Member Info for Sekforde

Stevo, do please come back the Enquest board after the update next month. I enjoy reading your analysis and yes I could be too optimistic on production and FCF.

I was a tremendous fan of Harbour when it was generating FCF of $1bn and had a yield (including share buybacks) of over 16%. But I began to see better value in Enquest which has superior reserves (relative to its size) and a very fortunate tax position. So I switched only then to see the Wintershall proposed deal. But I simply say any one interested in the maths should ask what will be Harbour's FCF for 2024 if Brent averages $78 and Gas averages 80p a therm instead of the assumed $85 and 100p? It would be negative about $200m. On that basis Wintershall's investors are set to get a minority stake in a company that is unable to generate any cash from its existing portfolio. But of course the market likes the deal and assumes it will sail through and it would certainly work well if Brent does recover a lot from its present levels. Enquest will have at least $150m FCF even at $78 so, in relative terms, it is safer and better value at 10% of the market cap of Harbour. As John Maynard Keynes once said "When the facts change I change my mind. What do you do sir?".

I do not think the deal will go ahead. Wintershall shareholders will not in the end see any benefit in it. Without the proposed deal (which it is all it is until approved) HBR would be trading much lower after this most dismal update.

I have sold my shares but still follow this company. The forecast for 2024 is dire. The FCF is just $200m and assumes $85 and 100p therm. Those are very optimistic assumptions. Using current forward prices the FCF would be negative. HBR has become a very risky proposition. It is saddling itself with a massive amount of debt to make its $11bn acquisition. The numbers just do not stack up at all. Enquest will have a FCF of $200m in 2024 at current prices. It is much better value at a market cap of around $330m.

Stevo's posts are excellent. He is always courteous and well informed and sometimes very witty. He likes a debate. It would be a shame if he has got fed up of puerile and false accusations about his motives.

Stevo, I think I get my FCF for Harbour from you! Some months ago you published some analysis as to how Harbour would fare with its tax losses fully used. It looked dire. I am so annoyed that I dumped all my Harbour stock in favour of doubling down on Enquest. But looking at reserves, tax position, other assets, debt and forward PE, Enquest looks much better value.

Stevo, I concede that $720m would be a gross valuation of our interest in Magnus. If you do not value the tax losses separately is should be discounted by 35% for the actual tax less something to take account of the fact that EPL ceases after 4 years. The 2 C reserves do not appear to be worthless, because we have sold a 15% in Bressay plus the Enquest producer for $44m. So to your valuation of $300m, we have to add $250m (remainder of stake plus remainder of Enquest Producer.

Using your sum of the parts numbers: $1.14bn (2p reserves) plus $500m tax losses plus $250m (85% bressay/producer) less debt $460m less Magnus $450m less leasing $350m =$650m. This is placing no value at all on Sullom Voe and the remaining 2c reserves.

Harbour will have a FCF of around $500m in 2024 (ignoring the acquisition which will not have taken place). Its current market cap is 6 times its forecast FCF. Our market cap is less than 2 times forecast FCF. We are not as risky as Harbour which has just hugely regeared itself.

Stevo, I do not think you could place a NPV of $450m on the 37.5% BP magnus entitlement without valuing Enquest's own NPV rights in Magnus alone at $450m x100/62.5 or $720m. Even if you value our 2p reserves at only $6 a barrel (far less than we paid for them) you would need also to place a value on the 2C reserves which are over 400m and worth perhaps $2 a barrel, the 85% Enquest Producer and Sullom Voe. The NPV of the tax losses is much than $400m - at least $500m. They save us far more than the annual payments to BP which you have valued at $450m. So on any view the proper market value is much more than $300m. I would say 2p at $8 x 190m ($1520m) 2c $2 x 400m ($800m) tax losses ($500m) Enquest producer ($200m) Sullom Voe ($200m) less net debt ($460m) less leasing costs ($200m) = $2.560bn.

Another way to value the company is a multiple of likely FCF and as we can easily manage $200m a year and a modest multiple would be 6. This would give us $1.2bn. But you still have to add something for assets that are not yet contributing such as the Enquest producer and Sullom Voe. The present market cap is a complete aberration.

Stevo, I am not sure how you arrive at the figure of $1.5bn. Until the EPL ceases to apply in 2028, the company is unlikely to pay more than about $700m and as this is spread over 5 years, we have to discount heavily for time. In addition the EPL came with much more attractive capital allowances which add value. I would say the EPL knocked about $400m off the intrinsic value of the company.

Stevo I think you are right. The market must believe in further declines. But I think we will be pleasantly surprised. It is all to do with increased capex and no repetition of the transformer problems. We are firing on all cylinders and getting $80 a barrel. Like you I am trying to be positive in 2024. I will try to stop posting obsessively.

Krakenoil. The reason that could not happen is that the company would by then be in a position to purchase $100m of its own shares per year or pay a dividend of $100m a year. A sustainable yield of 30% is nowhere to be found in the history of investing.

Hi Wiggly. Yes it can. It can sell into the forward market and I think it should. The forward market is slightly lower than the current market. But let us have the certainty of getting very close to net debt zero by the end of 2025. The company can then choose to have some debt at the end of 25 (say $200m) but start buying its own shares at these preposterous prices.

The current price of Brent may not hold. But we are over $4 above the average realised price for the first half of 2023. Assuming same again production that translates to an additional $33m in the first half.

We should have ended 2023 with net debt of $470m implying an improvement to the balance sheet of $297m (including the golden eagle payment)

Here are my updated working assumptions:

1. Same again production. (2023 is forecast to be 44,000 per day. (Craig Baxter has suggested that production can be maintained )

2. Same again income. (Brent $4 higher than the realised price in the first half of 23 but the forward prices in the second are lower than the second half of 23)

3. Reduced interest cost $20m. (If we average net debt $247m lower and pay off the most expensive debt first (13.3%), the saving would be $32.8m. But interest rates on the October paid off bond were lower hence the $12.8m adjustment.)

4. Reduced leasing costs $24m. (Shown in the accounts)

5. Increased opex $20m (5% is allowed on the $400m forecast figure for 2023.)

6. Further slice 15% of Bressay/Producer sold for $44m. (Why not. One sucker paid $44m. There must be another)

7. Same again capex.

8. Same again decom.

9. EPL payable in October 24 $70m higher. ($130m allowed against $60m paid in October 23)

10. One deferred consideration deal before end of February 2024 to add $30m to FCF for 2024. (Pure speculation by me but logical and "something" should happen to use the tax losses).

So: FCF for 2024 is $297m - $90m (EPL) - $20m (Opex)+ $20m (interest)+ $24m (leasing) + $30m (speculative deal) = $261m. This would give us a year end debt of $209m.

Remember 2025 looks so much better than 2024. We will have a further $20m saving on interest and a further $40m saving on leasing costs. And EPL should be lower than 2024. There is a very strong path to being net debt free by the end of 2025. It does depend on Brent. No one can justify a market cap of $335m. It is not a matter of opinion. It is a matter of mathematics.

Inflection not inflexion of course. Worse than mute and moot.

AB knows more than any one about the company. He was buying at 20p in December 2022 when the full horror of the EPL was known about. He could not in his wildest dreams imagine that 2023 would have turned out so well. I think we are at that inflexion point and the rebound to at least 20 p is weeks and not months away. The only thing to worry about is the price of Brent. The rest is all fairly clear. The market will wake up when we have the results. We have missed the really good hedges, but I would hedge most of the production for 2024 to take away the risk. Markets hate uncertainty and Brent is always a worry. But of course if Brent goes to $90 which it might then that would be terrible.

We have not had any formal guidance on production for 2024. But Craig Baxter has repeatedly said that the purpose of the present level of Capex is to maintain existing levels of production. In 2023 we will end up with 44,000 a day despite all the summer problems that reduced production to just over 40,000 and should not be repeated. 44,000 is a fair assumption for now.

For reasons that I will not repeat, I have net debt at the end of 2023 at $470m. It is down from $717m at the end of 2022 and we have paid the $50m contingent consideration on Golden Eagle. Essentially the balance sheet has strengthened by $297m in one not particularly golden year. What of 2024? The bad news is the EPL payable on 31st October 2024. Stevo has it at $150m. I am going to assume that it is a little lower, $130m, simply because the company contrived to reduce the EPL to $60m for 2023 and it must be able to do something similar. I am going to assume that gross income is overall $3 a barrel lower than achieved in 2023. We realised $75.8 in the first half of 2023 and around $83 in the second half. I will ignore the consequential lower payments to BP and to the Malaysian government. I am going to assume 44,000 barrels a day for 2024. The additional EPl is $70m and the loss of income is $48m. I am going to assume that the net saving of interest is $20m on the footing that the 13.3% debt is attacked first in the run up to the October EPL payment and we know about the $24m saving on the leasing costs. I am going to assume one further 15% slice of Brassay/Enquest producer is sold for $44m. I am going to assume a 5% increase in opex on the footing that inflation is now subdued and there are various small savings being made (e.g Swedish delisting). I am going to assume same again capex and decom. So doing the maths $297m -$70m (additional EPL) - $48m (loss of gross income) - $20m (additional opex)+ $20m (interest savings) + $24m (leasing savings) = $203m. This will give us a net debt at the end of 2024 of just $267m. In 2025 we should save a further $20m in interest, $40m on leasing costs and have lower EPL (as the profits in 2024 will be lower than in 2023). I also expect capex to be lower as the incoming government removes the present generous capital allowances. We could be almost debt free by the end of 2025 and generating FCF per annum close to our present market cap. Of course there are many possible ways this could be better such as a spike in Brent or some leveraging of the tax losses. But if any thing like this happens and the market places a valuation of 5 x FCF on a debt free company, we will be above 60p a share by December 2025. Time to buy more shares in this well run and essential UK company and to keep the faith.

Stevo the interest on the August $150m loan is SOFR plus 7.9%

We know the net debt figure for the end of October ($585m) and we know we have just received $44m so that is $541m. And then we have had 2 months of full production at very high prices, so net debt must be well below $500m. I think around $470m.

They are clearly wrong about net debt for year end if you take into account the $44m just received for the 15% sale.