Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
Stevo. I think there was $35m paid in tax in 2022 by a mistake. This was refunded in early 2023 but then there was a mysterious $20m exchange loss which reduced the effective payment to $15m. Net debt did fall by $125m in that half -however that was achieved. I don't think it matters that part of that money came from JV partners. It is all money coming in that pays the opex etc. I also do not think it matters if money is ringfenced. JC payments should continue in 2024. Or there could be another sale of a stake in Bressay. We definitely do not need to own 85%. There must be a way of getting to net debt of around $350m by 30th June 2024 and that should make a big difference to the market's perception of risk going forward.
Aim. The market cap in sterling is £278.66. This is $353.8m which is the figure I cited. The entire FCF over the next 18 months could be paid out to shareholders and that would be very close to the present market cap. All it would mean is that we do not pay off debt. But of course we should do that.
I keep returning to the FCF for the first half of 2023. After stripping out the tax rebate and the currency loss, this was $125m. We produced 8,186,400 barrels including the BP magnus share and the Malaysian element. That implies the FCF per barrel was $15.30 on a realised price of $75.80. We now have Brent at around $79. It is as likely to rise as it is to fall over the next 176 days so let us assume it stays the same. Reduced interest $10m and reduced leasing $12m should more or less match increased opex. We should produce at least the same after a year of heavy capex. So we should receive an additional $25m for the oil sold. FCF comes in at $150m for just 6 months. Then assume no FCF in the second half of 2024, what about 2025. Apply all the same assumptions for the first half of 2025 but reduce interest payments by $7m and leasing by $20m and we have FCF of $177m in the first half. So we have FCF of $327m in the next 18 months against a market cap of $353m. By June 2025 net debt should be around $177m.
On 18th July 2023 Jefferies' came out with a price target of 20p. Brent was around $78 and the forward pricing showed declines to the end of the year. So what has changed since then. Nothing really ..... oh except the news about the Bressay sale, the actual Brent price being higher than the July forward curve, the hedging of 0.7m at $88, the refinancing to 2027, the resumption of full scale production following the shutdowns, opex coming in $25m lower than forecast and the EPL coming in $15m lower than forecast. After all that terrible news of course Jefferies should cut 30% off their price target. These guys know a thing or two about valuation.
Thanks Stevo I have that now. If I have understood that table it looks like the leasing costs fall by a further $40m a year in 2025. By then we should also be paying far less interest as the expensive debt is paid down. The company has to avoid large increases in opex. An increase of 5% would be ok. We are now comfortable above the $75.8 a barrel received in the first half of 2023. If we maintain or increase production and keep opex and decommissioning costs down and average say $78 a barrel we could perhaps achieve FCF of around $150m in the first half. But let us hope for some deals very soon. One brave deal has transformed Harbour. Some company must want to dump a mature asset for deferred consideration linked to future Brent prices.
Stevo the last figures for 2P reserves were disclosed for the year ending 31st December 2022 at 190m. The figure for year ending 31st December 2019 was 189m. This is of course before any Magnus adjustment. So we are not actually depleting reserves overall. I could not find the figure for lease costs reduction for 2025. Do you have the figure?
Happy new year Stevo. The estimate for the 2022 EPL was $75m but then came in at $60m. Has there actually been a firm estimate from the company for the whole of 2023? Do you agree that with the sale of 15% of Bressay for $44m upfront and with the 0.7m barrels of hedging at an average of $88 for November and December we should be around $500m net debt as of 31st December 2023? Using 150m for 2p reserves at Harbour's $8 a barrel gives us a market value for them of $1.2bn. The tax losses assuming no accelerated receipt are worth $500m. (I think that was your estimate based on heavy discounting for deferment of use). We now have a real valuation for Bressay. Even with Brent at $75, the EV of Enquest seems way off. You did somewhere identify the actual reduction in leasing costs for 2025. I cannot find the figure any where but it was a lot and Craig Baxter identified it in one of the presentations. Can you help? We are not really using up our 2p reserves because for every 17m produced we manage to replace them.
Mansardman happy new year to you. If you are a betting man then the odds (betfair) of a Trump victory are 6/4 (2.5) implying a 40% chance. The criminal indictments seem to raise his support. But I agree Enquest will matter very little if the orange monster is re-elected. I lost a huge amount in 2016 by betting it just could not happen so I have learned my lesson.
I think there is more than an outside chance that in 2028 there will be no repeat of the EPL particularly if Brent is at or just above the present levels in inflation adjusted terms. Enquest's tax losses are so vast that it will not have used them by that year and we could therefore be back to paying no tax at all. If Bressay is producing then we could be a 70,000 barrels a year debt free company. But there is lots of scope to do deals in the meantime. The company just needs to acquire a few assets on a deferred consideration basis to accelerate the use of the tax losses. I am hopeful that will be announced before the end of this month.
The re-election of Trump will be a disaster for the world. But he is ahead of Biden in the polling. And a highly partisan supreme court will keep him on the ballot. The one thing he will do is impose fierce sanctions on Iran and make all manner of threats against any country that buys its oil. Removing about 2 million a day from the market will add perhaps $20 to a barrel. So all very interesting.
AimOilking your 27.5p a share by year end would give us a market cap of $667m. Assuming debt reduction of $200m to around $300m we would have a EV of just $967m. I think for the market to place a value of less than a $1bn on a company that has invested over $5bn and has 600m reserves plus its tax losses plus Sollom Voe which itself could be worth billions in the future would still too low. But I would settle for it.
I think that the FCF for 2024 after allowing for a payment of say $90m for the EPL in October 2024 could come in at around $210m. It does of course all depend on Brent. I assuming around $80 average for the year.
I base the $90m on the $60 m paid for the 7 months of 2022 profits at 25%. Assuming no further disposals no M and A and no dividend or share buy backs in 2024 we will have a net debt of under $290m by 31st December 2024. At the end of 2024 the market should be looking to a big reduction in leasing costs and a further reduction in finance costs. At $80 Brent we should be able to achieve a FCF for 2025 of almost $300m. It would in fact be safe to allocate 50% of that sum to shareholders and the balance being used to further pay down debt or to develop Bressay. But this could all be quite pessimistic. There is lots of scope to bring forward in 2024 the use of the tax losses. A rational market would give a company with at least 12 years of reserves and a FCF of $300m a EV of say 6 times FCF or $1.8bn.
At the start of 2024 it is worth doings some maths. The latest net debt figure as of 31st October 2023 was $586.8M. But since then we have had 2 months of trading with 0.7m barrels hedged at an average of $88. That is enough to have reduced the net debt by around $50m. We have also had the sale of the stake in Bressay for an initial payment of £34.75M or $44m. So we should as of 31st December 2023 have had a net debt of $496.8m.
In the first half of 2023 the FCF was $140m. But this was inflated by a tax repayment of $15m so the real figure was $125m. The average realised price of Brent was $75.8 per barrel.
I assume same again production which is conservative given the high capex in 2023. I also assume that Brent will average its present price which is $2.50 higher than the average realised for the first half of 2023. This gives us an additional $20m. I assume that with average debt down by $200m and the highest interest debt costing 13% per annum we will save some $13m in interest. Leasing costs should also be about $10m lower. I assume a $20m increase in opex given how tilted 2023 was to the second half. Capex etc I assume will remain the same. All this means that FCF should be $125m plus $20m plus $13m plus $10m minus $20m or $148m. So net debt as of 30th June 2024 should be $348.8m.
With 1,912,304,113 shares in issue we have a market cap of 15.7p x 1.27 = $381m. As of 30th June 2024, if the sp were to remain the same we will have an EV of just $729.8m. An EV of $1.1bn (the figure at the start of 2023) would require an increase in market cap to $751.8m. This would imply a 96% increase in share price.
Would an EV of $1.1bn be realistic? Well given the undeveloped Bressay field has a present value (based on the recent up front payment) of $231m and the tax losses alone are worth at least $500m, it would still remain grossly undervalued. It will be the crushing of this debt that will I think change the market's perception of risk.
3 years ago to this day the sp was 11.3p. At the prevailing exchange rate that gave the company a market value of $284m. Today we are at the dizzy heights of 15.08p which at the prevailing exchange rate gives the company a market cap of $360m. But back in 2020, on this day the company had net debt of $1.222bn as opposed to $500m (counting the proceeds of the recent deal.) So our enterprise value has fallen from $1.506 bn to just $860m. The key point is that on 28th December 2020 the price of Brent was $51 as opposed to $77.5. Really hard to follow. Oh and the sp on 28th December 2013 was 136.70p.
Of course that is the best time to invest when every one has given up. I see share buybacks starting soon. About $50m per annum, to give a return of just under 14%. Afterall Harbour has being paying a dividend of $200m and it has roughly four time FCF as Enquest in 2023 although falling in 2024 to about twice because of its much higher taxational rate.
I have just been looking at Aker BP. It is producing about 450,000 barrels a day as opposed to Enquest's 44,000. It has net debt of $2.7bn as opposed to Enquest's $500m. It has an effective rate of tax of 78% as opposed to Enquest's 45% (and of course falling as debt recedes.) It does have much lower opex (around $7 as opposed to around $18 per barrel). But it has a market cap of $18bn as opposed to around $370m (around 50 times greater). Very hard to justify the disparity. Harbour will look awfully like Aker BP after its merger. It would have a market cap of around $5.7bn at current market prices. So again very hard to justify the disparity.
Megla that is not really going to help much. The net debt will still be above $7bn and will take at least seven years to pay down if oil prices hold. I have now cashed in on Harbour. It is a great company and the deal makes sense despite the debt. But Enquest is so much cheaper and has its own surprises to spring in the next few weeks.