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Stupmy I am sure all participants in the market look for value and movement is not random.
However, the claim that that any guidance at all can be gleaned from past movements is false. There is absolutely no serious academic research that supports this approach to investing. If it were otherwise a computer programme could be developed to make buy and sell decisions based on graphs and would regularly out perform. No such programme exists.
I do not think graphs of past performance are any use at at all in determining future prices of shares or anything else. It is no significance at all what the 200 day moving average was or is. What matters it the market's perception of future FCF and the likelihood and scale of share buybacks or dividends. The single most important factor is the price of Brent and it is anyone's guess what that will do.
Well Stevo you have proved right in switching to the bonds and keeping stakes in the majors as well. I do not know how many investors or potential investors follow this board or your prescient comments. But if you are right about FCF for 2025 being significantly higher than the entire current market cap (and I think you are) then you may not get the chance to twist at these levels. It is incredibly unusual for a company to trade at a forward PE of 1 or less. To my certain knowledge the board is working on several deals to accelerate the use of the tax losses. I do not of course know the details. But these could be announced at any time and could be transformative of value and market perception of value with immediate effect. The other factor is Brent. I suggested you did some modelling at $80 for 2024 and you kindly obliged. But it is now at almost $83. That is quite a bit higher than when AB was purchasing at 21p in December 2022.
Stevo you say the company estimated its EPL for the first half of 2023 at $76m. I cannot find that estimate. Where is it? Thanks for your analysis for 2024. I see a clever strategy being pursued. Heavy capex is being made in 2024 to take advantage of the present capital allowances. In 2025 we should enjoy (i) lower capex; (ii) lower opex (iii) lower interest (iv)lower leasing costs (v) lower epl (vi) higher production. Your calculation of EBITDA for 2023 at $800m means that with debt at $481m as of 31st December and the $44m paid for Bressay/EP in January 2024, we are already at or very close indeed to the fabled ratio of 0.5 debt to ebitda. I do not know what the FCF has been for the first seven weeks of this year but it may not be far off, $37m which the sum required to reach a net debt of $400m. Happy Days.
I was so astonished by the net debt position that I began to wonder if in fact it included the $44m paid for the 15% stake for Bressay/Enquest Producer and sought reassurance: Here is the reply:
"Good morning D....
Many thanks for your feed back, it is much appreciated.
You are correct that the cash impact of the Bressay/Enquest Producer FPSO farm-down was realised in January 2024, with the net debt being neutral in terms terms of our 2023 out-turn of $481m."
In response to my whinging about the absence of a net debt figure for January 2024,
"On the net debt figure at 31 January, we provided key component updates ...to help guide the reasonable investor to a view of net debt. We will provide a further update at the end of March alongside our 2023 results and, as we have noted in our previous discussions, monthly net debt movements can be impacted by working capital, given that a single cargo can generate $50m."
What we do know is that net debt has come down from $592m on 30th June 2023 to $481m AND we have paid during that half the Eagle contingency and the EPL which comes to a further $110m. It all looks perfectly possible that the debt will come down by a similar amount in the first six months of 2024 PLUS the $44m from the 15% deal. A $250m reduction in net debt by the end of June 2024! And this is all in the context of our heading to 2025 in which year there will be a collapsing of interest and leasing costs. Even after today's rise we are worth just $312m.
Salman Malik is speaking to 400 of the great and the good of Scotland tonight.
Stevo, I look forward to your analysis this evening. You have the numbers for capex opex and decom for 2024 and I think you have previously worked out the leasing and finance costs. May be assume 43000 barrels a day and an average realised Brent of $80? It would be good if you could approximate the EPL in October 24.
A net debt of $481m without including the proceeds from the sale of 15% in Bressay and Enquest Producer ($44m up front) implies a true net debt at $437m as of the end of December 2023. Assuming further reductions in January and the first half of February, we should now be about $400m net debt. This is staggeringly good progress. The confirmation of maintained production and a clearly signalled golden year for both production and costs in 2025 is just excellent.
If we pay $150m in tax for 6 years we will be retaining $200m in cash for 6 years. That is $1.2bn against a market cap of less than $300m. Tomorrow will be good. There is 19 minutes left in the trading day.
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.