Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
The astonishing good news is the price of Brent. $82.90. This is over $7 above the average realised price for the first half of 2023. It translates into over $50M extra in the first half alone IF we can more or less maintain production. We simply do not need to worry about taxes. Our effective rate will soon be under 40% for 4 years and then back to zero.
I agree. I think hedge the next 6 months production at around $80. Guarantee the slow march towards complete safety. Roll on the day that we are completely debt free and generating FCF of about our present market cap. About 31st December 2025 by my reckoning. In 2026 we should be able to generate FCF of around our present market cap.
There are several companies who must be tempted to bid for Enquest. It would have to be done in the way that Harbour (as it became) purchased Premier - a reverse takeover. It is the tax losses which make Enquest so attractive to any company generating FCF. I expect that any takeover will be after the February update when the company is forced to publish its production expectations its hedging book and net debt. SQZ could sensibly pay double the present market cap using its cash and borrowing facilities and perhaps offering shares in the merged entity.
Londoner if you go back to the September 2023 presentation Craig Baxter stated that the existing capex should be sufficient to maintain production in the present range. Also we did have all those problems with the transformer in 2023. So I think the production for this year will not be far off my projection.
2024
Opex: $420m Capex $160m Decom: $60m Magnus $70m Malaysia Gov $60m Leasing $124m Finance interest $60m EPL $130m = $1084m
Revenue $80 x 43000 x 365 = $1255.6m
FCF = $171.6m
2025 Opex $430m Capex $130m Decom $60m Magnus $80m Malaysian Government $70m Leasing 80m Finance interest $40m EPL $120m = $1010m
Revenue 42000 x $83 x 365 = $1272.39
FCF $262.39m
That would make great sense. Our market cap is so low that she could possibly save the cost of a takeover in 18 months. But I think the Wintershall deal is her priority and that is going to require raising several billion in hard cash. I think we have to stand alone. Get the debt down to about $350m and then start buying the shares.
The fact is that HBR's update was a horror show. The key metric is just $200m FCF for 2024 on the assumption that gas averages 100 p a therm and Brent averages $85 per therm. But the forward prices are well below those levels. Hbr has raced up on the back of its Wintershall takeover which I just do not see happening. By contrast even at $78 we can generate around $150 to $200m FCF. This is based on maintaining production (more or less) and Brent remaining at around $78 for the year. I just think Enquest now is so much better value. I think our update will be really positive.
On the fall in FCF caused by forward prices for Brent being mid 70s not mid 80s, Stevo is right the gross reduction in FCF needs to be adjusted to reflect reduced EPL. But still it is barely positive if $200m is the forecast with those optimistic assumptions. Cannot understand why the projected figures are so low.
I was a tremendous fan of Harbour when it was generating FCF of $1bn and had a yield (including share buybacks) of over 16%. But I began to see better value in Enquest which has superior reserves (relative to its size) and a very fortunate tax position. So I switched only then to see the Wintershall proposed deal. But I simply say any one interested in the maths should ask what will be Harbour's FCF for 2024 if Brent averages $78 and Gas averages 80p a therm instead of the assumed $85 and 100p? It would be negative about $200m. On that basis Wintershall's investors are set to get a minority stake in a company that is unable to generate any cash from its existing portfolio. But of course the market likes the deal and assumes it will sail through and it would certainly work well if Brent does recover a lot from its present levels. Enquest will have at least $150m FCF even at $78 so, in relative terms, it is safer and better value at 10% of the market cap of Harbour. As John Maynard Keynes once said "When the facts change I change my mind. What do you do sir?".
I do not think the deal will go ahead. Wintershall shareholders will not in the end see any benefit in it. Without the proposed deal (which it is all it is until approved) HBR would be trading much lower after this most dismal update.
I have sold my shares but still follow this company. The forecast for 2024 is dire. The FCF is just $200m and assumes $85 and 100p therm. Those are very optimistic assumptions. Using current forward prices the FCF would be negative. HBR has become a very risky proposition. It is saddling itself with a massive amount of debt to make its $11bn acquisition. The numbers just do not stack up at all. Enquest will have a FCF of $200m in 2024 at current prices. It is much better value at a market cap of around $330m.
Stevo, I think I get my FCF for Harbour from you! Some months ago you published some analysis as to how Harbour would fare with its tax losses fully used. It looked dire. I am so annoyed that I dumped all my Harbour stock in favour of doubling down on Enquest. But looking at reserves, tax position, other assets, debt and forward PE, Enquest looks much better value.
Stevo, I concede that $720m would be a gross valuation of our interest in Magnus. If you do not value the tax losses separately is should be discounted by 35% for the actual tax less something to take account of the fact that EPL ceases after 4 years. The 2 C reserves do not appear to be worthless, because we have sold a 15% in Bressay plus the Enquest producer for $44m. So to your valuation of $300m, we have to add $250m (remainder of stake plus remainder of Enquest Producer.
Using your sum of the parts numbers: $1.14bn (2p reserves) plus $500m tax losses plus $250m (85% bressay/producer) less debt $460m less Magnus $450m less leasing $350m =$650m. This is placing no value at all on Sullom Voe and the remaining 2c reserves.
Harbour will have a FCF of around $500m in 2024 (ignoring the acquisition which will not have taken place). Its current market cap is 6 times its forecast FCF. Our market cap is less than 2 times forecast FCF. We are not as risky as Harbour which has just hugely regeared itself.
Stevo, I do not think you could place a NPV of $450m on the 37.5% BP magnus entitlement without valuing Enquest's own NPV rights in Magnus alone at $450m x100/62.5 or $720m. Even if you value our 2p reserves at only $6 a barrel (far less than we paid for them) you would need also to place a value on the 2C reserves which are over 400m and worth perhaps $2 a barrel, the 85% Enquest Producer and Sullom Voe. The NPV of the tax losses is much than $400m - at least $500m. They save us far more than the annual payments to BP which you have valued at $450m. So on any view the proper market value is much more than $300m. I would say 2p at $8 x 190m ($1520m) 2c $2 x 400m ($800m) tax losses ($500m) Enquest producer ($200m) Sullom Voe ($200m) less net debt ($460m) less leasing costs ($200m) = $2.560bn.
Another way to value the company is a multiple of likely FCF and as we can easily manage $200m a year and a modest multiple would be 6. This would give us $1.2bn. But you still have to add something for assets that are not yet contributing such as the Enquest producer and Sullom Voe. The present market cap is a complete aberration.
Stevo, I am not sure how you arrive at the figure of $1.5bn. Until the EPL ceases to apply in 2028, the company is unlikely to pay more than about $700m and as this is spread over 5 years, we have to discount heavily for time. In addition the EPL came with much more attractive capital allowances which add value. I would say the EPL knocked about $400m off the intrinsic value of the company.
Stevo I think you are right. The market must believe in further declines. But I think we will be pleasantly surprised. It is all to do with increased capex and no repetition of the transformer problems. We are firing on all cylinders and getting $80 a barrel. Like you I am trying to be positive in 2024. I will try to stop posting obsessively.