Member Info for Sekforde

The net debt figure does not really matter. It is also cheap debt to service so your right Megla is does not need to be paid off quickly. The Government produced a surplus of £5bn for January as opposed to an expected deficit of £8 bn. That actually could prove important because it enhances the scope to adjust tax in March. March could yet prove a quite pivotal month.

The pure dividend yield is now 6.98% assuming the pay out is maintained at $200M. I see no reason why the board will not give an updated net debt figure. But the FCF forecast for the year more important.

To close a short of 0.5% is the equivalent of buying over 4M shares. I would like to see that attempted if we have good results and they panic. I think they are just punting. I doubt they know anything that is not publicly available.

Net Debt as of 28th February $600M
Forecast FCF for 2023 $1.2 - $1.4 (revised down from my $1.54bn estimate on account of board cautiousness)
Dividend maintained at $200m for year.
Share buybacks - further $100m announced for quarter.

That is absolutely marvellous. Another 0.5% of share capital that have at some point to be purchased back.

Megla on tax, the deferred tax for Harbour was listed in the half year accounts as a $3.069 bn asset as of 30th June 2022. It surely cannot be fully used by end of 2023? I still have not entirely got my head around the 91% upfront allowance against capital spending which must also mitigate tax in a heavy investing company like Harbour.

And sorry add in spend a further $400m on share buybacks in 2024.

Megla you are using $67 boe after hedging and you still arrive at just over $1 bn FCF for this year. I hope we get some guidance on 9th March 2023. But if you are right, and assuming $200 M goes on dividends and $400 on share buybacks we end the year with a net debt of $400M or a ratio of 0.1 to EBITDA. You must concede that 2024 should be better not worse? The bad hedging is over, production should be higher than 2023, we have less interest to pay and the tax regime should be the same or better. Nevertheless, just assume only a further $1bn in FCF in 2024. Enough to eliminate the remaining debt, pay the dividend of $200M (now 14%higher per share thanks to the 2023 buybacks) and no debt at the end of 2024. What then to do with the likely $1bn of free cash flow in 2025 with no debt to pay down or service? All looking mighty positive. 22 months is nothing in terms of an investment horizon. On these quite modest assumptions the total return to share holders could be around 40% ($1200m / $3,000m) during that short period. We end 2024 with a debt free company with higher production and greater reserves. Did you ever see the like of it?

However, I would rather the company maintained the share buy backs at $400m a year and the dividend at $200M. If that means we still have say $200m net debt at the end of the 2023 who cares? That can be squatted out in about 6 weeks. One thing to watch is whether the company at the AGM seeks shareholder approval to buy up more shares . Last year the resolution was for 15%. Same again Sam I say.

If you go to you tube, AB in September 2022 was suggesting that Enquest had invested over £4bn in the North Sea over the last 10 years. (Pounds not dollars). That investment has produced a company with an Enterprise value of around £900M without any returns to shareholders. So there is no case to be made for excessive profiteering. The people who invested over that time have lost their shirts. But the very best time to invest is when everyone has had enough. We could be very close to the absolute nadir.

Returning to FCF last year the $2.1bn was weighted $1.4bn to $0.7 bn to the first half. This weighting was partly attributable to the EPL introduced on 26th May 2022 and to lower overall second half prices but it was also due to higher production in the first half. The higher production in the first half is likely to be repeated this year. Using a FCF figure of say $1.4bn for the year, I am wondering if the split could not be $800M to $600M? If so ignoring dividends the net debt free point could be around mid summer. Quite a mile stone and the start I hope of serious distributions.

There is some chance that the budget on 15th March 2023 will bring good news. The EPL was all about dealing with the UK's dire finances. However, it has clearly had a bad effect on investment in the North Sea. Meanwhile the cost of UK government subsidies has fallen back as gas prices have fallen. Jeremy Hunt is a pragmatist and it would not be difficult to justify a modified approach in these changed circumstances. One possibility is a tax which is calibrated to rises and falls in prices. The present tax is a blunt instrument. But even with the existing EPL, the FCF for 2023 and 2024 look excellent and we have many years of tax losses to deploy. The strategy should be to keep producing, to keep costs as low as possible, to limit capital expenditure to easy quick return projects, to continue to pay down debt and to announce a decent dividend toward the back end of this year. $75 M would be about right and be both affordable and sustainable and give a yield of 17.73% at current prices. (Market cap around $423M).

I do not think the company should pay dividends or buy back shares now. Some of the debt is extremely expensive and needs to be paid down. But with high production in the first half of the year (48000 boe in January) we could see real progress by the end of June. It is just about being patient. Tremendous potential if we continue to deleverage and prices hold.

Of the three I favour Harbour. The market has focused on FCF for 2023. But in Harbour's case it has suffered from its bad hedging. Surely the focus should be beyond the next 10 months. In a market very adverse to risk I see its negligible debt and excellent potential earnings for 2024 as being extremely positive. The downside is ok too. President Biden said he wanted to replenish the much depleted strategic reserves at around $70 a barrel. That puts a floor of some sort on the downside. With production costs around $16 or $17 that makes us extremely safe should prices drift lower. The entire case for the EPL has been eroded as prices have fallen back to pre-war levels. It means that the cost of any future Government subsidies has reduced allowing scope for a reduction in the tax or some other adjustment to maintain investment. I am not worried about a future Labour Government. The EPL went far further than anything it was calling for and it will need support in Scotland to win the next election. Besides Harbour's strategy of building a second leg outside the UK provides an insurance policy for the future against excessive UK taxation. Over the weekend we have been discussing FCF. But CAPEX is steaming ahead. Should boost production and reserves over time and therefore returns. Looking ahead to the really long term, being debt free and producing huge cash surpluses should enable a transition into a different sort of energy company as fossil fuels cease to be used.

Megla if as you say that $400M had been paid in dividends then the market value of the company would be about $400M lower than it is now. So it amounts to much the same thing. The effect of eliminating the company's shares is that each shareholder owns a proportionately larger stake. Or put another way, if we maintain a market cap of just $3bn but buy and cancel $400M of shares then the sp should rise to around £3.40. I like the board's approach of saying you can count on the basic $200m but we will eliminate shares whenever we can and that will mean the dividend per share will automatically rise as we do this. The lower the sp the stronger the argument for more and not fewer share buybacks. In fact I do agree with you about debt. Our debt is very cheap to service and is being eroded by the effect of inflation any way. The ratio of debt to EBITDA is 0.2 which is nothing at all. We should always be sniffing around for good quick pay back deals, but until those are identified, I say let's keep purchasing these cheap cheap shares. One day whoosh... Could be on 9th March 2023.

The yield is often not accurately stated in the financial press. There are now 836,874,871 shares outstanding. At Friday's close of £2.95 we have a market cap of £2.468 bn or $2.962 bn. So the precise pure dividend yield assuming $200M of distributions is in fact 6.752%. A simple increase in the dividend to $300m (both affordable and sustainable for the foreseeable future) takes the pure dividend yield to above 10%. I prefer share buybacks which are really the same as a dividend in overall impact. The problem for the company will be what on earth does it do with all the free cash flow in just 10 months time?

Megla good reply but I think your post hedging figure of $67 boe will prove far too low. We have both used the middle forecasted range on production. The board is always conservative in its guidance and I suspect we will be closer to the top of the range as we were in 2022. And we still have this positive statement from 19th January 2023 in relation to this year's guidance:
"Continue to be forecast to be net debt free in 2023. Flexibility over future capital allocation retained, including for meaningful acquisitions and additional shareholder returns over and above our stated $200M annual dividend." $800m debt eliminated and $200M dividend implies at least fcf of $1bn. But the company could not contemplate "meaningful" acquisitions and additional shareholder returns as well unless the fcf were substantially higher than $1bn. All should become clearer on 9th March 2023.

Megla the figures I am using are culled from the 19th January 2023 trading update. There is a big uncertainty for 2023 as to what the post hedging boe figure will be for the year. The finance officer Krane was talking about doing some hedging on gas when prices were sky high. I have used $75 boe. Sales will on this figure be (192500 x $75 x 365) $5.269 bn. Capex $1.1bn, Opex (192500 x$16 x365) $1.124, finance leasing and other costs $500m (2022 $660 but adjusted down as interest costs reduced.) Total tax $1 bn. This gives us FCF of $1.54 bn. For 2024, the year of the end of bad hedging, I assume $85 boe and 200,000 a day production which take sales to $6.205 bn, capex $1.1 bn, Opex (200,000 x $17 x 365) $1.24, finance leasing and other costs $400m, total tax $1.2bn FCF $2.265. 2025 is too far away to say anything meaningful so I assume it is identical to 2024 which gives FCF of $2.265. It is worth looking at the last paragraph of the 19th January statement as to being debt free this year paying a dividend of $200m and paying substantially more to shareholders on top of the $200M. All this implies a FCF of well in excess of your figure of $1bn. But why a lower figure in 2024 when we still have the historic tax losses to use (as we will in 2025) and when, with all this capex, production should be rising not falling and the bad hedging should be over? BP's dividend yield is about 4% against harbour's 6.7%. BP will certainly not be debt free in 2023. Any how using my figure I arrive at a FCF for 2023 to 2025 of $6.07bn. I think it is worth remembering that 2022 produced FCF of $2.1bn. True oil prices were high and gas at times insane and until 26th May 2022 we did not have the EPL. BUT we had dire hedging and plenty of interest to pay and both of those enemies will be gone by 2024.

Megla Harbour is super cheap on at least 4 metrics. First its free cash flow over the next 3 years should comfortable exceed its present market value cap assuming constant oil and gas prices and 192,500 barrels a day (middle forecast for this year). Find me another company which reasonably expects that to happen? Second the current dividend gives it yield of 6.7% (twice the FTSE 100 average). But that becomes 20.1% if you add in the $400m or so of share buybacks which are likely to be announced throughout 2023. Third the company should produce 192,500 boe this year. That compares to Exxon's 3.8M. Exxon produces 20 times as much boe. Harbour's market cap is $2.982bn Exxon's is $458bn or more than 150 times the market cap. Of course Exxon also has other valuable businesses but oil and gas production are its central plank. It faces similar prospects of windfall tax on its $56bn of profit. Fourth Harbour will be free of net debt by the end of this year. That makes it extremely low risk compared to a host of other companies. (Exxon has about $40bn of debt). All this sort of thing has been said before by the fan club. And it is true the entire sector has been a graveyard of misery. I do not know when the worm will turn. But it will one day very soon. Grossly grossly undervalued.

Well I have been hammered today like never before. I went yesterday massively long on Harbour and Enquest. Brent then tanked and Enquest announced puny production forecasts. But you know what? This will come right. Both companies are insanely undervalued.