Member Info for Stevo12

Saudi built its pipeline to Red Sea in 1980s with 5m barrels a day capacity and was expanded to 7m in 2018. You can track the loading at Yanbu oil terminal in Red Sea. UAE oil is pipelined to Funjuaih but has less than 2m barrels a day capacity. UAE pipeline capacity will be doubled by 2027 - pretty easy to build a pipeline through desert without need for planning !! When it is critical to national security. Iran is using the Kurd pipeline via Turkey to Ceyhan but only has 0.5m barrel capacity. Iraq and Iran also trucking oil and a lot of Iranian oil got though SOH before blockade and is fully getting out now.

Oil has a way of finding a route to market! 7m barrel/ day lock in still huge.

Kraken

I agree with your broad thrusts but the supply cut off has been closer to 6-7m barrels a day and not 20m barrels. Depletion of reserves closer to 1b barrels - still huge and the fact the price has not really spiked is a testament to the reserves and resilience built into the system. The questions that the market is trying to figure out is (1) what is normalised level of Chinese demand after you remove the reserves built up over last 3 years from cheap Russian and Iranian oil (2) What spare capacity really existed in market (Saudi and UAE) and will break up of OPEC release this capacity (3) are flows through SOH going to rapidly settle at a new normal (possibly 10m barrels a day with balance going through by-pass pipelines) (4) HAs there been damage to flow rates from shut in and how long will it take for tanker fleet to reconfigure (5) how much will SPRs grow by (compared to pre SOH) and how quickly will they be filled.

The market has decided that they currently believe the answer to the above questions is $72 Brent which is effectively a balanced to slightly oversupplied market. As the answers to the above questions become clearer, the oil market will reassess fair value per barrel. I don’t think Trump will restart a hot conflict with Iran this year and some uncomfortable agreement will be reached.

Medium to long term market dynamics are looking favourable but concerned over price for rest of 2026 and 2027. An oil price in low $70s does not work for existing Enquest (FCF breakeven) but Malaysian acquisition should still deliver $10/barrel at $70 oil.

There is no way possible that new production can come on stream in 2027 that was not already in the pipeline pre US/Iran conflict. Yes the spare capacity held by primarily UAE and Saudi could be turned on (if it really exists) but there was not much else being held back pre SOh. Russians and Iranian sanctioned oil was still finding its way to market (primarily china and Indian refiners).

Accordingly and assuming no damage to wells as a result of shut-ins , difficult to see more than 2m additional barrels coming on stream and this will only be to fill SPRs. The big question for me is not supply but demand in late 2027, 2028 and beyond and particularly China demand (excluding the refilling of SPRs). I don’t think we are going to know whether the oil market is likely to be in medium term balance until much later this year and possibly 2027.

In the short term it feels like there is a risk of price over correction if SOH restrictions are fully lifted (low $60s) but this should only be a short term issue. Equally prices will quickly move higher if Iran kicks off again.

I would certainly be adding more Enq, Serica and HArbour if oil price over corrects and SPs falls 10-20%

Rom

You know me too well and you are broadly correct re content of RTO prospectus. Most importantly an update on current trading and Debt levels at end of May will be included- possibly June.

Like many on this and other o&G BBs, I am scratching my head as to how quickly oil has dropped. I do not believe Oil has gone high enough or stayed there long enough to cause significant demand destruction or to encourage new supply.

There has clearly been a wake up call for those oil importing countries to increase their SPRs and for investment in pipeline alternatives/storage to bypass SOH. Yes china has played a blinder in building up its SPR in anticipation of the Iranian conflict and the market now recognises that there was a larger supply surplus prior to SOH which was being masked by Chinese oil stockpiling.

However it is undeniable that there is over 1b barrels of reserves to rebuild over next 1-2 years (2-3m b/day) and that should absorb much of the surplus supply when SOH fully reopens. My concern is that there is still some risk premium in the price and we might see a dip into $60s before a new equilibrium is found. Pre SOH i was anticipating a nice gentle rising trend into the $80s by 2028, now i am just confused.

Profitaker

For once we are in agreement, $80 oil is the sweet spot for both oil producers and consumers. At $80 oil Enq will be able to start repaying debt and Malaysian acquisition should kick in $200m Pa pre interest on acquisition funding and Capex.

In the medium term (2028-2030), $80 oil should be a floor given shortfall of global investment over last decade but in the short term it’s anyone’s guess.

Enq has published its 2025 PSC and tax payments and UK EPL as expected at a little over $100m ($50m due to Bressay deal with Rockrose).

Malaysian tax and PSC down by approx $30m to $52m due to lower oil prices and $30m higher capex. 2026 payments will reflect the almost doubling of production, higher oil and gas prices and lower CAPEX.

My estimate for 2026 tax and PSC payments, UK down to $50m and Malaysia up to $200m. Not sure on Vietnam but in $30-40m range.

Kraken

I am in until 40p unless oil returns to low 70s and sticks there, in which case i will be out.

However i am always going to look at the facts in a dispassionate way and not drink the cool aid.

Profitaker

As I noted earlier EBITDA is a very poor metric for comparing or valuing O&G companies. Enq generated $500m of EBITDA in 2025 which translated to negative FCF after refinance costs.

We will see in the prospectus what FCF the acquired Malaysian business generated in 2025.

Kraken

I am saying my view of fair value is approx 40p on completion of the acquisition if oil retains a base line of $80 per barrel. This excludes any UK acquisitions or changes to EPL. I have no idea how quickly it moves towards that 40p year end FV and of course if oil returns to $70/barrel all bets are off.

Profitaker

I have included the $170m capex as an acquistion price as management have stated that this is an inherited obligation and is sustaining CAPEX, rather than growth CAPEX. Equally you can deducted it from future FCF which has broadly the same effect on valuation. Agree acquisition price could be $90m less. I have Proforma Malaysian royalty, PSC and corp tax on 2025 EBITDA at closer to $250m.

I am forecasting that Malaysian acquisition will FCF $10-12/ barrel pre interest expense at $80 oil equivalent oil/gas mix for 2026. However gas could be lower depending on regional pricing/contracts in place. We should know more with prospectus.

Not sure there is a better indicator of Fair Value over an extended period than the stock market. Of course you are perfectly untitled to have a different view as to fair value which I presume is why you are buying, equally the person selling you that share has a differing view.

In my view, EBITDA multiples are a poor way of valuing O&G for two reasons, firstly the tax regimes differ widely across the globe with UK, Norway and Malaysia close to 80% and US as an example around 25%. Also EBITDA excludes sustaining CAPEX to maintain production and this can vary widely. FCF after tax and sustaining CAPEX is the only really comparable basis you can use to value across countries and field types. I would say a 6-7x FCF (across the cycle) is a reasonable proxy for a mid-cap Enterprise value, being a 15% ish discount factor. You can probably go as high as 10x for a super majors.

Profitaker

The IEA report assumes that oil does not start flowing above current levels through the straights until Q4 of this year. While the straights might be technically reopened this weekend, I can’t see meaningful volumes (5m + barrel per day) passing through in the near term (next 3 months) due to logistics and insurance.

Really surprised that oil has dropped this far on a sketchy MOU.

I think some folks on here are getting a little over excited on potential upside due to Malaysia acquisition. Enq are paying $1b for approx $200m Pa of FCF, a very nice deal which has potential to 2x the pre acquisition SP. However it is not going to 3-4X on its own without UK acquisition or EPL changes. I am still hoping for a 15-20k BOPD UK deal which would deliver $250m+ of FCF pa.

Unfortunately Trump still moves the market and the close to 5% fall in Brent is going to have an impact on all NS O&G share prices.

The real question is what the new normal in oil prices if this peace deal holds. We are at $83/barrel this morning and I was hoping that $80 was the new floor for at least the next 18 months, but looks like it could go lower if the peace deal is finalised over the next 60 days. At least a return to the $70s would allow the OPGM to be introduced.

Profitaker

I have triangulated my 2026 forecast with the 2025 numbers in the RNS, namely $400m of EBITDA for acquired business pre corporation tax. Post Malaysian Corp tax of 38%, 2025 FCF pre CAPEX was $248m ($12/BOE). The 2025 financials is based on oil at approx $70/barrel and an increase in oil prices of $10/barrel translates to approximately an additional $2/barrel FCF after royalty, PSC and corp tax.

Tamarack makes a good point as to whether the diversification translates to a potential increase in value of UK NS business. I agree that there is potential that the enlarged group attracts a higher valuation multiple, equally the proforma gross debt level (BOND and RBL) will be approx $1.25b before cash balances, which is a potential drag.

Really impressed that AB is not seeking to raise equity as part of this deal which would have materially diluted us. While the quid pro quo is higher debt, I am very supportive of a fully debt financed deal.

I personally think 40p is a more realistic target at completion but would be very happy with higher!!!

While acknowledging that until the circular is published that this is a “finger in the air” valuation, but here goes.

Assuming with additional $170m of CAPEX referred to in RNS that production can be maintained at 21m BOE pa for next several years and oil/gas averages $80/BOE, the target business should generate approx $14/barrel FCF (post royalty, PSC, OPEX and CT) or $294m Pa before interest expense. Assuming interest on debt of 10%, interest will average approx $70m over first 5 years results in post debt servicing FCF of approx $224m. Applying a 6 times valuation (approx 15% IRR) values the target at $1.35b.

Acquisition price including CAPEX totals $1b. Accordingly acquisition should add approx $350m to equity value (£260m) - approx 70-75% to share price. We have seen 25% to date and so another 50% yet to be realised.

WOW - I was not expecting a deal of that size in Malaysia. Transformational and positions Enquest as a key player in Malaysia.

First impression of deal is that it adds 21m BOPD production, $700m of revenue and $400m of EBITA at 2025 oil/gas prices. This translates to average revenue per barrel of $33 (post PSC payments) and EBITDA of $20 per barrel. This should translate to approx $200m FCF post interest and Tax ($10/barrel) but before any ongoing sustaining CAPEX requirements. Very similar to existing Malaysian business.

So first impressions are the max purchase price represents a multiple of FCF of a little over 4X (pre future sustaining CAPEX). Pretty decent purchase price multiple with initial purchased price closer to 2.5X. Translating to oil/gas prices $20 higher would add approx $4/barrel to FCF or $80m.

My only concern is that this acquisition uses borrowing capacity and may inhibit a significant UK NS deal which would have much higher FCF per barrel (approx 3x per barrel)

Aim

I would not try to second guess and use mid-point of management forecast.

If I recall correctly, Enq hit the top end of forecast range in 2025, fell short of bottom end of forecast range in 2024 and were in the middle of their forecast range in 2023. Second half of the year is normally lower production due to summer maintenance schedule (although this year might look different due to Magnus) and I would wait for updated guidance.

2026 is an interesting inflection point with SEA moving from an historical 15-20% of group production to potentially close to 40% in 2026. A NS acquisition could change the at mix quickly.

Profitaker

Thanks for your considered response and I am also leaning towards higher oil for longer as a result of SOH constraints. However I have been around a long time and I have seen the impact of high oil prices, namely low oil prices too many times. However we find ourselves in broad agreement that in an environment of higher oil pries for longer, Enquest share price should do very nicely.

I agree that it is impossible to know exactly how the market would value Enquest without its legacy liabilities of $1.6b, which have an annual cash cost of $220m+ to service, but we can male a reasonable estimate at 6-8X FCF which would be broadly equivalent to the current NBV of the liability. However the key point I was trying to make is that when you look at Enquest’s equity value of £360m, you also have to consider gross enterprise value after adjusting for financial liabilities (debt, lease and ABEX) and tax assets to form a more considered views on current value. This can then be viewed as a multiple of FCF both before and after cost of servicing these financial liabilities to form a view on current value.

IMO Enquest is currently overvalued at $70 oil, fairly valued at $80 oil and undervalued at $90 oil. I see Brent averaging $90 for next 12-18 months and I am hopeful of an acquisition which will bring more NS production and lower the $70 breakeven.

Profit

What do you think Enquest equity would be valued at if it had $400m less debt, $800m less ABEX liability and $300m less lease liability - at least £1-1.2b higher as the above 3 liabilities alone cash cost $220m per year to service.

This is the reason for different equity values between Enq and Serica not some market conspiracy.

BT faith.

I agree that in a long term oil price uptrend Enquest share price should outperform the likes of Harbour, Serica and Ithaca as a result of relative leverage.

I would argue that on a like for like basis, Enquest and Serica are similarly valued. Enquest has significantly higher legacy liabilities such as leases, ABEX and net debt of approx $1.6b and equity value of $480m. Serica’s equivalent legacy liabilities are $450m and equity $1.4b. Given other assets such as tax losses and working capital are broadly similar, the aggregate asset values (Reserves) are broadly similarly valued.

The key difference is, and the reason I have moved some equity into Enquest, is that in a rising oil price environment the “value” of both business should increase by a similar monetary amount. For example, a $500m increase in value of reserves due to rising oil prices (approx $2b to $2.5b) translates to a 100% increase in the equity for Enquest and around 35% for Serica. This is the impact of liabilities being fixed in monetary terms and Enquest’s higher leverage.

Similarly in a falling oil price environment Enquest’s equity value is more exposed.

I moved some equity back to Enquest as i believed that we were entering a multi year oil bull market in 2027 and beyond. I was not expecting the SOH to be closed and i am concerned as to the impact of the closure may have on oil prices in 2028 to 2030. Yes we are going to have abundant FCF for next 12-18 months but not sure what oil prices looks like the other side of this. Anyway hopefully all NS O&G companies can fill their boots for next year and for Enquest a real opportunity to reduce net debt.