Member Info for Stevo12

Krak

I follow and post on the Enquest, Harbour and Serica forums - I also folllow Rockhopper but very rarely post. I posted quite a bit on Serica at the time of the Tailwind deal but I have not posted much recently.

The reality is that Enquest is the best forum in terms of informed debate and there is a cross over across all O&G.

Tony

I am invested in both Serica and Enquest. My investment in Enquest is 75% bonds and 25% shares. I am 100% shares in Serica.

Serica has a lower risk profile due to no debt and much lower cash cost per barrel. Higher % upside to Enquest share price if oil prices are high (high 80s+). However if oil in low 70s, Enquest is going to struggle to generate sufficient FCF to repay its $625m bonds.

SEK

Like you, I believe the tax noose will be loosened as it always has been in the past when NS has been the target of tax raids. I do not think it will be in October 24 budget and the government need to see that NS operators are not bluffing about curtailing investment. I think Spring 25 budget more likely to see some respite - rosebank needs to be put on ice.

SEK you need to b e careful in extrapolating the 2 months FCF for March and April 24 which included the benefit of a significant overlift which management highlight would reverse by year end. $55m FCF for 1/2 year 2024 is a more reliable base to extrapolate from.

Taverham

I was disappointed with the results and particularly the FCF generation in the first half of the year. FCF of $55m for the first 6 months and a little over $20m for May and June on relatively high realised oil prices. The farm down of Bressay has greatly helped by producing a $108m cash inflow, but we need to recognise this was a tax driven transaction to take advantage of (abuse) the EPL investment allowance uplift and will likely reverse in late 2025 / early 2026 (unless labour change their policy materially).

My greater concern is that there was no or very little cash tax payments in first half of year and there is $175m of EPL to pay in October 2024.

I have a running bet that FCF (excluding asset sales or purchases) will be less than $100m for 2024. With EPL payments in second half of the year ($125m on trading and $50m on Bressay sale), to hit the 2024 $100m target, FCF in second 1/2 of year needs to be over $170m or close to $30m per month as compared to $10m per month in May/June when oil prices were high.

Accordingly I think it is now going to be very difficult (almost impossible) to hit the $100m target for 2024 and $0-50m FCF for 2024 is now more likely with Oil at $80. Below $80 oil will require cut backs.

2024 was always going to be a transition year and 2025 still looking a much better year.

Any thoughts from SEK, Londoner and others

NSS

On your net debt forecast, I am in broadly the same place as you with cash generation in 2024 by WD and Harbour settling the majority of $2.15b cash payment. I have net debt in $5-5.5b range.

I can not see any financial or economic logic for Serica or other NS O&G company acquiring Enquest. The only real synergy I can see is that Serica could use its better credit rating to refinance Enquest’s $625m of bonds at a lower rate. Also the relatively small operations in Malaysia would not meet Serica’s ambitions to diversify away from UK NS.

The only logical nest step is for Enquest (or Serica) is to acquire producing 2P reserves to utilise the benefit of their tax losses. Enquest has too much baggage such as Magnus deferred consideration and decom liabilities and acquiring Enquest as a share deal would not result in an EPL allowance.

Currently 2P reserves are trading in the $6-8 region and it would be much cheaper to acquire producing fields than acquire the likes of Enquest as the acquirer would not be able to use Enquest’s tax losses for 5 years.

Rom

The other great con is that currently the wholesale price of electricity is 7p per therm and the price caps (retail price) is 24.5p per therm and 61p per day standing charge. The actual cost of the operators buying the electricity is approx 25% of what we are charged by the electricity operators with the balance being green levies, operator costs and taxes.

Uk wholesale price of electricity is lower than France and Germany and yet we pay more as consumers.

As AR6 shows that the wholesale price of wind (particularly offshore) is approx 50% higher than current wholesale electricity prices and this is going to result in higher bills in the future.

NSS

I am more positive on the deal now than at initial announcement. The main reason being that Labour’s policy has devalued the worth on the UKNS fields and as this is principally an equity swap and not a cash purchase, the less the current Harbour business is worth the better the deal looks.

It looks like there will not be a significant cash payment beyond cash generated up to completion date and the interest rate on the $4b+ of bonds is looking increasingly attractive. I am assuming 2025 and 2026 will be principally focussed on deleveraging with debt hopefully reducing by $2b+.

My target is £3.50 by year end and £5 by end of 2026 as long as there is not a global recession and oil price collapse.

NSS

Remix and Argentina are looking very interesting.

The only problem with Argentina is the gas prices are about 20-25% of European gas prices (approx $20 per barrel oil equivalent) and accordingly profitability is pretty low. Oil is much closer to WTI prices but most developments seem to be gas.

Londoner

The Bentley losses acquired become available to offset against Enquest taxable profits after 5 years. This will add $1b of additional losses to Enquest and push out paying UK corporation tax by a further 2-3 years.

In reality EPL is an effective tax rate of approx 50% for Enquest due to non allowable interest and decom costs. This is better than the majority of NS producers who have used their losses and are currently paying an effective rate of 85%+ which will rise to close to 100% for new developments under Labour proposals

Dumbly/ Londoner

The value of the tax losses included in the balance sheet at Dec23 was $700m ($1.75b at 40%) being the cash value of the losses that the company can classify as probably usable in foreseeable future.. This has reduced from $900m at Dec22. The tax losses have arisen as a result of previous capital investment programmes (such as kraken) where 100% of the CAPEX was tax deductible and trading losses during oil prices crashes.

The Bentley losses are $1.1b (potential cash value $440m) but are not recognised as a balance sheet asset as they are currently ringfenced. These losses were acquired with the Bentley field and represented the losses/investment made by Excite several years ago. These losses are ringfenced for 5 years.

There are other corporate losses that are also not recognised on the balance sheet due to the uncertainty of usage.

I think the key takeaway is that Enquest will not be paying core UK tax for several years and the cash tax will be EPL and Malaysia. The acquisition of a significant producing field would accelerate the use of losses but still a number of years before used.

Dumbly

Deferred tax assets are not discounted even though the benefit arises over many years in the future. The amount of deferred tax recognised is based on a “probability of use” test.

The amount of recognised and unrecognised deferred tax assets are disclosed in the notes to the financial statements. Currently Enquest has not recognised a a deferred tax asset for the Bentley tax losses which will become useable this year or next.

Dumbly

The tax charge consists of three principal elements.

1. the tax loss which reduce core 40% UK tax are recognised as an asset and as these losses are utilised the asset is expensed as a tax charge. Accordingly there is no cash tax to pay for UK core 40% tax, but there is a tax expense as the related asset is expensed. This a deferred tax charge.

2. EPL charge is applied to taxable profit but because EPL does not allow a tax deduction for interest or decommissioning cost, the taxable profits subject to EPL are higher than the core UK taxable profit. The EPL charge for 2023 comprised a current charge of $175m (cash payment in 2024) as well as a deferred tax credit (non cash)

3. Overseas tax - principally Malaysia.

The best estimate of taxable profits = EBITDA - CAPEX- Decom- Interest for core UK corporate tax.

Aimoil

Agree $275-285m a reasonable net debt target for end of August. My estimate of $300-310 was for end of June. My estimate for year end net debt is $380-400m due to $150-175m EPL payment, higher CAPEX in second half, reversal of overlift and reduced JV cash. I am sure that any CAPEX such as equipment for Kraken 2025 Campaign will be purchased pre Nov 24 to get the additional EPL allowance.

Helpful update from IR that the Rockrose/Bressay transaction will not be terminated until late 2025 if development does not progress.

Aimoil

My guesstimate for 1/2 year FCF and debt is $60-70m and net debt $300-310m.

The FCF excludes the $108m from the Bressay transaction and net debt is after offsetting the JV cash (which Enquest cannot access to repay debt etc). The FCF and net debt will be impacted by any reversal of the overlift in Jan-April.

Year end net debt probably higher than 1/2 year due to EPL payment in October.24. If Bressay transaction is reversed due to Labour policy making Bressay uncommercial, then debt will be $108m higher.

Dumbly

I would expect the capital allowance treatment will be signposted well ahead of the budget and I think it has been left vague to give room for negotiations.

Unfortunately I don’t think we can afford to take on debt to fund a serious overseas acquisition and I think Indonesia was a red herring. Hope I am wrong but AB seems to have backed away from Indonesia in subsequent presentations.

Rom

The ESIM is anything but. It has been designed such that it is very, very unlikely to trigger. Oil prices could drop to $50 per barrel but it is highly unlikely that Gas will fall below the threshold for two quarters. The gas price in Europe was historically driven by cheap Russian gas and this is not going to return to market any time soon, if ever.

The likelihood that both gas and oil will fall and stay below the threshold is highly unlikely and for Enquest as primarily an oil company it unfortunately does not provide a floor.

Dumbly

On the positive side, the additional EPL arising from Labour changes will not impact FCF until October 2026. This gives Enquest an opportunity to repay a good chunk of the $625m bonds and high yield debt.

Much of the Labour announcement regarding the 38% rate and the removal of the additional 29% allowance was fully expected. I have read through the Treasury announcement and it highlights there also may be changes to the 100% first year capital allowance for capital expenditure (as is available for all companies). However it does not specify what the change will be. It may be that no capital allowance is available to offset capital costs against EPL or it may be spread over a number of years (like Norway).

This lack of certainty will be crippling for investment. The removal of the 29% investment allowance will reduce the tax deduction for capital investment from 91.4% to approx 83% for full tax payers - not disastrous. However removing first year allowances will reduce the tax deduction to 45% of capital costs and would make almost all projects uneconomic.

This clarity is needed ASAP. I would hope that Rosebank and other projects are put on hold until this is clarified.

What does this mean for Enquest?

1. Bressay and Bentley are now unlikely until 2030. Does this mean we have to repay the $108m we received early this year?

2. All development expenditure needs to be accelerated pre November. Probably not possible to accelerate Kraken programme targeted for early 2025 but may be possible to prepay contractors which would have a FCF implication, but secure the EPL investment allowance.

3. We need to purchase producing assets as an asset transaction pre 1 November to secure EPL allowance for purchase price. Management need to get their skates on and I am sure they are doing everything to secure an acquisition.

4. Capital expenditure to be further cut in 2025 onwards and then all about managed decline of own fields and positioning Enquest for increased decommissioning activity across the whole sector. If oil prices stay north of $80, Enquest could be close to debt free by mid 2026.

5. CCS and green hydrogen is still many years into the future for Enquest. I can’t see any real activity in next 5 years and probably 10 years. The track 1 and track 2 programmes selected by Gov for support are running behind schedule.

6. I do not see Enquest materially diversifying overseas.

As other have noted, the impact on tax raised will not be felt for 4-5 years.

The NAO report on the state of CCS projects is pretty negative and concludes that Track 1 projects are behind schedule with uncertainty over whether technology will work and means of funding, with no clear route to FID. It states no defined timetable for Track 2 projects (Acorn and Viking) which sit behind track 1.

Reading the report it appears that Acorn and Viking and further away from FID than represented by Harbour.

https://www.nao.org.uk/reports/carbon-capture-usage-and-storage-programme/

I would put a no premium merger in the unlikely box and an acquisition by Serica at a premium In the very, very unlikely box.

Serica might look to acquire some additional UK production to utilise the Tailwind losses but this will be picking up Waldorf or other producing fields at sub $10 per 2P reserves. Acquiring Enquest comes with some historical baggage such as $625m of high interest bonds, substantial liability to BP and significant decom costs. I can not see any significant synergies except for refinancing debt at lower interest rates and some head office savings and Enquest tax losses would not be available to use against Serica’s profits - they also have the Tailwind tax losses.

Enquest needs to acquire 10-20k of additional production and really leverage their losses - now is not the time to sell up.