Member Info for Sekforde

No worries Dumbly. Scepticism healthy. Fingers crossed for the results.

Dumbly. I am not the least bit worried whether you think they were my purchases or not. Cannot imagine why I would bother to make a false claim. It did move the price up a little on Monday afternoon as one would expect with a small cap company. I shared the information so no one would think there was anything significant going on. Two contributors were suggesting there was. I am really like the two companies because of their FCF against their market cap. I am not interested in a diversified portfolio. Mine is certainly a high risk approach and not one that I would recommend for most people. But we do have both Harbour and Enquest's half year results coming up and I think they will be good.

Honestly folks please do not get too excited about those multiple £50k buys. They were mine. I have no inside information. Have met the Harbour board and had a nice chat with Linda Cook (big fan) but not Enquest. And I have been hugely wrong about Harbour. I have now £700k in Enquest and £700k in Harbour and no other holdings in anything else. But hey Enquest should make its entire market cap in FCF in the next 24 months.

The the CEO must surely know more about this company than any one. In December he spent over £800,000 buying shares at over 20p. That was of course after the EPL. Since then everything has improved. production was higher in the first quarter than expected and the price of Brent has gone from $80 to $85 and with it all the forward prices. $5 extra per barrel assuming production of 45000 a day is (5 x 45,000 x 365) $82,125,000 extra a year. That is taxed at 35% leaving an additional FCF of $53,381,250. I think net debt will be about $550M at year end and $350 M at the end of 2024. Assuming an increase in current enterprise value (debt plus market cap) from $1bn to $1.1bn (justified as risk is eliminated) that would give us a market cap of $750M or close to double the present market cap.

Stevo

I am afraid you are not right on this occasion. Parliament as a matter of constitutional law can change by legislation any contract it likes including a contract to which the State or an entity of the state is a party. That is something that all law students are taught in the first week as it is fundamental to understanding the concept of Parliamentary sovereignty.

Stevo

Parliament can change any contract or any previous Act by passing a new Act. That is the whole concept of Parliament being sovereign. Historically it has not passed tax legislation that has retrospective effect. However that is precisely what Labour has said it would do in relation to the EPL - raise it and back date the rise to the start of the war in Ukraine if it secures a Parliamentary majority. I suspect in the end it will shy away from such a radical approach.

I think if you assume that HBR will pay total non EPL tax of around $800m in 2024, that would be completely eliminated if it were able to use Enquest's losses. So if Enquest purchased for say $600m in an agreed takeover by year end, HBR would have recovered the entire purchase price in saved tax before the general election and of course still have all the assets of Enquest.

Ignoring hedges for every $ on Brent the extra to Enquest is 44,000 (mid range forecast) x 365 x (65/100) = $10.439M. The additional revenue of $16m odd attracts additional EPL at 35% but the remainder is untaxed because of the historic losses.

I really have no idea whether HBR will bid or not. But it is the one company that could really make good use of about $3.5 bn of tax losses and has the cash reserves to knock out Enquest's expensive debt. Any bid would have to be at a premium to the current price of at least 50%. No wishful thinking though. The company is grossly undervalued bid or no bid.

The present market cap is $417m. By the end of this year net debt should be down to about $530M. Next year our total costs per barrel of Brent should be around $65. (I am including everything: interest, CAPEX, OPEX, leasing, bp payments). Assuming average realised Brent of $85 and unchanged production guidance and unchanged EPL, FCF should be (44,000 x 365 x $20 x (65/100) ) -$208.78m. If 50% of that FCF were returned to share holders and the balance used to further deleverage, the yield would $104.39m/$417m = 25.03%. I favour share buybacks over dividends especially at current sp but I expect a combination of the two. If the board is more conservative it will limit pay outs and repay more debt. But ultimate that should enhance potential dividends/share buybacks in 2025. Still think Harbour will buy Enquest for its tax losses.

The tax is really quite similar elsewhere. Enquest can be bought using HBR's ample cash reserves and the shareholders need not be diluted at all. The share buybacks [which I am a huge fan of] can continue.

Of course Harbour should buy Enquest. It has $3.5bn of tax losses and 12 years of reserves at around 44,000 per annum. It has a net debt of about $600m and could be acquired for around $600m. The immediate value of the tax losses to HBR would be around $800m.

There are three factors for me that stand out. First the capex of around $1bn a year. No company spend a $1bn a year to make FCF of say $500m a year. If the Capex is well spend it should produce an annual return that exceeds $1bn. Second the company is virtually debt free. That is huge in terms of being able to weather any drop in price but also in terms of taking advantage of opportunities. Top of my list is buying Enquest for its tax losses. Third the dividend and share buybacks are both affordable and going to continue. Even after the recent rise the effective yield is 16%.

If we do pay $6bn in EPL over the next 6 years, that implies we will retain profits of $6bn x 25/35 or $4.28bn. Not bad against a current market cap of just $2.51bn.

The present market cap of the Enquest is $381M. Exactly one month ago it was almost exactly the same - in fact slightly higher as the sp was 16p. In the last month the price of Brent has risen by almost exactly $7 per barrel. With the spot rising all the forward prices have gone up by almost exactly the same amount. This extra dollar a barrel assuming 44,000 a day production and an effective rate of tax of 35% (we only pay the EPL) translates to an additional $7x 44,000 x 365 x (65/100) or $73,073,000 per annum FCF. Let us say $70,000,000 to allow for a small proportion of production being capped at around $74. That additional $70,000,000 a year should be subject to a multiplier of say 6 to arrive at what would be a fair additional market value. So in a rational market we should have seen an increase in market cap by about $420M. The sp should have more than doubled. Yet it has stayed the same. I say that makes no sense. Stevo has often remarked how incredibly sensitive FCF is to the price of Brent. We are heading in the right direction even if the market is oblivious to the maths.

By the end of the present round of buybacks we should be down to around 760M shares. At 230p that gives HBR a market value of 230 x 1.27 x 760M = $2.219 bn. The pure dividend yield is 200m/ 2219m or 9.01%. A company investing $1bn a year should be able to maintain a dividend of just $200m a year plus buybacks of $200m. But strange times when conventional valuation is ignored.

And one more reason the be cheerful, having been awful for 2022 and 2023 the hedging for 2024 looks great. Both the dividend and share buybacks at $200m each a year are sustainable.

We have been given fairly precise figures for costs in 2023. So far this year post hedging realised prices have been just under $78 per barrel. I am going to assume that over the year as a whole they average $76 per barrel which would require them to remain broadly where they are today. I am going to assume production averages 45,000 a day toward the top end of the guidance because of the excellent figures to the end of April.

2023: opex $425m, capex $160m decom $60m golden eagle $50m Bp $80m October bond $135m EPL $35m lease $152m interest $70 =$1167m.

Receipts brent realised average after hedging 2023 $75 x 45000 x 365 = $1232M. FCF 2023 $65m (but after paying the October bond so really $200m)

Net debt reduced in 2023 to $517m ($717m - ($135M - $65M)).

For 2024 I assume average $78 brent, 44,000 daily production of Brent. I allow for an increase in opex to $450m I assume all other payment remain unchanged except lease costs fall to $130m and interest comes down to $40m.

So opex $450m capex $165m decom $60m golden eagle payment $50m bp payment $80m EPL $25m lease $130m interest $40m =$1bn

Revenue $1252m (78 x 44,000 x 365). So 2024 FCF $252m. Distribution $100m shareholders $152M debt reduction. Prospective return to shareholders in 2024 $100m/$335m (market cap) = 29.85%.

It really does makes sense to hedge all production for at least the next three years or so. The company enjoys only 25% of the upside so it is not worth hoping for prices to rise beyond the present curve. Having hedged we would benefit hugely from any large falls that trigger the reduction in tax back to 40%. I do not rule that out. Who really knows whether the world will collapse into a major recession or whether there will be be a return of a more virulent form of COVID. I like the Talos tie up proposed. For whatever reason the US market places a much higher value on oil and gas companies than does the UK. Hedging would help with the terms of borrowing to clear Talos's more expensive debt. The devil is in the detail. What percentage of the shares of the new company would we obtain? If it is based on current market capitalisation I would not be in favour. If it is based on looking at reserves, production, relative debt and tax rates then a deal should be done. At present we have virtually no net debt.

The average price of Brent so far this year is around $80 and a disproportionate amount of production has already taken place. An average of $75 for the rest of the year would be just about ok.