Member Info for Stevo12

Jeffrey

I am guessing the trading update is coming out tomorrow am.

Just a gut feeling.

There are only three likely reasons for the delay in the trading update:

1. Enq are in the final stages of agreeing a deal and want to announce it with trading update

2. FCF and debt to end of October were not looking great and Enq want to include Nov FCF and net debt in the update.

3. Something else!

Take you pick.

I meant to add everyone is focussing on FIG sign off. The senior debt funding has also not been approved yet and I would suggest this is a higher bar to cross than FIG approval. However i was comforted by the Navitas latest statement that they expect banking approval by year end.

It is very difficult to value RKH post FID or even on first oil. We have the NPV10 valuation of $1.8b from the CPR which roughly translates to £1.50 per share. However NPV10 is a low discount rate for O&G companies and there are clearly risks between FID and first oil that need to be factored in.

Interestingly the NAvitas CPR provided a valuation at NPV5, NPV10 and NPV15 while RKH CPR only used NPV10. Looking at other O&G companies in production the discount rate (WACC) is somewhere between 10-15%. On the upside, the value of opportunities beyond Sealion will start to be factored in at some point as RKH approaches first oil, equally there will be hype on FID which may push the price.

I looked at cash flows on first oil and based on 50k BOPD, RKH cash flow will be approx 6.4m barrel at $40/FCF (after OPEX and Royalty at $70 oil) totalling $255m as no CT to pay for at least 4-5 years due to losses and CAPEX. A valuation of 6 times FCF would yield $1.5b (roughly NPV15) but this only relates to phase 1 and 2 of Sealion and production will start to ramp up on later phases around 2030. So let’s say Phase 2 adds another $1b to the at first oil valuation.

So a pre debt adjusted value of $2.5b on first oil. Our share of debt will be $350m(senior)+180m (Navitas)+ 350m (phase 3+4 CAPEX) provides an equity value of $1.6b which is pretty close to the $1.8b CPR valuation. Discounting back from first oil to FID is very difficult but a valuation of $1.1b-1.3b looks reasonable for the development risk. So £850m-£1b market value on FID is a possibility but again this is dependent on sentiment and the number of sellers/ II interest.

Again so may variable to make the above just a stab in the dark!

Hunbah

I feel your pain.

The bigger message for me is that you can’t make an acceptable return in NS with oil at $65/barrel. Tax does not really matter if oil price remains below $70 in the long term. I personally don’t think it will and OBR are being conservative.

Agree Fiscal certainty is important and labour have provided it. All parties (except greens) are signed up to ending EPL and if reforms or Cons win next election , EPL will end earlier and their policy to NS O&G is very supportive (although I’ll never forgive Hunt). Your point on a depleted workforce and supply chain is the biggest risk but if the UK in 2030 offers one of the world’s lowest O&G tax rate and there is a return to made, investments will flow. i also think the whole Net Zero zealotry will become increasingly discredited over the next couple of years.

We do need a change in sentiment from Labour in the meantime and Rosebank & Cambo approval will help. Not sure when these will come on stream and i understand Rosebank is quite advanced. However Cambo could hit the Goldilocks window, CAPEX reduces EPL and CT and production taxed at 40% in 2209 in first oil.

Karat

Any spend on new development is deductible against epl and core Uk tax. If you are a full taxpayer, a £1 spend reduces CT and EPL tax bill by 80p.

However if the project is decarbonisation, the tax paid is reduced by approx £1 for every £1 spent (has to be electrification though).

Re q3, Capital allowance is not relevant as it is a revenue tax. 35% of revenue over the threshold.

Hunbah

I don’t disagree with your general thrust but the reduction in tax take from £2.7b to £0.3b in 2030 is largely due to removal of EPL in 2030. The tax raised from 40% core UK tax over the next 5 years is pretty meaningless (about $0.4b per year) with EPL contributions 3/4 of O&G tax revenues. This is based on assumption that oil stays in the mid to high $60s for next 5 years and highlights that most of sector will not be generating taxable profits at sub $70 oil (partly due to b/fwd tax losses).

Enquest falls into that basket, with oil in mid $60s, Enq will be around breakeven for core UK 40% tax, but when you add back $70m of interest and $60m of decom spend, it is suddenly paying $45m EPL. Very unfair!

I am still a little more optimistic and see no reason why O&G will not start developing fields such as Bressay and Bentley (they have the licenses a) in 2028 and 2029 ahead of the new tax regime which i think it is reasonable. Post 2030 UK will have one of the most attractive tax regimes in the world (excluding Falklands and USA) and certainly far more attractive than Malaysia, Vietnam etc.

Why would a company sink capital into Vietnam in 2027/28 who will take 75%+ of your profits with operator required to upfront fund 100% of CAPEX. The UK will start to look attractive again, particularly if Reform is on the cusp of an election victory given their energy policy.

While logic tells you that EPL is highly destructive, the OBR forecasts it will raise £6b from 2026-2030 (at sub $70 oil) as compared to £2b for NS CT. The treasury simply needs this £6b and this overrides any medium/long term damage or risk to our energy security.

Interestingly the OBR forecast that the ESIM is very close to being breached for oil and gas in late 2028 as gas prices fall.

Frac

Agree that resetting the RBL facility was a real positive. The key will be the redetermination date in Jan 26 which will set how much of the facility can be drawn down which is driven by 2P reserves and oil price (and any changes to taxation). Enq is currently allowed to draw down $200m+ (cannot recall the exact number) and while this may reduce slightly in 2026 (due to 2P reserves extracted) it does provide capacity to fund an acquisition which comes with 2P reserves.

Refinancing the $600m+ bonds is the next challenge for H2 2026. Bond prices remain stable which is a good sign

I am hopeful there will be a change to EPL pre 2030 and the run up of NS O&G share prices pre budget reflected the expectation of changes to EPL. It is going to take a real public fight with marches on Westminster and for press to treated it as Coal Miners 2.0. Does the O&G have the stomach for the fight is the real question - bring back Arthur Scargill.

A

Hunbah

While extremely disappointing that our Rachel did not at least bring forward the retirement of EPL to 2029 at the latest, the follow on tax regime is very sensible. Without any further changes to EPL, this should result in a flood of development in 2027/28 onwards to benefit from the tax deductibility against EPL, with production taxed under the new regime. This would include the likes of Bressay and Bentley which already have licenses and are development and not exploration projects.

The question is whether there will be the skills and resources left.

In the meantime it is going to be survival and consolidation and oil price is now the key challenge. The upcoming operational update will confirm whether Enq can generate FCF with oil in the mid 60s.

Dumbly

Unfortunately I think you are spot on. End of EPL pulled forward 12 months as a token. I do think the announcement of post EPL tax regime could be an important milestone. if attractive could drive investment in 2027-29 to benefit from what is effectively an 80% tax allowance, with subsequent profits taxed under new post 2029 tax arrangement.

However 2026 looking like a very low investment year with such low oil prices and real question as to maintenance of a supply chain into 27 and beyond.

Not long to wait until Rachel reveals all.

My understanding was that when the election was originally pushed back from November to December, it was to enable FID to be concluded prior to the start of campaigning.

We should not underestimate the challenge of raising £1b of debt finance on a non-recourse basis from a cohort of banks. Debt financing has always been the No 1 challenge from PMO days onwards and this may have taken a little longer than Navitas originally estimated. However I was very comforted by Navitas’ statement a few days ago that FID was still scheduled for 2025 and it is repeated in the recently released investor update. Whether it is November or December is largely irrelevant, but the sooner the better as it looks like their are some macro dark clouds on the horizon.

Hunbah

I concur, we simply do not know enough about the PSC agreement and the profit share at different oil prices to model accurately. Interesting conceptual debate for us finance nerds but not much use in building a useable model. However the company tells us each six months exactly how much profit Malaysia has contributed at the respective oil price and production output. Accordingly much easier to take company’s disclosed Malaysian results and extrapolate/adjust for oil price and production volume assumption.

November trading update is going to be very interesting, question is whether it will be pre or post budget.

Kamrat

You are assuming $6/barrel OPEX on Malaysian production - looks far too low. I have not seen any specific guidance on OPEX per barrel for Malaysian but i recall it was lower than UK. I still don’t understand your volume assumption for 2025.

Thanks for the modelling work.

Kamrat

Please ignore the numbers at the bottom of previous message. I was trying to do some workings before i realised it was not possible and forgot to delete.

Kamrat

Total production from PMG8 and Svengali is approx 17k BOPD and Enquest has a 50% working interest with PETRONAS as the partner. This is a normal work working interest share. Then from Enquest approx 8.5k BOPD Working Interest there is a PSC arrangement whereby the profit derived from the 8.5k BOPD is shared after charging royalty, OPEX and Depn as described by Hunbah.

It is going to be difficult for you to accurately model as the 8.5k BOPD includes gas volumes where Enq receives a lifting fee. Not sure how much. What we do know is Enq reported Malaysian revenue for H125 of $54.9m which is net of the Royalty and PSC payments.

Appreciate your efforts in trying to model and hope this helps.

Revenue 8.4k*71*365/2 =$109.1m.

Royalty payment =$11m

PSC = $43.2m

Reported Malaysian revenue = $54.9m

Enq OPEX+depn-PSC = $36m

Malaysian PBT = $18.9m

Reporte barrel

Accordingly

Rom

Your comparison of 2P valuations across different regions highlights the impact of EPL. Pre EPL UK 2P was valued at. $20-25 / barrel and the EPL has basically reduced this by 2/3 to $7-9 per barrel. In broad teams pre EPL companies kept 60% of profit and post EPL its 22% (excluding impact off tax losses.

Looking at Enquest and HBR or any individual company you need to use EV rather than market cap to get a value per individual company 2P reserves.

What this does show is that removal of EPL could add over $1b to the value of Enq 2P reserves.

Kamrat/ Hunbah

Just for clarity, Enq has a 50% working interest in the PMG8/ Svengali field which contributes approx 8k BOPD to Enq (apologies if I am teaching gran to suck eggs) and the royalty and PSC payments are made from the revenue and profit derived from these 8k BOPD.

We will never know the exact PSC % share at different oil price as they are individually negotiated but I would not get too hung up on this. We know that Malaysia contributed approximately $12/barrel (after all taxes) at $80/ barrel and $9.5/ barrel at $70 oil and should generate positive FCF all the way down to approx $35/ barrel oil.

In terms of your detailed workings, you are materially understating OPEX which appears to be in the $20/barrel region.

Overall Malaysia contributed approx 13% of the group’s pre tax profit in H125 (excluding interest) and 22% of production (similar in 2024). In 2024 Enquest paid $82.2m to Uk government and $81.2m to Malaysian government, so please don’t think Malaysia is a low tax regime. Although it does flex PSC payments to oil price.