleverage at around $40m a month. By mid March 2024 we should have debt down to around $420m which should be less than 0.5 of EBITDA. Hence with the annual results in late March the company will say what dividends/buybacks it proposes to make. Just buybacks for me. Effectively tax free if you have bought above present SP like most of us.
Krakenoil I do think there is a good argument for offering to do just that as Swedish shareholders should not be left stranded. If we are only talking about $35m to $50m then that is fine and would not impact greatly on the balance sheet. I think the FCF from November 23 to March 2024 should be around $36m a month if $92 per barrel holds and we manage 45000 barrels a day.
Martinen
I do not pretend to know exactly what a holder of Swedish Enquest shares should do. Craig Baxter did suggest that there were 10 banks that offered a nominee service for those who wanted to keep their holdings. But the company could not maintain a listing for just $35m worth of shares. When delisted if no nominee account is set up, I assume that the title to the shares is not lost. So I suppose it will mean that those share holders could continue to be entitled to future dividends but the just would not be able to sell them on any exchange.