Member Info for Sekforde

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.

Yes we need to stick to buybacks and forget dividends. It is by far the best was to reward investors. No tax to pay unless you have made a gain. Tax much lower.

500 million barrels has a gross value of $45.5 bn. 10bn well spent!

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.

Morning Stevo,

I would be dismayed if the company just sat on any cash balances when it it paying 13% interest on some of its debt. It either needs to pay down the debt or do cash generative deals.

The company will be required to do an RNS within 24 hours of every purchase.

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.