Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
Stevo I think you have been balanced. But on 6th March 2024 you suggested $50m fcf for this year and $200m fcf for 2025. Your analysis assumed no increase in production in 2025 and $80 Brent. The management has told us to expect an increase in 2025 and current Brent is $86. I think if the current price is maintained (a fall in real terms) and production increases by say 1500 barrels a day we add a further $75 FCF for 2024 and $100m for 2025. Agreed? So our FCF for 24 months would be $425m against a market cap of $350m. 2026 will see collapsing interest and leasing costs. Our liabilities are not real liabilities any way. They are just the cost of generating that FCF which could continue to a perpetuity as the company pivots towards carbon capture and renewables over the next 15 years. Decom costs, leasing costs and even finance costs are not really different from a firm of solicitors paying rent on its offices. They are all very manageable costs that are rapidly shrinking anyway.
To answer your question Redbuffet, the answer is I would if that were to happen. Current prices reflect the intersection of supply and demand. In practice no one knows whether prices will rise or fall. Traders selling at $86 think they will fall. Traders buying think they will rise. By assuming for the purpose of calculating FCF they will stay the same I am adopting a neutral middle course stance. Stevo argues that one should use the forward price curve and there is sense in that too. But the recent increase in Brent has increased all the forward prices as well. We are, for the time being, adding not far off $1m to the balance sheet every day. Happy days.
Accepting Stevo's excellent analysis of 6th March in which he assumed 43000 a day for 2024 and 2025 and an average of $80 a barrel and arrived at FCF of $50m for 2024 and $200m for 2025, I adjust for two factors: (i) Brent is now $86.5 - so let us assume we average that for 2024 and 2025 (ii) We were promised an increase in production in 2025 - so let us assume 45,000 barrels a day. After allowing for the increased payments to BP, this would add 13 .495m x 6.5 = $87.7m for 2024. For 2025, the additional assumed price gives us an additional $87.7m and the additional assumed production gives us an additional $55m. There would be higher EPL to pay in October 2025 (around $30m) but that would be offset (by around $20m) in interest savings over those two years. So in rather rough terms I think our FCF looks like around $140m in 2024 and around $330m in 2025. Taking into account the receipt of $44m for the 15% of Bressay/EP and the last posted outstanding net debt of $481m, we could be net debt free in just 20 months. But of course a net debt of say $150m at the end of the 2025 would be fine and consistent with very large share buybacks until then.
I think we we get with the full year results in a few days (i) the net debt to the end of February 2024 (ii) confirmation of the costs guidance for year (iii) confirmation of production guidance (iv) estimate of EPL for October 24 (v) A lovely surprise of one sort or another !!
Thank you BTFath. If we manage to average $84 Brent this year (not an especially brave assumption) then that translates to an additional $4 x 15,695,000 or $62,780,000 - $8m (additional bp magnus payment) = $54.780m in FCF this year on Stevo's figure of $50m. The market simply has not woken up to the enormous benefits that accrue to a highly geared company from these higher Brent prices. I now favour a very aggressive buyback approach. I think the company can afford to spend $70m this year and $100m next year whilst reducing net debt by over $200m. That is a very substantial and sufficient deleveraging in a short period of time. It could be achieved at the same time as giving shareholders back more than 50% of the current market cap. I think we deserve it for all the pain we have endured!
Stevo I have returned to your excellent analysis on 6th March 2024. You projected FCF for 2024 of $50m and FCF for 2025 of $200m. Accepting these figures (and they were cautious in that you assumed $80 Brent and no increase in production in 2025 which Craig Baxter has told me there would be) but adding in the $44m paid in January for Bressay/EP then that would give us FCF of $294M by 31st December 2025. If there were no return to shareholders the net debt would fall from $484m to $190m. It would be safe to return $110m to shareholders by means of buybacks between now and December 2025 leaving us with a net debt of around $300m in December 2025. At present market prices that would remove more than a third of the shares. But of course the effect of all that buying would quickly drive the sp much higher.
After the election, we will be paying tax at 38% until 2029 and then back to zero until 2033 assuming we do not find a way of accelerating those tax losses. Harbour is paying a dividend of $200m a year. Ignoring its recent takeover it is 4 times the size in terms of production. It does not have the reserves Enquest has and has used up its tax losses. It has much less debt. The cost of servicing our debt is less than the tax advantages. So I am expecting at least $50m a year in share buybacks starting in March.
2023 and 2024 compared using company's figures and assuming same again production and $3 extra realised per barrel (2023 realised $79.50 so assuming $82.50)
Costs
Opex - + $45M. Capex +$40m Decom + $10m. EPL + $105m (after repayment adjustment) Interest - $10m Leasing - $20m = $170m worse than 2023
Income: Assume additional $3 Brent over year (average realised price Brent 2023 $79.50) on 12.8m barrels and same again production = plus $38.4m.
FCF in 2023 was $236m plus $50m (Golden Eagle payment) = $286m. So: $286m - $170m + $38.4m = $154.4m.
Stevo your figures are not far off based on what we have been told so far. But here is why you may be too pessimistic for both years:
2024.
1. You have used $80 average brent price. We have averaged $81.70 so far in 2024 and at present are above $83. If you use say $83 average then that gives us an additional $38.4m.
2. You have not (and you say so) included the 15% sale of Bressay/Enquest producer. That gives us an additional $44m.
3. The $150m EPL may be too high (you will recall the 2023 surprise reduction). I am using $130M. That gives us $20m
4. The fact that the EPL is payable on 31st October 2024 means that until that date the net debt should be falling rapidly especially at $83 a barrel. Interest is difficult because we have to calculate it on gross debt then adjust for money earned on cash. But perhaps your $70m could be nearer $60m. That gives us $10m.
5. Your opex figures of $415m is of course what the company has told us, but that would be an increase from $370m over 2023. An increase of 12% is above what could be justified. A 5% increase in OPEX gives us another $27m.
6. Your decom figure is again what the company has told us. It is an unjustified increase from $60m. A 5% increase gives us an extra $7m.
I get therefore to an extra $146.4m on your FCF figure for 2024.
2025. There is understandably less detail in your 2025 figures. but you assume I think same again production. But as I have said before I met Craig Baxter for lunch and he wrote to me afterwards and said the company expects to maintain production in 2024 and increase it in 2025 because of the 2024 drilling campaign. It is all about making use of the generous capital allowances in 2024 before they are reduced by the next Government. As you acknowledge 2025 is a golden yea and you have calculated FCF at $200m. But there are many paths that lead to an excess of $300m FCF for 2025.
More news from this slightly opaque company coming soon. So we may both have to adjust our estimates.
Not really worried about 2029. We will be a completely different company by then. No debt. Still with tax losses to use. High earnings from carbon capture. Higher oil and gas production as Bressay delivers. Nothing to worry about. Stolen Labour's clothes. Election result not in doubt.
3dart, I agree. The target of 0.5 debt to EBITDA is really unimportant. But it implies a very low actual level of indebtedness and I think we have reached or almost reached it. Some cash is required to be kept in segregated accounts. But any that is not should be used to either pay down expensive debt or distributed by share buybacks. I am sure the company knows that and will use its capital efficiently.
Tommo, the capex covers the drilling etc. FCF is at the moment just being used to pay down debt. I think it is time to start using at least 30% of FCF to buy shares. The debt is quite expensive to service. But the shares are so cheap in terms of forward FCF to market cap that I now think we should pay down the debt at a slower rate. Even spending around $100m a year on share buybacks is consistent with a steady reduction of debt. Quite obviously the market cap cannot stay at $325m with $100m being spent each year on buybacks. AB has not bought any more shares because he has a huge stake already and has made huge losses. He may or may not have spare funds. But there comes a point when you think "I have enough already no matter how much of a bargain they are". Good news I am sure is coming this month. Stay positive with Brent above $83 and money pouring in.
A mixture of buybacks and dividends is inefficient. Dividends are taxed. Buybacks are not. We do not need more investors coming in if the company is buying its own shares. Some large investors however will anticipate the effect of the buybacks and buy any way.
The market cap is now about $327m - less than likely FCF for 2025. With brent at $83 the company could easily afford to commence immediately a programme of $60m per annum in buybacks. Afterall the gross additional income arising from Brent being $83 rather than say $78 is more than $60m - even allowing for the additional payments to BP. Or looked at another way, we paid $50m for the contingent payment on golden eagle in 2023 yet we paid off $236m in debt in a year when Brent prices realised were lower. There are no such contingent payments in the future. Paying to long suffering investors $60m this year in buybacks is consistent with continued rapid deleveraging. The buybacks could in fact be increased in 2025 to more like $120m. Again this is consistent with continued deleveraging. Of course the effect would be to drive up the price quite rapidly as most investors are long term holders and would not be tempted to sell at 20p or 25p. I strongly favour buybacks over dividends. They are simple to do and more tax efficient than paying a taxable dividend. The formal results and announcement or buybacks should spell out to the market once and for all that these shares are grossly undervalued.
Do not worry about either. None has proposed to take away our tax losses and both parties recognise that oil and gas are needed for "decades to come". But Enquest will be making hundreds of millions from carbon capture in 10 years time and will no longer attract the present level of hatred.
Romaron if they have said that, then it does not look like the company buying. The company has in fact bought bonds in the market before and I do not think it needs any special shareholder resolution to do that. The RBL is expensive in terms of interest and so it would make sense to keep paying it down unless of course a complete bargain with a 12 months payback emerges.
The issue is whether you can look at a graph and make a prediction from the graph itself as to what will happen next. You can't. The graph tells you nothing about future valuation by the market. It simply represents an historical record of how the market valued a share or commodity. The sort of claims that I think are silly are "now we have broken 14p we will go to 15.8p". Or "now we have fallen to 11p the next stop is 8.6p".