Member Info for Sekforde

I do not think the delisting is responsible for the fall. In relation to its size it is a highly leveraged company and the reduced SP is entirely due to the fall in Brent prices. The company is extremely well run. Its balance sheet continues to strengthen every day even with Brent at $75. We hardly every mention Sullom Voe. The terminal has the prospects of being repurposed for carbon capture if a partner can be found and worth many billions of dollars. Sitting tight. These things can change very quickly. Nothing at all to worry about.

Who ever can predict where Brent will go. But with realised Brent at $75.2 we did generate $140m FCF in the first half of 2023. We face 2024 with declining interest payments and leasing costs and Brent at $3 a barrel higher. I think we should be able at current prices to generate say $150m in the first half. I should like around $50m to be spent on share buybacks in the second half. Enough to buy about one sixth of the company at present sp. The exit of companies from the north sea should help keep wage costs under control.

You cannot really compare May 2022 with today. The big new thing is the EPL. But in December 2022 when EPL 2 was all known about the sp was in the low 20s AB was filling his boots. Was he wrong? No it is just sentiment in the market. Not to worry about. These things can change very quickly.

I agree I was extrapolating from the September and October debt reductions. Although we do have about 30% hedged at $88 for November and December Brent is lower now than it was in September and October. Production however should be above average to arrive at the forecast 44,000 barrels a day for the full year. But let us be more cautious. Assume that the debt reduction is only $20m a month in November and December and that FCF for 2024 and 2025 is $200m per annum, the debt at the end of 2025 will be just $150m. At constant EV that would give us a market cap of $750m. I am a big fan of clearing the really expensive debt but some is relatively cheap and it really would not matter if the net debt at the end of 2025 was say $300m. That would leave $150m for shareholder returns on my revised figures which should be spent on share buybacks. Enough at the present insane market cap to take out half the shares. I do not agree that in calculating EV you should include decommissioning costs. These are a different sort of liability to the payment of bank debt. They are more akin to the cost of staff or the cost of heating the head office. All this ignores the very high likelihood that a deal will be secured to make use of the tax losses.

We now have an enterprise value of just $900m. Roughly $310m market cap and $590M debt. That is a remarkable feat given that the company has invested over $5bn in the North Sea and has never paid a penny to shareholders. In inflation adjusted terms the investment is well over $6bn. By the end of the year (if you include) the $50m paid to BP we should have FCF of around $250m. The net debt should be around $515M. Is there any reason to suppose we cannot achieve the same again next year? There are reasons to suppose we might do better. First oil production could actually be higher with the new wells coming on line and a likely avoidance of the summer equipment problems. Second Brent could average higher. Worth remembering that we only achieved $75 per barrel in the first half of 2023. Third interest payments should really come down a lot as we take debt down to around $250m by October 2024 with the most expensive debt being cleared first. Fourth leasing costs will be lower. I accept of course that the EPL in October 2024 will be much more than $60m. I have pencilled in $100m. There may also be some opex increases. But not much with inflation coming under control. But let us assume $250m FCF. 2025 is much more difficult. We have to assume a change of government and an increase in the EPL to 38% and a cutting of some allowances. However, that impact will be fairly marginal and more than offset by the very much reduced leasing and interest costs. I am going to stab $250m FCF again. Let us then assume that the EV remains the same - $900m. That is a fairly cautious assumption given it has been $2bn less than 2 years ago. The net effect will be an increase in market cap to $885M ($900-$15). But a debt free company could and should be worth at least 5 times its forward FCF. If 2026 looks like coming in again at $250m that would mean a market cap of $1.25M by the end of 2025. So there is a real chance that Enquest rises to around 52p a share in 25 months. I think no one should panic or become disillusioned. It is a great company with a strong board doing all the right things. Markets are fickle and not always rational in the short term.

No one should dispute that global warning is real and consumption of fossil fuels is largely to blame. We face an existential threat and it needs to be tackled. The plain fact is however that Enquest is in fact part of the solution. We need to transition away from fossil fuels as fast as possible and pursue carbon capture technology as we do. Enquest will be a very different and much more valuable company in 20 years.

Yes but no one knew the EPL payment would be only $60m instead of the $75m forecast and no one knew the OPEX would be $400m and not $425. Stevo was just working from information provided by the company earlier in the year. He has already explained this.

I do not agree Krakenoil. Stevo's posts are not negative. They are helpful and informed and I do not detect any agenda from him other than to have a healthy debate about valuation. I am myself hugely optimistic and am in the equity and not the bonds. It is still a highly geared investment. But each day that passes with Brent at this level should be improving the balance sheet by close to $1m. I would not be at all surprised to see the SP at 25p before the end of February 2024. We could have by then added a further $100m to the balance sheet since 31st October and we have a present market cap of just $325m. As debt is repaid the market's perception of the risk should recede. We have no more tax to pay until 31st October 2024 and no further deferred consideration to pay. The debt and interest on debt should deflate like a large balloon.

The other intriguing thing is that Harbour announced an increase in its borrowing facility despite not on the face if it needing it for organic growth.

Stevo I am interested in your revised figures for FCF for next year. Can we not conclude that in view of the EPL for more than 7 months of 2022 (FCF $518m for full year) coming in at just $60m, the figure for October 2024 may be much lower than the $150m you feared? And then do we not have collapsing interest and leasing costs from now until next October?

Stevo

I think the smart idea would be just to pay off the RBL. If a superior credit rating causes the cost of the bonds to rise then they can just be left until they mature.

The average interest on all Enquest debt is about 8%. It is not a real problem if it is not paid off. The main thing is to use the tax losses.

Stevo I think that Enquest would be in a position to demand 20% (1 to 4) because its tax losses alone are worth at least $800m to the combined company (ie say $900m in saved tax in 2 years) That is a sum which exceeds its net debt. All the bonds could be bought up over the next 5 months or so. It is producing not far off 20% of Harbour (36,000 (say) v 189,000) but has much greater reserves proportionately. It has a better hedging position. Harbour's operating costs went up a lot. Enquest's came down. But frankly I would take 18 to 82%.

Enquest should be enormously valuable to Harbour because of its tax losses. Enquest will take 10 years to fully use them. The combined entity can use them in 2 years or so. There is just a huge marriage value and a deal can be done if both sides are fair and pragmatic.

I remain optimistic that there will be a deal with Harbour soon. It will in effect be Enquest buying Harbour with new shares being issued in the merged entity at a ratio of 1 to 4. HBR announced that they have FCF of $1bn for the year. But next year they face penal levels of taxation. The combined entity will have net debt of about $800M at very low rates of interest. It should be able to generate FCF of $1.5bn in 2024 and $1.7bn in 2025 by using Enquest's tax losses. No cash need change hands and the operations can be run as they are now with some costs savings made.

The update is good news. I was not expecting net debt to come down to just $585M. It is not just the lower opex ($25m) but the EPL was only $60m against the $75m we were expecting. The real point is that if you treat the EPL as a one off, we have reduced net debt by $45m a month in September and October. With now lower Brent but some good hedging at $88 we could be close to just $515m at the year end. That is far better than any one could sensibly have expected. It would mean in the second half we have FCF of $77m when I (and indeed Stevo) thought it would be at best zero.

There is no chance that share buybacks will commence any time soon. Nor should they. The debt will in fact have risen to the end of October because of the EPL payment. I think we should expect something around $650m. Part of that debt is costing around 13% a year. We simply must deleverage before any buybacks. The good thing is that from now on we have no major payments to make until next October. I am hoping we can clear debt at a rate of around $20m a month even with Brent at $80.

The company did talk about setting out a pathway to shareholder returns in February 2024 when the end of year results are announced. But frankly they do not make any sense whilst the debt levels remain so high in relation to market cap. The most expensive debt is at 13% and it needs to be paid off as soon as possible. The recent fall in Brent is going to make that much more challenging. The answer is of course a reverse takeover by Harbour or a sale of assets by Harbour on a deferred consideration basis. It could be structured so that both sides benefit from Enquest's tax losses. Why this has not happened yet is hard to understand.

The November update is all important. Negative FCF for the second half would be a disappointment. We do know that there was positive FCF of $27m in July and August if you ignore the golden eagle payment. And we do know that production and prices are significantly higher since August. I am expecting net debt at the end of October to be around $650m but with the EPL paid. We then have a completely tax free period until October 2024.

Stevo I think you could be about right for 2023 although your interest rate assumptions are pessimistic. Average debt in 2022 was about a billion, in 2023 about $600m. My interest is in 2024 and 2025. I like to assume Brent will be the spot price plus likely inflation and that gets us to around $90 a barrel for 2024 - far more than in the first half of this year. I do not believe in the futures market which I think is all to do with interest on money paid for future delivery which is why the price falls in a linear way the further out you look. I am taking Craig Baxter at face value when he says they intend to maintain production levels. Really when calculating FCF for 2023 one should include the Eagle payment. So we are about $185M for this year on your figures. I would settle for $200M FCF for 2024 and 2025 after payment of EPL . Big reduction in interest and leasing costs are required and on the horizon.

Stevo no need to apologise. We all need to be realistic. But what you cannot escape from is the 2022 figures for FCF $518m. We averaged a realised price of $89 per barrel in that year. At 47800 barrels production a day we produced 17,447,000 in the year. So that is $29.68 per barrel FCF surplus. That takes into account payments to BP and the Malaysian government. Although capex and opex will be higher, finance costs and leasing costs are coming down rapidly. I accept that production will be slightly lower. To assume a surplus of just $20 a barrel overall as compared to $29 plus seems reasonable.