Member Info for Stevo12

Rom

I concur that there are early signs of a change of sentiment towards the green energy revolution and when economics and physics clash with dogma and ideology, reality always wins (eventually). The question is how much damage will occur before the realisation that WInd and Solar are not the answer to our energy needs.

I don’t think we will have to wait too long to see how producing 2P reserves are valued and I anticipate there will be 2 or 3 deals pre Christmas and hopefully Enquest will be among them.

I would say that Enquest management were misleading in how they presented the Golden Eagle and to a lesser extent the Magnus acquisition paybacks. On golden Eagle (which we bought in October 22) production collapsed almost immediately post acquisition to 6K BOPD and in 2023 Golden Eagle production was 2.3m barrels and at the very best this will have generated $100m before the EPL tax charge. There was a very significant write off of the $250m purchase price in the 2023 financial statements and management presenting Golden Eagle as a great success with $316m of FCF in 14 months ended 31 December 2023 is clearly ludicrous and massively misleading.

Magnus acquisition was a great success but again presenting that we paid $100m for Magnus when we agreed to pay a further $1billion to acquire Magnus over the next 10 years+.

OILK

We will hopefully see the market value of 2P reserves post budget in the coming weeks and months as deals are done.

My earlier point was that if you are generating cash after paying 78% tax of $11 per barrel, why would you sell for $3 per barrel. Also depending on the structure of the deal, the seller would have to pay 78% tax on the $3 resulting in net cash of $0.6 per barrel as compared to $11 per barrel FCF if you do not sell.

While there are those who want to exit NS (possibly less now post budget), I think there will be enough competition to keep prices fair.

However just my guess. The important feature is the potential uplift to share price even for a quite modest 10k BOPD acquisition.

Oct

If the market was assuming $65 oil for next several years, the FCF for 78% tax payers falls from $11 to $9 per barrel and the FCF for Enquest falls to $25 per barrel. The NPV10 discounted value falls by $2 per barrel to $6.30.

Personally $65 per barrel feels low for a long term forecast but does not materially impact the value of 2P reserves in the hands of 78% tax payers.

OILV

Using $75 oil and $25 OPEX, a 78% tax payer retains $11 per barrel after tax. Discounting this value over 7 years at NPV10 (average remaining field life) values the 2P reserves at $8.40 per barrel for a 78% taxpayer. The discounted value to Enquest is $23.4 per barrel.

As a result the value of 2P reserves using 10% discount rate is $8.40 per barrel. Using 15% discount rate the value per barrel reduces to $7.50. Beyond these values a seller is better off retaining production and paying the tax. Also recognising there a several O&G companies with tax losses, there will be some competition for 2P reserves which is why I think purchase prices will be slightly higher than the $7.50 per barrel.

To give us an ideal of the potential value to Enquest. 10k BPD for 7 years translates to 25m of reserves at a purchase price of $212m. The annual FCF to Enquest would be $113m per annum pre interest of say $23m - net $90m of FCF which should add approx $200m to market cap or 8-9p per share.

In broad terms this is probably the best we could have hoped for given the manifesto commitments and possibly makes development of new fields, for companies without brought forward losses, just about economic.

For Enquest the best option still remains to acquire producing assets as opposed to new development for the following reasons;

New developments costing approximately $20 per barrel of CAPEX will generate a tax reduction for full tax paying companies of approx $17 per barrel so (so net cash cost of $3 per barrel) as opposed to Enquest which would have to fund $12.5 per barrel. The value of 2P reserves being $6-10 per barrel.

In contrast 2P reserves with OPEX of $25 per barrel and oil price of $75 per barrel would generate FCF for Enquest of $31 per barrel as opposed to $11 for full tax payers. Huge arbitrage opportunity and Enquest could comfortably pay towards the higher end of the value range ($10 per barrel) and be very cash positive.

Accordingly my take is that new field development should be deferred for a few years and focus on acquiring producing fields.

Tamovv

The speech lays out the principles and some of the details and the treasury then issue a more detailed report after the speech. Anything before 12.30 are leaks or speculation.

Rom

Great to see you back again.

There are a few simple and undeniable truths on renewables v hydrocarbons which I use in discussions, namely

- The UK has the highest electricity cost of all developed economies and has decarbonised faster than any other developed country - there is a reason for this.

- The energy suppliers (EDF etc) charge to consumers is approx 30p per KW including standing charge. The actual electricity cost is about a quarter of the bill and the other 75% is Network costs, Renewable subsidies, Taxes, Energy supplier costs and margin.

- The recent AR6 auction (which provides a price guarantee to WInd and Solar farms) saw guaranteed electricity prices between 2022 and 2024 increasing by 60% and locks in offshore wind electricity costs that are over 25% higher than current electricity costs and will increase by inflation every year. Offshore floating wind electricity price is guaranteed at approx 3 times higher than current wholesale electricity prices.

- Even excluding the cost of building a network of pylons across the country to bring electricity from North Sea to UK industry and populations and the cost of a back up system for when the wind does not blow, the guaranteed price to the wind farm operators in AR6 is higher than cost of gas generated electricity. The one fact that can not be denied is the outcome of the AR6 auction which lock in very expensive electricity and in contradiction of the BEIS and the CCC prediction renewable cost are rising and not falling as used in their models.

I have had a look at the escape presentation and the development cost is estimated at approx $96m for Seascape for their 28% - approx $150m for Enquest.

The FDP cost for Enquest is not material ($1m). However I can not see how Seascape with a Market cap of £8m can afford to fund $96m of its share of development cost. Whether Enquest can make a return on the development investment depends on the PSC, which presumably must look positive or Enquest would not have applied for this license.

Always good to diversify away from UK but let’s not kid ourself regarding Malaysian O&G tax regime, which is less favourable than labour’s proposals.

This is the reason that in production 2P reserves in Malaysia are selling for $4 per barrel which compares to approx $6-8 per barrel for UK North Sea. We used to be $20 per barrel pre EPL!

There will be a reason why the company that undertook the original exploration and discovered this field walked away. Enq now has 2 years to produce the FDP which does not look too expensive based on Cavendish note. Not much downside for Enq

Like most green projects, CCS can only work with substantial subsidies or guarantees of pricing. Labour have only currently committed to supporting the two phase 1 projects. The two Harbour Phase 2 projects (Viking and Acorn) have not received any funding commitments and Veri sits way behind Acorn in the line for government support.

I don’t think we can currently count on any material funding/subsidies in the short term. Whether CCS can stand on its own two feet without government support has yet to be determined.

NSS

Management stated on 3 September that $800m of the $1.5b bridging loan would be repaid from cash acquired with WD. Interesting that 3 weeks later they have decided to raise $1.6b of new funding to repay the bridging loan - Do they have new plans for the $800m of WD cash inherited?

Kraken

Very difficult to catch a falling knife but I believe there is now more upside than downside to Enquest Equity. My Enquest investment is still 50% bonds which have delivered a little over 9% a year as opposed to my equity position which is down 50%.

I have flipped some of my bond position because I am betting on the following:

1. Enquest will acquire significant 2P reserves in the next 3 months;

2. FCF looks solid for 2025 as long as POO does not implode. In the medium term POO supply and demand should maintain prices north of $80 due to lack of recent investment.

3. I am hoping that Reeves does not remove first year capital allowances against EPL in October

I have also increased equity position with BP, Serica and Harbour.

.

Kraken.

Thanks for sharing the BofA analyst update. It does not really tell us anything new. We knew that for 2024 Enquest had a cash cost per barrel in the low to mid $70 per barrel due to high CAPEX, significant EPL payment and high lease costs.

What BofA did not highlight is that cash cost per barrel drop to around $60 per barrel in 2025 due to reduced CAPEX,EPL and lease costs and hopefully slightly higher production. We know Enquest is a high risk, high return investment and oil price is key. My concern is that without the Israel/ Ukraine situation, the oil price would be in the $60s which is indicative of a global economic slowdown/ mild recession.

I was principally invested in Enquest bonds (75:25) but have switched an element to equity (now50:50) as this feels like maximum pessimism and on the basis that M&A is close. The logic of M&A is too compelling for it not to happen and oil will equalise in the $75-80 range in 2025 as US reduces interest rates.

My only lingering concern is that Enquest’s real net debt is much closer to the gross $650m of bonds than the reported net debt by Enquest and I am now resigned to no debt reduction in 2024 beyond proceeds of Bressay farm down. I am however still positive on $200m+ of FCF in 2025.

I am struggling a little to understand the logic of issuing $160m of new bonds to repay $150m of US term loans which were issued in August 2023 (costing several $m in transaction cost). The US term loan being repaid also mature in 2027 and while interest rates of the US term loans being repaid are currently a little higher at 12.5%, with interest rates falling the US term loan interest rates will also fall.

So ultimately this refinancing neither extends the repayment date of the debt or materially changes the interest rate. Accordingly, not sure why Enquest would incur significant transaction costs to refinance the US term loan.

Interestingly Enquest are raising an additional $10m for corporate purposes. Given management have been telling us they have $100’s of million of cash in the balance sheet why do they need to raise an additional $10m.

Hopefully it is to fund acquisitions!

T

Dumby

I am not sure there will be a significant link between the value of in production fields and the incentives (or lack of them) for new field development. I see your point, but I think it is more likely that capital and skilled labour, which would have been applied to developing new NS fields, will flow to other basins (inc Norway) with more attractive and stable fiscal conditions.

The value of existing 2P reserves will be principally determined by the projected post tax FCF per barrel and the internal rate of return required by the bidder. Whether there will be more buyers than sellers for existing 2P production is yet to be seen, but the only buyers will be those with tax losses to mitigate core UK tax and the question will be whether the buyer will share some of the value of the tax shield with the seller (in the purchase price).

I was comforted by the recent investor meeting call with Craig disclosing that there are a number of deals in the pipeline - but we still wait! I am not sure how many appreciate the potential impact of a “good deal” of approx 20k bpd (say 30m 2P) could have on share price.

Kraken

The problem is that developing a new NS field costs approx $20 per barrel (depending on size, complexity etc) and comes with risks and uncertainties during development. Alternatively fully proven and producing NS fields can be purchased for $6-8 per barrel under the current UK regime.

Post tax FCF per barrel at $80 oil and $25 OPEX is approx £12 per barrel and new field developments can only work with supportive investment allowances which are currently uncertain. We need to put Bressay firmly and publicly on hold beyond the gas cap to demonstrate to HMG the folly of their policy - same for Rosebank and Cambo.

Gordon

I am not concerned that the $625m bonds due for repayment in 2027 will not be able to be refinanced. The debt level will also be far lower by then with 2025 being a strong FCF if oil returns to $80 level. I am targeting $400m of FCF in 2025 and 2026 which should bring debt down to very affordable levels.

I am however not anticipating a material reduction in debt in 2024 except for the proceeds of Bressay farm down. OPEX $50m higher in second half of year, CAPEX and ABEX $30m higher, Production slightly lower and realised prices probably lower than first 1/2 and of course $170m of EPL to be paid.

Pyeuck

Unfortunately interest is not an allowable cost in determining EPL tax payable - so this would not work. There are other ways to reduce the EPL bill such as the Bressay farm down which has given Enquest a $58m interest free loan from HMRC. I am sure Enquest and other O&G are exploring all options to mitigate tax bill.

SEK

I forecast that year end net debt will be in the $400-425m region (gross debt $625m) as a result of the $175m October EPL payment. If oil stays in low $70s (which I do not think it will) this could be $60m worse before management actions to reduce CAPEX and other discretionary spend.

There may be some working capital Shenigans at year end to reduce reported net debt but I am expecting the JV cash balance to fall.

Dumbly

The reality is that the 78% tax rate is locked in and the issue to be resolved in the Oct budget is the level of capital allowances. This heavily impacts new field development but has very little impact on the value of producing 2P reserves. Accordingly there is no reason a deal to acquire producing 2P reserves can not be done now.

I would prefer that Enquest finds the right deal than rush into a bad deal - but boy are they taking their time!