Member Info for Sekforde

Even at today's slightly lower prices, we should be reducing net debt quite rapidly. The Malaysian situation is extremely difficult to work out. But overall production I think is holding up well and assuming 45000 a day and a surplus of $20 a barrel we are making $900 k a day. If net debt is $650m by the end October (after paying the EPL) that allows us to reduce net debt by $328m before October 24. It is the elimination of debt that is so crucial to the future SP. 2025 is a long way off but interest charges and leasing costs move very much in our favour during that year. The market will see the end of the EPL on the horizon by then. The Labour party has never suggested that it will be extended beyond 2028.

Stevo

Contango makes sense. The value of money is always declining in real terms so would would expect to pay more in the future than now. In addition one could understand backwardation for some commodities that cannot be stored such as gas. But oil can be stored and in relation to the US strategic reserve it is for years. What makes no sense is for someone who has the commodity in storage not to sell into the present spot market to save the cost of storage and buy back in the future market. This trade would not have any possible downside and I cannot work out why any one in that position would not do just that.

Stevo it still does not really make sense for the futures prices to be lower than the current prices. Much oil bought today is simply stored. There is a great deal of oil already in storage. Any one who has oil in storage could sell into the present market and buy into the future market making a certain profit. A rational market would eliminate that risk free trade.

Tarmak

Thanks for your helpful and encouraging analysis. I suppose the key assumption is that Brent averages $95 in 2024 and 2025. Not so unreasonable given the spot price today and the effect of future inflation. But Stevo would point out that the forward market is lower and that is what one should use. I am struggling with the extent of backwardation. The forward prices for 2030 are in the mid $60s. Is this not just because, in effect, anyone buying oil for delivery in 2030 pays now and so the seller gets the use of the money for seven years? Otherwise it makes no sense at all.

After today's long overdue and modest rise we now have a market cap of $368m. Yet if the present price of Brent holds, we should be able to strengthen the balance sheet by $5m a week on the most conservative assumptions. That is around 1.36% of present market cap each week. And with every reduction of $5m in debt we save around $600,000 a year in interest payments. I think this is very cheap indeed. JP Morgan were being far too conservative.

With Brent already at $91, we could see averaged realised prices for 2024 of a few dollars higher than 2022 when, to repeat, we had a FCF of $518m with realised average prices of $89. So far we have just a few put options at $60 so we will be receiving the actual prices for all of our production. I see a very slight reduction in output compared to 2022 and higher opex and capex. But that largely is balanced by lower financing costs and lower leasing costs. If something approaching $400m of FCF can be generated between end of October 23 and end of October 2024 before payment of any 2023 EPL it will be completely transformative. After payment of the EPL this month the net debt should be around $640m and we have therefore the prospect of net debt coming down to just $240m before payment of the October 2024 EPL. The focus should of course be on paying off the most expensive debt first.

Stevo, the company only realised $89 a barrel after hedging in 2022. For 2024 we have no relevant hedging and catch all the upside.

Stevo I have included the BP Magnus payments in my calculation of costs for 2024. I do not think FCF $400m should be considered unrealistic before EPL. As a cross reference, I go back to 2022 when the FCF was $518m. We have to assume slightly lower production levels, similar realised price per barrel, materially higher opex and capex, but lower leasing and finance costs. The other thing that we will not have in 2024 is all the upfront fees for all that expensive debt restructuring. It is a huge advantage that we pay the EPL so late in the year - 31st October 2024. Oh and of course the savings on the Swedish delisting.

Stevo's forecast was for $150m FCF a year whilst the EPL lasts whcih would hardly make the company worthless. Like all our forecasts, even for 2024, it is just a stab in the dark. We simply do not know what the price of Brent will average and what the total production numbers will look like. I would settle for $150m a year for the next 5 years against a market cap of just $340m. I think a modest and fair assumption is that prices remain the same and that production holds up. I am guessing 45000 barrels a day and surplus a barrel $25 which gives us $410m before EPL due in October 2024. I do think it would be insane to pay a dividend whilst paying 13% interest on debt which is not even deductible for the purpose of EPL. A company with just say $300m of debt paying just $30m a year interest will look very different in terms of risk. Patience is required.

Stevo is right that we do not get much FCF, if any, in the second half. We need the debt to come down to save on interest and at the same time improve the marginal tax rate from around 50% to more like 40%. But there is a possibility debt could come down a bit by the year end. We know that brent averaged $83 during July and August. During that period we reduced debt by $13.5m in each month (after accounting for the $50m paid for Golden Eagle). It is reasonable to assume that Brent will average $90 per barrel for the period September to December - $7 higher. It is also reasonable to assume that we will average around 4000 additional barrels a day during the last four months over the July and August period because of all the shutdowns. Simple maths would imply that in addition to the £13.5m a month reduction or $54m over 4 months, we will receive 4000 x $90 x 122 = £43.9m and $7 x 46000 x 122 = $39.2m. This all comes to $137.1m. One then has to deduct the EPL of $76m and around $5m extra payable to BP. This gives us an overall reduction by year end of $56m. The net debt would on this basis be $615m - $56 or $559m. I have of course assumed that capex and opex are evenly spread over the 6 months. There are of course many dangers with extrapolating from two months of figures and frankly I would be ok with $600m by year end. Because after that I see a period of 10 months of steady debt reduction supported by higher oil prices, reducing interest and leasing costs. We may start 2025 with around $400m of net debt and a EV of $1.2bn implying a comfortable doubling of the share price. We are very highly leveraged still but that can bring quite spectacular gains if oil prices do not collapse. I do not think there will be any disruption to supply and I do not see the conflict in Gaza spreading so the present small surge may not last. But the balance of supply and demand is still very tight and no one wants to be caught short of oil in a crisis.

I think his analysis is good and helpful. Always very mathematical. He knows a great deal about the company. I think he is an accountant and that helps.

I do not rule out 2024 being very like 2022. In that year we generated $519M of FCF on 47259 barrels per day and an average realised price of $88.9. How might 2024 be different? First production will not necessarily be any lower at all. The top of the range for this year looks like being achieved (46,000) and Craig Baxter confirmed that the company intends to keep production within the range absent M and A. But there is still plenty of time for something on that front being announced. So I am looking for at least 2022 levels of production. Second Brent could easily average $88.9 for 2024. Third capex and opex will be higher but leasing and finance costs will be lower. The average net debt in 2022 was around $1bn and it may be around 50% of that in 2024. Ok we have the wretched EPL but even if that is $150m we would still have around $370m FCF. That hugely reduces risk and interest payments for 2025. I say buy more. Crazy to sell. What was AB doing when he bought 4m in December 2023 when Brent was at $80 and the price was 21p? Bargain then. Super bargain now.

Ignoring the $50m golden eagle payment net debt came down by $27m in the period 30th June to 31st August. Brent averaged around $83 during that period. Since end of August it has averaged around $90. Production should be higher than in July and August. We have the $76m EPL payable this month. Overall I see debt being around $580m year end. Assuming production maintained and with no tax until October we should be able to get net debt down to below $300M by October 2024 assuming $90 brent and no dividends or share buybacks. Both leasing costs and finance costs should be lower. Just not sure that the EPL will be as much as $150m in October 2024. Must find a way of leveraging the tax losses soon.

The reasons for delisting were completely sound. But the best advice for Swedish holders is to do nothing. No one is going to take away your shares come the end of the year. Delisting may make it more difficult to trade. But why sell? They represent a fantastic long term investment with earnings in 2024 and 2025 not far off the present market cap. There will be dividends and share buybacks soon. In due course a device will be found to enable you to sell your shares easily. Perhaps the company will offer to buy them. Relax. Everything is going well with production. The price of Brent is in the goldilocks zone. Plenty of potential M and A coming soon.

Stevo

At the risk of being a complete bore, there is nothing which can be agreed that binds a future Parliament. The state can enter into any contract with any company and then Parliament can legislate to change that contract or to cancel it. Equally Parliament can pass a law which confiscates property without the payment of any compensation at all. This very rarely happens however. There would be opposition in Parliament itself to passing laws which are fundamentally unfair or confiscatory. But talking about binding guarantees misunderstands the notion of Parliamentary Sovereignty.

Dumbly this subject keeps coming up as to whether there could be some sort of guarantee which would bind another government or more strictly a future Parliament. As a matter of constitutional law there can be no such thing. Any Parliament is free to pass legislation determining the rate of taxation and there is nothing preventing it passing a law that has retrospective effect. It is of course in fact the case that Parliament very rarely passes taxational law which have retrospective effect. But this was in fact precisely what the labour party were threatening to do by promising to pass a "proper" windfall tax that took effect from May 2022. They seem to have gone a bit quiet on that idea. I do think it is interesting that they have not condemned the Rosebank decision. It is a very real dilemma for all of us, how to transition away from burning harmful fossil fuels without damaging the economy or the need for some form of national energy security.

I do not think there is any chance at all that the Labour party would have given any private reassurance to anyone that it will not alter investment allowances nor increase the EPL to 38%. That is its stated policy and it is just not going to contradict that in some private meeting. All investment decisions now will be based on the likelihood that the Government will change in October 2024 and that a more punitive tax regime will be implemented. We have to live with that and factor that in to all our forecasts of future earnings. For Enquest it is just crucial that this period of high oil prices is used to clear most of the really expensive debt. It will then be able to cope with its tax rising from 35% to 38%.

No need to worry about the Sp. In the end it is all about maths and probabilities. The company has to first deleverage and remove expensive high interest debt. That could take another two years or so. When that debt is removed it enables shareholder returns of at least 30% of present market cap. It is much better that these take the form of buybacks as most of us are nursing large losses. But dividends are possible too. Once the market perceives the company will be paying $100m a year in the form of buybacks or dividends in two years at that is sustainable for the next 20 year or so, the sp should rise.

I still think there is a good chance Harbour will bid. An agreed take over at around $600m could result in a saving of that sum in a year by Harbour. It has the cash sitting ready and its borrowing costs are much lower,

But the more likely is the purchase by Enquest of producing assets in the NS on the basis of deferred consideration. The Magnus deal is the right sort of structure.

The present sp is such an opportunity for the brave. Everything is coming right. Production is at the top end of guidance, the problems with the transformers at Kraken were a blessing in disguise because it brought forward maintenance when Brent was relatively low, and we now have sterling weakening just before the sterling bond is due to be repaid. I still have net debt at between $520 and $550m at year end after payment of the EPL and then I hope for steady reductions until October 24 EPL of the order of $30m to $40m a month causing a huge reduction in financing costs. I do not want to see share buy backs start until 2025 when I think $100m a year is affordable. I do not want to see dividends paid before the market cap is above $500m again.

Oh and I head the last post November is coming because we will then learn about the two key components in this golden out look: Actual production figures for 2023 and net debt after paying the October EPL. If that debt is still coming down rapidly despite the additional expenditure in the second half then happy days are around the corner.