Member Info for Sekforde

I met Craig Baxter for lunch and on 29th January 2024 he sent me this email:

"Good morning D.... and thanks for your note.

In terms of capex, I'd expect that the 2022/23 level of guidance (C$160m) plus 25% would enable us to maintain production within our 2023 range in 2024 and, given planned activities (including drilling at Magnus and PM8/Seligi, as well as a return to drilling at Kraken) we should see 2025 production increase vs 2025."

By the way Craig Baxter is a very intelligent man and good company. He was full of enthusiasm for the company and spoke highly of his colleagues. He does play by the rules and provided no information about any discussions that may be taking place to make accelerated use of the tax losses beyond saying "On the subject of utilising our tax losses, I can assure you that we remain focused on growth through M & A."

Hi Stevo. But does it matter? Our partners are paying for things we have to do. Whether it counts as Opex or Capex it is money coming in and reduces debt. Do not any one get me started on Trump and his bromance with Putin. Both evil creatures.

Stevo are you sure about the treatment of that advance? Is it not simply a payment for future work which is then accounted for in the $400m opex? In other words if you did not include it as effectively our money, then our opex would be lower by the amount of the advance and so the overall FCF and debt reduction would be the same. I see the key thing to look our for is the net debt figure as of 31st January 2024. I went on like a broken record about the apparent FCF of $45m per month in September and October 2023 (taking into account the $60m EPL). In neither month was there any funny or anomalous payments. I entertain a wild hope that we could see the same again for November, December and January when we know production was high and there was some spectacularly good hedging. $135M debt cleared in 3 months should be saving us over $17m a year in interest. Labour needs the oil industry to survive and it needs it to carry on investing. There will not be an election before October. The Tories cannot make up a 20 point deficit in the polls by May and they will want to try against all the odds to stay in power.

Romoran, the existing producing fields have more than 10 years of proven reserves. The company confirmed in September 2023 that production would in 2024 be in the same range as for 2023. The continued drilling at Magnus and PM8/Seligi as well as a return to drilling at Kraken should see 2025 production increase versus 2024. It will however require additional capex (25%) But smart to spend the money in 2024 when the capital allowances are still available. I think the North Sea as a whole is in gentle decline. But both Enquest and Serica Energy are planning to increase production over the next 24 months. In relation to Enquest certainly the 2024 position will be confirmed in its update on 15th February 2024. I am immensely bullish and attribute the present sp to a sort of frenzy of fear and frustration with the Government and the future Labour Government. But I remind myself that AB was investing heavily at 20p a share more than a year ago when we knew about the EPL and Labour were threatening to apply it retrospectively. Since then we have had a terrific year and the price of Brent is marginally higher and Labour has dropped any suggestion that the tax should apply retrospectively. So the present nonsensical sp will soon be corrected when the company starts spending between $50m and $100m a year on buying its cheap cheap shares. With half the shares held by 9 institutions and AB who do not seem inclined to sell, it will not take many buybacks to drive the sp back to more rational levels.

There is just too much hysteria. The company is not going bust. It is highly profitable and grossly undervalued on all normal metrics. It particularly benefits from Brent being above $80. There are huge savings ahead in terms of interest and leasing costs. And Labour is not much of a threat either. We just go from 35% tax to 38% tax and not much else. In its latest policy statement Labour declares: "As the North Sea Transition Authority itself indicates, oil and gas produced in the north sea will be with us for decades to come". The party also states categorically that it will not allow the oil and gas sector to be destroyed as the coal sector was in the 1980s by the Tories. I must say that I support Labour's general policy of transition to a low carbon economy anyway and, in 10 years time, I would expect Enquest to be making handsome profits from carbon capture and the like.

Why did Serica arrange a $525M lending facility when it has net cash of about $70m? Why did its latest report talk of "disciplined M and A"? One answer is that it plans to bid for Enquest. If Serica paid $600M or over twice our present market cap, using its cash and new facility which is at SOFR plus 3.9%, it would cost it roughly $50m a year to service the debt. But with Enquest producing FCF of at least $200m a year for 2024 and 2025, that would be hugely revenue enhancing. I do not see any other possible target that has the same attraction.

Stevo $132M FCF to the 31st October 2023 if you ignore the contingent consideration of $50m for golden eagle. Include it and FCF comes to $182M for just 10 months. And then of course we had 2 months of high production and high prices and no one off costs. So roll on 15th February 2024 when all will become clear.

Stevo I base my $250m FCF forecast for 2024 on the following. The FCF for 2023 was almost $300m. We went from net debt $717m to around $470m at year end and we paid $50m for Golden Eagle in October 2023. My rough calculations for this year now are as follows: Additional income on same again production but much higher realised prices in the first half: plus $40m. Savings on interest plus $20m. Savings on leasing costs plus $20m. Same again payments to Malaysian government. Same again decom. Additional EPL minus $60m. Additional opex (5%) minus $20m Additional capex (25%) minus $40m. I assume a further 15% sale of Bressay /Enquest producer. So compared to 2023: $297M + $40m + $20m + $20m -$60m -$20m -$40m = $257m. I take your point that the interest rate on some of the debt is higher but I have allowed for that. The increase in OPEX is in line with SQZ which reported recently. I am wondering what you think I have got wrong?

Everyone assumes a Labour Government. If all they do is increase the EPL from 35% to 38% and extend its life to the end of the Parliament, then I do not see anything to worry about. We will soon learn all about net debt and whether production can be maintained at current levels in 2024. If Stevo you are right that the market is assuming some decline then it is in for a pleasant surprise on 15th February 2024. I am very confident indeed we will learn that production will be maintained in the current range. That means around $250m FCF for 2024 and net debt assuming present Brent prices of around $220m at the end of 2024. And the company will be buying its shares which will send them dramatically higher.

There really is nothing to worry about. The update is coming in less than 2 weeks. That will show solid debt reduction and a good positive forecast for 2024 and 2025. The ideal price for Brent for us is around $80. It is enough to produce very strong FCF without attracting the additional taxing instincts of both major UK parties. We are very close to shareholder returns. The company can comfortably afford to spend $60 -$70m a year on share buybacks to give a return of over 20% at the current absurd valuation.

The astonishing good news is the price of Brent. $82.90. This is over $7 above the average realised price for the first half of 2023. It translates into over $50M extra in the first half alone IF we can more or less maintain production. We simply do not need to worry about taxes. Our effective rate will soon be under 40% for 4 years and then back to zero.

All the future forward prices for Brent are above $80 until June 2024.

I agree. I think hedge the next 6 months production at around $80. Guarantee the slow march towards complete safety. Roll on the day that we are completely debt free and generating FCF of about our present market cap. About 31st December 2025 by my reckoning. In 2026 we should be able to generate FCF of around our present market cap.

There are several companies who must be tempted to bid for Enquest. It would have to be done in the way that Harbour (as it became) purchased Premier - a reverse takeover. It is the tax losses which make Enquest so attractive to any company generating FCF. I expect that any takeover will be after the February update when the company is forced to publish its production expectations its hedging book and net debt. SQZ could sensibly pay double the present market cap using its cash and borrowing facilities and perhaps offering shares in the merged entity.

Londoner, yes I have just done it in a rather oversimplified way assuming that the total averages 43000 a day.

Londoner if you go back to the September 2023 presentation Craig Baxter stated that the existing capex should be sufficient to maintain production in the present range. Also we did have all those problems with the transformer in 2023. So I think the production for this year will not be far off my projection.

2024

Opex: $420m Capex $160m Decom: $60m Magnus $70m Malaysia Gov $60m Leasing $124m Finance interest $60m EPL $130m = $1084m

Revenue $80 x 43000 x 365 = $1255.6m

FCF = $171.6m

2025 Opex $430m Capex $130m Decom $60m Magnus $80m Malaysian Government $70m Leasing 80m Finance interest $40m EPL $120m = $1010m

Revenue 42000 x $83 x 365 = $1272.39

FCF $262.39m

That would make great sense. Our market cap is so low that she could possibly save the cost of a takeover in 18 months. But I think the Wintershall deal is her priority and that is going to require raising several billion in hard cash. I think we have to stand alone. Get the debt down to about $350m and then start buying the shares.

The fact is that HBR's update was a horror show. The key metric is just $200m FCF for 2024 on the assumption that gas averages 100 p a therm and Brent averages $85 per therm. But the forward prices are well below those levels. Hbr has raced up on the back of its Wintershall takeover which I just do not see happening. By contrast even at $78 we can generate around $150 to $200m FCF. This is based on maintaining production (more or less) and Brent remaining at around $78 for the year. I just think Enquest now is so much better value. I think our update will be really positive.

On the fall in FCF caused by forward prices for Brent being mid 70s not mid 80s, Stevo is right the gross reduction in FCF needs to be adjusted to reflect reduced EPL. But still it is barely positive if $200m is the forecast with those optimistic assumptions. Cannot understand why the projected figures are so low.