Member Info for Sekforde

I continue to be fixated by the market's valuation of Enquest. I am intensely opposed to those who imagine that the world does not need to transition away from fossil fuels. It does and the sooner the better. However, the plain fact is that that is going to take at least another three decades and companies like Enquest and Harbour have a hugely important role to play in that transition. Both will be around in 30 years and probably not producing any fossil fuels at all. In the meantime, Enquest has a market cap of around $350m. One way of valuing any company is as multiple of its forward FCF. After all FCF is essentially a sum available for distribution to share holders. By the end of 2025 I think we will be essentially debt free. For the following year 2026 we will be saving at least $100m in finance costs and around the same sum in leasing costs. Our effective rate of tax will then really be 33% and not the almost 50% we are paying now (as a result of the non deductibility of the finance costs.) Moreover, an end to the EPL will be in clear sight (2028). It is perfectly conceivable that by 2026 our FCF will be matching the $518m figure achieved 2022 even with (say) $200m EPL. What is a realistic valuation at the beginning of 2026 for a debt free company with projected FCF of say $500m, then $500m then $700m and then $700m. Certainly $3bn would not be crazy. Many Us oil companies trade at around 8 times FCF. A $3bn valuation would imply a share price of just over 120p. Of course an even better situation could be produced by the company not paying off all its debt but using some of the FCF in say 2025 to purchase its shares. I think that will happen.

The price of Brent is now $20 higher then it was in July. With that higher price all the forward prices have moved higher. At 45000 barrels a day, $20 extra yields an additional $328.5M (per annum) or close to the entire market cap in just one year. ( I have not adjusted for the additional payments to BP for Magnus) It was not as if the company was anywhere near insolvent at $74 Brent -It paid off a huge chunk of debt in 2021 when prices averaged around $74. There is no bad hedging and all the extra money is pouring into the company's bank account...... The SP represents an absolute steal.

Stevo the presentation was on 13th September 2023. Although they will not say it is in fact obvious that production will be very near the top of the range. This is because we produced 45480 in the first half despite all the transformer issues at Kraken and the first two months of the second half saw debt being eroded at $13.5m a month which suggests to me it did not dip much during July and August despite most of the non Kraken maintenance work taking place. The arrangement in Malaysia is not comprehensible to me. But never once has the management mentioned the payment of such tax in its guidance on calculating FCF. Apart from the Malaysia figure I agree with all your figures. But oil is now trading at $13 a barrel more than when AB bought all those shares at 21p in December 2022. He knew by then all about EPL 2.0. It is more than $15 extra per barrel than the forward price then suggested. $15 extra per barrel translates to an extra $249m at current production rates if maintained over a year. (I am ignoring extra payment to BP and the interest savings.)

Stevo the answer starts at 37.18 in response to a question about FCF over 5 years. Craig Baxter said in the absence of M and A "we are looking to spend capex that helps maintain production in the current range". That implies that any M and A should enhance production above the current range. He also made clear that the $76m EPL was due in October 23 and relates to the period 26th May 22 to end of December 2022. He said "it stands to reason" that EPL should be more than $76m in 24. But we are now up to a current price of $94 a barrel. If we use an all in costs figure of $65 a barrel which includes payments to Bp and the Malaysian government and assume that total production is 44,000 a day in 2024 and assume only $90 a barrel in 2024 and ignore anything obtained from gas sales, the FCF should be 44,000 x 25 x 365 or $401m before whatever turns out to be the EPL. However there would be a saving of interest of around $30m which gives us a FCF of around $280m after payment of the EPL using you $150m figure. For the second half of 23 If taking into account the payment of the $50m for golden Eagle, the payment of $76m in EPL, the much higher opex, but also the much higher prices, we merely end the year with the same debt as at June 30th 2023, that would still mean our net debt falls to around $300m by the end of 24. In 25 we should save a further $30m in interest costs, and $70 m plus in leasing costs which will cover most of the October 25 EPL. Most if not all of that $300m should be paid off in 25 as it is expensive and does not qualify as a deductible cost when calculating EPL.

Hi Stevo

Craig Baxter said in terms that the $160 m capex was enough to maintain production in the current range without m and a. It was clearly a planned remark.

We reduced debt by $13.5m a month in July and August if you ignore the exceptional and last payment for golden eagle. Oil averaged $80 a barrel over these two months. It is now almost $94 and averages about $93 in the forward market until December. We should have higher production than in July and August - 2000 extra a day? We only have the one exceptional item which is the EPL of $76m so we definitely should reduce debt in the last four months.

I do not think you can simply double first half EPL to arrive at $150m for October 2024. Most deductible opex will be incurred in the second half.

Why does not the US government sell into the current market using its reserves and buy the futures to exactly replenish the oil sold. Where is the flaw in this no risk money making strategy?

Papegoya, I have just used the approach that Baxter took when he answered a question from me last May about FCF for 23. He did not answer the question directly because he did not want to give a profit forecast. But he outlined the approach one should take. (He clearly forgot interest and leasing costs). But I agree that actual turnover would appear to be even higher than the sums my approach produces. I am supposing that Brent averages $96 for 2024 which is above the forward price but I cannot for the life of me understand why, say, the US does not sell into the current market using the Strategic reserves and then buy into the futures market to replace them at a lower cost? Logically price should be higher in the future to account for the constant devaluation of the buying power of money.

The tax rate for Enquest is 35% before adjusting upwards slightly for non deductible finance costs and decommissioning. But here is my logic. Year end debt should be $520m. Assume $96 Brent for 2024 and 45000 a day production we have $96x 45000 x 365 = $1.576 bn revenue. (I have merely adjusted Brent for inflation and the 45000 a day is taking at face value the Baxter comment about maintaining current production)

Less: opex $450m capex $170m leasing $120m, Bp magnus profit share $90m finance $50m (collapses as debt repaid) EPL $100m = $596m FCF. At end of 2024 we should be debt free and have no EPL to pay until October 2025!

Smart move. I have also topped up selling down Harbour to do so which I hated as it is also undervalued. The Swedish thing is just so temporary. What matters is $93 Brent. Once the October EPL payment is over (paid for by September and October's earnings), at 45000 a day we deleverage at around $40m a month. By mid March 2024 we should have debt down to around $420m which should be less than 0.5 of EBITDA. Hence with the annual results in late March the company will say what dividends/buybacks it proposes to make. Just buybacks for me. Effectively tax free if you have bought above present SP like most of us.

Krakenoil I do think there is a good argument for offering to do just that as Swedish shareholders should not be left stranded. If we are only talking about $35m to $50m then that is fine and would not impact greatly on the balance sheet. I think the FCF from November 23 to March 2024 should be around $36m a month if $92 per barrel holds and we manage 45000 barrels a day.

Martinen

I do not pretend to know exactly what a holder of Swedish Enquest shares should do. Craig Baxter did suggest that there were 10 banks that offered a nominee service for those who wanted to keep their holdings. But the company could not maintain a listing for just $35m worth of shares. When delisted if no nominee account is set up, I assume that the title to the shares is not lost. So I suppose it will mean that those share holders could continue to be entitled to future dividends but the just would not be able to sell them on any exchange.

The delisting was the right move. Craig Baxter suggested yesterday it costs several hundred thousands a year. But more importantly also inhibits M and A. If Swedish selling is because its investors cannot be bothered to arrange a nominee account then it just represents a classic buying opportunity. The big take out of the presentation for me was the claim that the capex expenditure was designed to maintain the present range of production for the future absent M and A. If so, we do not need to worry about declining rates of production when forecasting FCF. The new loan is effectively at 13% per annum interest (SOFR plus 7.9%). It may be justified paying that sort of rate if there are some fast payback opportunities. But the focus in 2023 and 2024 should be entirely on reducing debt and not buying shares or paying a dividend.

Stevo

I see. There are reasons to support the EPL will be lower for the second half because deductible opex is weighted to the second half and non deductible interest should be lower in the second half as debt is reduced. Any how it is not payable until October 24 when the debt position should have really improved.

Morning Stevo,

So if we add say $5 a barrel to your calculations and assume 42000 a day (which I do think is very pessimistic), it adds $76,650,000 m to FCF for 2024. On you figures we would have debt of around $300m by end of 2024. I am still struggling with your EPL figure of $150m. I cannot see that that has been suggested by the company any where. It seems very high. The EPL for 2022 was only $70m. That was on FCF of $364m for the 7 months it applied at 25%. On FCF of $200m for 2023 at 35% I would expect it to be around $70m again. (I appreciate that the tax is not on FCF but there is some relationship between the two).

Stevo I think your are not looking at the forward figures for Brent which average around $86-$87 for 2024. I often wonder why they should be lower than spot prices when the value of the $ is constantly depreciating and I think perhaps the price is artificially depressed by the oil companies that are forced to hedge. Enquest does not hedge and I think it reasonable to speculate that the price will go slightly higher when adjusted for inflation. But we will see.

= $413.9m!

Stevo yes it should of course be 190m (not 290m) x 92 = $17.48 bn for the value of 2 p reserves when extracted. I appreciate that the current market value of these reserves locked in the ground is much lower. But your figure of $8-10 per barrel does not reflect any sales of reserves since the latest price increase of Brent. Have you looked at the likely FCF for 2024? You did suggest an all in cost figure of $65 a barrel for 2024 which seems about right. Even at 42000 barrels a day we have at current prices 27 x 42000 x 365. Enough to make a huge impact on expensive debt levels and bring down the finance charge for 2025 BIGLY (as Trump would say).

When AB purchased all those extra shares in December 2022 for 21p the forward price of Brent for September 2023 was $78. Lo and behold he is getting $14 extra per barrel that he could not reasonably expect. 14 x 45000 x 30 is $18.9m EXTRA in a month! Or 5% of market cap EXTRA in a month!. Just insane. Perhaps the meeting tomorrow will be a source of some news/comfort.

I think you count hubby's shares too. She has plenty and is earning a mighty fine dividend from them.

I think LC has plenty of shares in Harbour and like AB is far too well paid. But I think any deal would have to be an agreed takeover or merger with a future role for them both. I think the attractions would be that Harbour can borrow cheaply and is debt free. Enquest has greater reserves in relation to its current production. The tax loss is worth at least $800m if it can be used in 2 years. Then there are all the savings of eliminating a head office and a load of administrative staff. Enquest does not need a deal. But it will take a decade to use all its tax losses and there is no adjustment for inflation.

I think future leasing costs and future decommissioning costs are really no different to future wage costs. They are part of the costs of doing business. We have 290 million of reserves. That has a gross value $26.39bn at current prices. Of course it will take time and money to extract but a future asset is no different conceptually to a future liability. At these ridiculous low SP Linda Cook is poised to pounce. She knows the company well and does not like paying 75% plus tax. Time to do a deal.