Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
With $44M being added to the bank account, we should end the year with net debt below $500m. As we enter 2024, the cost of servicing that debt should have fallen to around 8% of the outstanding balance. In the first half of 2023 we had a FCF of $140m with average realised Brent of $75.80. Assuming an extra $34M from higher Brent (8.5M x $4), $10M saving in interest, $10M saving in leasing costs, same again opex cap ex and production we could get to close to $200m FCC in the first half of 2024 . But let us say $150m. That will take the net debt down to around $350m. Harbour paid $8.60 per barrel for Wintershall's 2p reserves. We have around 190M. But our reserves are much more valuable in our hands because of the extremely low tax status. Let us say they are worth $12 a barrel. That would give a rational EV of $2.28bn. (I shall ignore sullom voe and the producer and the 2C reserves which clearly have additional value). Deduct then the $350m net debt and we should have a market value of $1.93bn as opposed to $368m. This is not wishful thinking (which I am often guilty of) but a fair comparison based on what Harbour is paying. Sell Harbour and buy Enquest is the answer.
At close of play last night we (Enquest) had a EV of $900m (market cap $340m debt (say) $560m). The EV of Wintershall is $11.2bn following the bid yesterday. That is 12 times the EV of Enquest. ANY YET we have roughly one sixth of the reserves and one sixth of the production. AND we have tax losses worth around $500m AND Sullom Voe. So Enquest remains very cheap indeed.
Megla the BP debt is around $22bn against a market cap of $103bn. It is in relative terms tiny. Bp is much more diversified. The debt after this deal will be more than $7bn against a market cap of perhaps $5bn. So I do think the re-gearing makes it more risky. The higher promised dividend will not leave much for debt repayment and share buybacks. I would have favoured a tie up with Enquest instead.
We have been in the FTSE before and will go back into it again. But the forced buying theory did not help last time. Do not get me wrong I see the logic in this much larger deal than the Enquest deal I continue to advocate. But it is a massive re-gearing of the balance sheet. I liked the balance I had between low risk undervalued Harbour and high risk undervalued Enquest. I now have two high risk highly indebted companies with enormous potential IF oil/gas prices remain at current levels.
The FCF for Harbour alone will be about $1bn for 2023 but it falls to around $500m in 2024 because nearly all its tax losses will be exhausted. The FCF for 2024 is not unfortunately going to be anything like $3bn for the combined group.
We end the year with a market cap of just over $300m and debt of say $540M and so an Enterprise Value of $840m. This after investing $5bn. We have roughly 600m of reserves. And we have tax losses worth gross $900m or so. And we have Sullom Voe potentially worth many billions if we can find the right partner. In the short term even with Brent at about $78 we can clear debt at around $4m per week. I see a reversal of all the losses suffered this year with or without M and A. 20p before June is quite possible.
The tax losses would save Harbour around $800M in 2024 if a deal could be done. They are worth less than that sum to Enquest because they will take so long to use. But even assuming no deal they are worth at least $500m. That is not a sum very different from the net debt at the end of 2023.
I do not think the delisting is responsible for the fall. In relation to its size it is a highly leveraged company and the reduced SP is entirely due to the fall in Brent prices. The company is extremely well run. Its balance sheet continues to strengthen every day even with Brent at $75. We hardly every mention Sullom Voe. The terminal has the prospects of being repurposed for carbon capture if a partner can be found and worth many billions of dollars. Sitting tight. These things can change very quickly. Nothing at all to worry about.
Who ever can predict where Brent will go. But with realised Brent at $75.2 we did generate $140m FCF in the first half of 2023. We face 2024 with declining interest payments and leasing costs and Brent at $3 a barrel higher. I think we should be able at current prices to generate say $150m in the first half. I should like around $50m to be spent on share buybacks in the second half. Enough to buy about one sixth of the company at present sp. The exit of companies from the north sea should help keep wage costs under control.
You cannot really compare May 2022 with today. The big new thing is the EPL. But in December 2022 when EPL 2 was all known about the sp was in the low 20s AB was filling his boots. Was he wrong? No it is just sentiment in the market. Not to worry about. These things can change very quickly.
I agree I was extrapolating from the September and October debt reductions. Although we do have about 30% hedged at $88 for November and December Brent is lower now than it was in September and October. Production however should be above average to arrive at the forecast 44,000 barrels a day for the full year. But let us be more cautious. Assume that the debt reduction is only $20m a month in November and December and that FCF for 2024 and 2025 is $200m per annum, the debt at the end of 2025 will be just $150m. At constant EV that would give us a market cap of $750m. I am a big fan of clearing the really expensive debt but some is relatively cheap and it really would not matter if the net debt at the end of 2025 was say $300m. That would leave $150m for shareholder returns on my revised figures which should be spent on share buybacks. Enough at the present insane market cap to take out half the shares. I do not agree that in calculating EV you should include decommissioning costs. These are a different sort of liability to the payment of bank debt. They are more akin to the cost of staff or the cost of heating the head office. All this ignores the very high likelihood that a deal will be secured to make use of the tax losses.
We now have an enterprise value of just $900m. Roughly $310m market cap and $590M debt. That is a remarkable feat given that the company has invested over $5bn in the North Sea and has never paid a penny to shareholders. In inflation adjusted terms the investment is well over $6bn. By the end of the year (if you include) the $50m paid to BP we should have FCF of around $250m. The net debt should be around $515M. Is there any reason to suppose we cannot achieve the same again next year? There are reasons to suppose we might do better. First oil production could actually be higher with the new wells coming on line and a likely avoidance of the summer equipment problems. Second Brent could average higher. Worth remembering that we only achieved $75 per barrel in the first half of 2023. Third interest payments should really come down a lot as we take debt down to around $250m by October 2024 with the most expensive debt being cleared first. Fourth leasing costs will be lower. I accept of course that the EPL in October 2024 will be much more than $60m. I have pencilled in $100m. There may also be some opex increases. But not much with inflation coming under control. But let us assume $250m FCF. 2025 is much more difficult. We have to assume a change of government and an increase in the EPL to 38% and a cutting of some allowances. However, that impact will be fairly marginal and more than offset by the very much reduced leasing and interest costs. I am going to stab $250m FCF again. Let us then assume that the EV remains the same - $900m. That is a fairly cautious assumption given it has been $2bn less than 2 years ago. The net effect will be an increase in market cap to $885M ($900-$15). But a debt free company could and should be worth at least 5 times its forward FCF. If 2026 looks like coming in again at $250m that would mean a market cap of $1.25M by the end of 2025. So there is a real chance that Enquest rises to around 52p a share in 25 months. I think no one should panic or become disillusioned. It is a great company with a strong board doing all the right things. Markets are fickle and not always rational in the short term.
No one should dispute that global warning is real and consumption of fossil fuels is largely to blame. We face an existential threat and it needs to be tackled. The plain fact is however that Enquest is in fact part of the solution. We need to transition away from fossil fuels as fast as possible and pursue carbon capture technology as we do. Enquest will be a very different and much more valuable company in 20 years.
Yes but no one knew the EPL payment would be only $60m instead of the $75m forecast and no one knew the OPEX would be $400m and not $425. Stevo was just working from information provided by the company earlier in the year. He has already explained this.
I do not agree Krakenoil. Stevo's posts are not negative. They are helpful and informed and I do not detect any agenda from him other than to have a healthy debate about valuation. I am myself hugely optimistic and am in the equity and not the bonds. It is still a highly geared investment. But each day that passes with Brent at this level should be improving the balance sheet by close to $1m. I would not be at all surprised to see the SP at 25p before the end of February 2024. We could have by then added a further $100m to the balance sheet since 31st October and we have a present market cap of just $325m. As debt is repaid the market's perception of the risk should recede. We have no more tax to pay until 31st October 2024 and no further deferred consideration to pay. The debt and interest on debt should deflate like a large balloon.
The other intriguing thing is that Harbour announced an increase in its borrowing facility despite not on the face if it needing it for organic growth.
Stevo I am interested in your revised figures for FCF for next year. Can we not conclude that in view of the EPL for more than 7 months of 2022 (FCF $518m for full year) coming in at just $60m, the figure for October 2024 may be much lower than the $150m you feared? And then do we not have collapsing interest and leasing costs from now until next October?