Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
I think we should be very cautious. Going from a 43000 a day producer to 70,000 would be enough and should enable us to make quite rapid use of the tax losses. But without a deal I am beginning to think 2025 might be very like 2022 when we had $518m FCF. After all Brent is now well above the realised price for 2022, we may well get close to the production figures just over 47,000, with FCF this year of say $180m the interest payable in 2025 will be much lower, the leasing costs fall by about $80m. Diesel costs coming down by over $20m. These factors go an awful long way to matching the cost of the EPL in 2025. BP is on a forward PE of 8. Exxon 12. Struggling to see why our forward PE is just over 1!
OK so the market cap has risen from $300m to $400m. But not nearly enough with Brent now at $90. Using Stevo's figures and assuming no M and A, then we are at $180m FCF this year and around $300m next year. But there will be some M and A and it will be transformational. Craig Baxter said as much yesterday when he said "we could do a deal today but we are waiting for the right deal." The buybacks will start soon and I do not think you can buy $100,000 worth of stock every trading day without it having some significant impact on the SP.
Stevo yes I am sure you are right. But the company does have the recently paid off RBL to dip into to smooth out the peaks and the troughs so they could buy back some high yield bonds. The good news is that with Brent at $89 we should be generating far more cash than expected. You produced figures at $86 for 2024 and 2025 and those showed FCF greater than market cap over those two years. Roughly a dollar on Brent covers the cost of the announced buyback for this year.
Stevo I should have thought the average debt in 2025 as compared to 2024 may cause a saving in interest well above $10m. The Magnus payments do count for balance sheet purposes as a reduction in liabilities do they not? 1000 barrels a day does not seem "substantial". There will presumably be a big addition to 2 p reserves when Bressay gets going.
Stevo you posted on 29th March that you thought at $86 brent the FCF for 2025 would be $234m as a result of reduction in cash costs of $185m of which $90m was a reduction in lease costs. But do we not have the following savings over 2024? EPL $75m, ($175m - $100m) capex (say) $40m, lease $90m, interest on debt/bonds (say) $30m. We then are promised a "substantial" increase in production in 2025. Shall we say 2000 barrels a day net of BP's Magnus share? That would add $62.78m (2000 x 365 x 86). 2025 is beginning to look a lot like 2022 despite the EPL.
Stevo just to quote from Craig Baxter's email to me:
"The EPL estimate includes the charge payable on the Bressay/Enquest Producer farm down so is a significant increase versus our tax associated with "core" operations. Analysts consensus has our tax charge at around $125m which excludes the farm down but includes around $15m which is payable in Malaysia." I can assure you we are doing everything we can to reduce the charge" So I conclude the EPL is $110M on core operations in the UK. I do not think it is all that bold to use $86. Average could be lower or higher for 2024 and 2025 but prices of everything tends to rise over time with inflation. I like to take today's price and assume it will average the same. $86 not high in inflation adjusted terms by historical standards. Doing "everything we can to reduce" is I think a reference to the taking advantage of the very favourable capital allowances which labour may scrap next year.
Thanks Stevo. Just had an email from Craig Baxter after I asked about the size of the EPL and whether he could give any guidance on 2025 production. He said the EPL on the core activities was estimated to be $125m but that included $15m payable in Malaysia. The balance relates to the 15% sale of Bressay/Enquest Producer as you have surmised. This means that the real EPL for 2023 was only (!) $110m. I am wondering what figure you have estimated for 2024 EPL (payable in October 2025). Craig Baxter also said he could not give any guidance on the 2025 production increase and mentioned a number of variables but said that the Board would not have given that general guidance if the increase was "insignificant". The more I think about it the more I think the board were right to start modestly on the buybacks. They have kept their promise to start returns in 2024 whilst maintaining the focus on debt reduction. Using your most recent figures we have FCF of $364m for 2024 and 2025. This is enough to completely smash the debt or invest in something really attractive with a quick payback.
The buybacks are really tiny. But I assume the thinking is that the company must shed its expensive and non-deductible debt before proper buybacks. But with Brent at nearly $87, production high and no tax payable before 31st October 2024 that debt should melt away like winter snow. M and A just does not seem to be happening. But perhaps we keep it simple and focus on Bressay.
It all looking good. I was initially disappointed by the buybacks. But they will need to spend around $100,000 every trading day to get through $15m by the year end. The net debt reduction to $409m was pretty good and even with the EPL payment we could get to around $300m by the year end assuming no M and A. I liked the idea of making money from the decommissioning team.
Taverham, why would evidence be ignored? I do not accept that the very large number of scientists who all around the world carry out research are under some sort of pressure to ignore real evidence. There really is not some sort of coercive super state that causes harm to any anyone whose research might show that climate change is some sort of hoax or that it is not caused by human activity. A proper scientist produces evidence and evaluates it and then publishes a paper which is peer reviewed. The scientific consensus is highly inconvenient to policy makers.
Dogma is a religious concept completely hostile to science. I think that "Just Stop Oil" and other groups do not really understand science either. And they certainly do not understand what is politically possible. But they are right to keep us focused on finding a solution that does not leave large parts of the world uninhabitable.
I did not watch "The Movie". The International Panel on Climate Change receives evidence from the world's leading scientists. The overwhelming consensus among them is that climate change is caused by increasing CO2 and other greenhouse gasses emitted by humans. There are a few that dispute the claims. But I do not myself think they have any scientific understanding or know how to evaluate evidence. It is a bit like people denying that cigarette smoking causes cancer. Having said that, I am all for a pragmatic approach. We cannot in the next two decades stop using fossil fuels without causing economic collapse. And it certainly makes no sense to use Russian or Saudi oil rather than our own.
I personally think we should completely accept the case for reducing greenhouse gases. Long term the use of fossil fuels should decline. Those who do not accept the case for large and urgent reductions in world wide emissions do not understand the science behind climate change. The UK has been reducing its carbon dioxide emissions fairly dramatically. Scotland has enormous potential to deliver clean energy and Enquest should be part of that future. Frankly I would not invest in a company that just wanted to produce oil and gas for ever. Enquest is and should be a transitional company.
I think net debt at the end of February will be $400m. From the $481m we have to deduct the $44m for 15% of Bressay and EP which gets us to $437m. FCF of $20m for January and February seems a reasonable guess although it is all about the timing of capital movements.