Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
AIMoil
Unfortunately where you list has no bearing on where you pay tax. Tax is paid based on location of your operations and the only way Enquest can avoid EPL and other UK taxes would be to sell all of its NS operations.
SEK
Fully agree that both Serica and Enquest are under valued. In fact on any normal metric all UK NS operators are undervalued but this reflects the fiscal uncertainty that remains and will continue until Labour finalise their position.
On comparison of FCF for 2024, I have Serica generating approx $80m more FCF than Enquest in 2024 if Gas remains at 80p per therm and oil at $90. Key difference in 2024 is Serica’s all in cash costs are $45n per barrel compared to $75 for Enquest. However due to lower gas prices ($50 per barrel equivalent) and poor oil hedges in Q1 and Q2, I have Serica's revenue per barrel $25 less than Enquest at $90 oil. Net effect is that I have Serica generating $5 per barrel higher cash flow in 2024. If oil drops to $80 per barrel, Serica generates $14 per barrel higher FCF per barrel.
The key difference in 2024 is that Serica will use its FCF to return approx $120m to shareholders and Enquest will repay debt. The debt repayment by Enquest of say $120m should result in a similar rise in Market Cap. So in theory, with Enquest we should see a higher % gain in share price than Serica with Serica’s shareholders receiving more of their return in cash via dividends.
Of course theory and reality often very different
Tigar
If you go to note 28 and look under the section headed liquidity risk. The table in this note breaks down the BP payments to be made in 2024, 2025, 2026-2028 and 2029 onwards. This is a very useful note as it discloses both the projected payments to BP but also they same detail on lease payments.
OilKing
Not trying to defend myself but my 2023 FCF forecast were based on management guidance provided in September and November which turned out to be materially incorrect but thankfully positively incorrect - I guess I am trying to defend myself.
In response to your points
1. Enquest tax losses are higher than Serica’s - approx $200m higher at 40% rate. These will be used over several years and annual impact is not material. What is more important is that Serica can currently only use its losses against Tailwind profits..
2. Magnus represents 45% of UKNS production and I have assumed they will also account for 45% of 2P reserves (as not disclosed) and accordingly BP’s share is 25m barrels.
3. I have not explained myself clearly enough re Malaysia. As you not PSC are common place in many countries and in Malaysia The government apply a royalty of 10)% of revenue, take 40-50% of operating profit under the PSC and then tax residual profits at 40%. What I was trying to say is that while Enquest is producing approx 8K BPD and has 2P reserves of a little under 30m barrels, approximately 1/2 of the profit earned form these 2P barrels is paid to Malaysian gov under the PSC and Royalties. My goal was to provide a more comparable basis with UK production.
On 2C reserves, the market is not attributing any value to these reserves due to EPL. As an example HArbour gave up its share of Bressay 2C for no consideration and Shell also passed its interest in Cambo to Ithaca for no consideration. I recall Enquest paid a couple of £m for Bentley pre EPL. Nice to have 2C reserves but no value currently ascribed by MR Market.
SEK
I fear that the negative working capital of approx $50m in Jan/feb was a reversal of an unusual timing issue at 31 December 23 as disclosed by management and may not reoccur in March/April.
We will see at next trading update.
Kraken
We pay to BP the FCF earned from 37.5% of Barrels sold from Magnus. This is effectively 37.5% of Magnus revenue-Magnus OPEX- Magnus CAPEX.
What I have tried to highlight is that Enquest retains 62.5% of Magnus FCF but the reported BPD production and 2P reserves is 100% of Magnus
Rom
In simple English, Enquest have $1.7b of tax losses which are deemed likely to be used as compared to Serica who holds approx $1.1b. Enquest also holds Bentley losses over over $1b and not sure if theses are purely ringfenced for Bentley taxable profits.
Serica’s losses can currently only be used against the Tailwind profits and so does not eliminate 100% of core UK tax.
Tigar
Unfortunately not quite. The amount still to pay BP for Magnus is $824.9m (see note 28 of 2023 financial statements). The $461m is the NPV of the future projected payments to BP for Magnus. Copmpany’s projections are that they will not pay the full $1b of contingent consideration but this is of course dependent on future volumes, oil price and OPEX.
Company forecast 2024 BP payment reducing to $46.5m due to high Magnus CAPEX. Should be approaching $100m a year thereafter.
Romeron
Regarding your questions.
1. Tax losses were acquired with Tailwind and $331m tax loss included as deferred tax asset - see note 9D of financial statements. Only usable against Tailwind profits initially and so still some core Uk tax to pay annually in addition to EPL.
2. On 2P reserves and production. Approx 4k BOPD of profit from Malaysian production is paid to Gov under production sharing agreement and gas lift. Also approx 6k+ BOPD of Magnus production is paid to BP. While Magnus is responsible for operating 43k BOPD of production, a little over 10k or 25% is for third parties and no benefit flows to Enquest.
3. On gas OPEX costs, I would be guessing but should be in the $10-15 range per barrel. The larger gas fields in Norway are $6-10 OPEX.
I hope for UK ECONOMY that Bressay does get developed but a lot of water to go under bridge and the initial phase to access 35m 2P is projected to cost $700m CAPEX.
I forgot to add that Serica’s cash cost per barrel for 2024 is approx $45 per barrel compared to Enquest’s $75 per barrel. However need to reflect that 50% of Serica’s production is gas which is currently realising approx $50 per BOE - so much less profit on Gas BOE.
SEK
I an invested in both Serica and Enquest and I do think comparisons of performance and market caps are useful. However I do not think you have fairly compared the two companies and my takeaways from today’s results announcement are as follows:
1. Adjusted for debt and cash balances, Enquest and Serica have similar EVs
2. Serica’ s FCF for 2023 was $195m after paying $183 of 2023 tax liabilities, including approx $100m of EPL. Enquest reported $300m of FCF but management noted that approx $100m was a result of working capital benefits which are non-recurring and will likely reverse in 2024. Also Enquest will not pay its 2023 tax liabilities of $125m (excluding. $50m Bressay EPL payment) until October 24.
3. Production for 2024 is similar at approx 43k BOPD but Enquest only has an economic and financial interest in 33k BOPD, while Serica has full entitlement to all its production.
4. Serica has limited finance lease liabilities and much lower decom liabilities than Enquest
5. Enquest 2P reserves are 175m compared to Serica’s 140m but, as noted above, Enquest has no economic or financial interest in approx 25% of its 2P reserves and so similar 2P
6. Serica inherited some pretty poor oil hedges with Tailwind that continue through to Q2 2024 which resulted in realised oil prices in 2023 of $70 compared to Enquest’s $82.
7. Serica 50% gas and personally I prefer the more predictable and higher value oil markets. However recognise there is a push to move into gas for ESG reasons
8. Serica CAPEX is adding more 2P reserves than its is extracting. In comparison, despite quite high capex over last 2 years Enquest has added close to zero 2P reserves.
9. Serica has lower OPEX for 2024 ($20 compared to $27 per barrel). However this would be expected with gas mix.
10. Serica paying $100m pa in dividends and $15m of buybacks
11. Similar level of tax losses - Enquest slightly higher.
As noted above I am invested in both Enquest and Serica but I have increased my Serica investment over last month - while Enquest is a hold. Higher percentage gain likely with Enquest shares if oil holds $85 plus, but lower risk with Serica and 12% dividend return. We all pick our own poison but I do not believe, based on above, that Enquest is undervalued compared to Serica.
Seric
NOQ
The Losses can be used against the TW profits post acquisition. At approx 25k BOPD of oil the TW business should be generating at leat $40 per barrel taxable profit after investment allowance which is approx $380m per annum. UK tax (excluding EPL) at 40% would be approx $150m pa and accordingly the $1.2m of TW tax losses (which are available to reduce tax payable by $480m) would be used over 3 years from the TW business alone.
The assertion by management at the time of the acquisition was that they would accelerate the use of the TW losses by offsetting against the Serica profits and we will see with the publishing of the results whether this has been the case for 2023.
NoQuestions
When a company acquires another company with tax losses it can not offset those losses against the current groups profits for 5 years. There are ways to mitigate this tax law but not easy. The losses will of course be used against TW taxable profits (excluding EPL).
Redb
My 2025 forecast fcf assumes a $70m drop in capex compared to 2024 as a result of Labour removing investment allowances (from $200m to $130m). I have not reduced it further as Kraken workover planned for Q1 2025 will have been contracted pre election. Reduction of capex likely much higher in 2026 if Labour remove investment allowances as currently stated.
Interesting 2025 and 2026 could be stella FCF years under a more aggressive labour policy before depletion rates start to really bite in 2027 onwards. If Labour stick with current conservative policy the capex could rise quite dramatically with progression of Bressay etc.
My gut feel is that energy policy could become a significant area of debate and differential in election campaign.
Redb
I have Enquest FCF break even at $75 oil for 2024 and $65 for 2025. This excludes proceeds from asset sales and working capital movements.
It is anyone’s guess where oil goes in the short term (next 6-12 months). It could go higher if conflict escalates or lower if we start to see global recession as interest rate hikes start to really bite.
SEK
I should have added that an acquirer would prefer an asset deal and if they are paying corporate tax and EPL, they will get to reduce their tax bill by 91% of the purchase price while Enquest will only pay 35% EPL on the purchase price.
Accordingly we might be in another situation similar to Bressay whereby a buyer pays say $200m for GE and its total tax bill is reduced by $182m resulting in a net cost of $18m and Enquest receives $200m less $70m EPL (payable in Oct 25). This could be another opportunity to exploit the difference between EPL payable on asset sales and the super allowance available to acquirers, together with using Enquest tax losses.
Could be wrong but just s thought.
SEK
It all depends on the sale structure. If the GE asset sits in a separate legal entity and Enquest sells the shares of the legal entity there will be no EPL payable and potential a capital loss on sale of the shares. This loss will not be offsetable against EPL.
If we sell the actual field as an asset deal (as opposed to the shares of the company owning the field) there will be an EPL bill of 35% of the proceeds payable in October 25 (similar to Bresssay). The reason being that Enquest would have taken a tax deduction on acquiring the field which would have added to the tax losses and resulted in a zero cost base.
I have no idea whether GE was acquired into a separate legal entity or into the main Enquest trading entity.
As Kraken notes, we have to trust management to structure any deal in the best interests of Enquest. That is if there is an intent to sell GE and it could all be another press misunderstanding.
The best way to pay down debt is to convert tax losses into cash though growing production. Selling producing assets at current market values for 2P reserves does not make sense and we should be buying producing 2P reserves which, with tax losses, will cash payback in 2 years.
Enquest is not in a distressed situation like others with debt in place until 2027 and with FCF in 2025 looking strong. accordingly no need to sell of assets into a depressed market. Debt should reduce to 0.5X target over next 2 years while still freeing up $200-300m to buy 2P producing assets.
Of course the potential sale has not been confirmed by the company and might be another non-story. However it also has not been denied which probably means there is some substance.
I am somewhat surprised by the proposed sale of GE. At the time of acquisition Enquest's 27% share represented 18m barrels of 2P and 10k BOPD production.
Given production has more than halved to 4.2k per day in 2023, 2P reserves will have also have fallen to say around 10-12m barrels. Enquest paid $375m including $50m earn out. EPL has reduced the value of 2P reserves by a little over 50% and production is also approximately half of anticipated volume. Enquest paid over $20 per barrel plus additional $50m. Current values of 2P in recent deals are below $10 per barrel and so I would say $100-120m would be upper end of deal values.
I recall GE had low ongoing costs of $20 per barrel. Accordingly at $80 oil GE will be generating $90m pa pre tax or $22.5m pa post tax for a full tax payer or $58m if using tax losses. Accordingly I am struggling to see why Enquest would sell $58m of FCF for any thing less than $250m. There is no way any buyer would pay this sort of price as they will want to benefit from the value of their tax losses (if they have them) - as Enquest would if buying producing assets.
Intrigued to se how this develops!