Member Info for Stevo12

Dumbly is correct. Uk tax law allows hmrc to apply a market price for transactions between two connected parties if the transaction is not at “arm’s length”.

Enquest could enter into a future hedging arrangement with an overseas connected party to sell future production based on prices on futures market which is normally below current prices.

As we have seen by the bressay transaction, Enquest is using all legitimate means to reduced EPL impact.

NSS

Having read the prospectus, I am a little more positive on the purchase price.

Looks like a fair purchase price given 2024 WD cash generation and interest rate on WD bonds and most importantly the uncertain value of Harbour’s UK operation under Labour. It feels like 360p is achievable in 2024 if oil stays in the mid $80s and gas in 75p-£1 therm range and deal completes in Q4.

Imperative that Harbour diversifies away from UK and there is a price to pay.

SEK

Trying to forecast beyond 2025 is too much guess work. We know EPL will be higher than 2025, production most likely lower, OPEX per barrel higher which will be partly offset by lower interest costs. Anyone’s guess what oil priced will be in 2026.

In reality this is all moot as there will be acquisitions in 2024/25 - hopefully.

NSS

I don’t like Argentina. Gas prices are approx 1/4 of European prices and Argentina has a habit of Nationalising O&G - with no compensation.

Mexico’s government does not like overseas O&G investors and glad we have Carlos on board.

What about Falklands - unfortunately that boat has sailed!

Probably focus on Norway and accept that Norwegian government is effectively a 78% equity holder.

Also the real tax rate will not be 78% but much closer to 100% under labours proposal for companies without losses as the EPL is applied to profits before interest costs, decommissioning costs and with no (or reduced)investment allowance for CAPEX.

Norway allows O&G to offset all of these costs against taxable profits and also provides financial support if oil/gas prices drop. Norway is much more like a nationalised model with operator receiving a 22% share of profit after funding 22% of. capital and recovering all OPEX costs.

Uk model is just State theft.

Kraken

I agree that Enquest share price has more upside potential than Serica due to its higher leverage - Ultimately it comes down to each investors risk appetite with Serica being a lower risk and lower potential upside (due to no net debt and lower cash cost break even per barrel).

Ultimately quite similar businesses in scale with the interest paid by Enquest similar to dividends paid by Serica. Tax losses are similar, although Serica is restricted to using their losses against former Tailwind production. I do like that Serica has organically replaced its production with new 2P reserves each year, while Enquest has been depleting its 2P reserves over the last few years without adding any meaningful new 2P reserves.

As SEK concluded, both are substantially undervalued on any normal metric. Unfortunately I don’t believe Enquest could afford to buy Serica outright - would probably need £700m+. But a merger would be interesting and would enable Enquest debt to be refinanced on much more attractive terms and alone could reduce interest bill by $30m pa.

Ultimately the future share price is now linked to whether Labour truly want to destroy NS O&G industry to virtue signal while importing. In personally think there will be a pragmatic solution post election which will leave just enough meat on the bone to avoid a cliff edge.

Not sure how many of us are invested in both Serica and Enquest, but Serica is looking like a very compelling investment, particularly at current prices.

Has anyone done a pros and cons of Serica vs Enquest? Uk business looks similar in scale but Serica has a more balanced oil and gas production (personally I prefer Enquest’s higher oil leaning as oil price less volatile). Obviously big difference is the debt position with Serica paying substantial dividends.

Thoughts?

Londoner

I am not aware there are any exemptions for North Sea O&G for core UK tax rules.

The Enquest losses could be used quicker if Enquest acquired 2P reserves as a trade and asset deal as opposed to buying the legal entity holding the 2P reserves. However this would result in the seller paying EPL and core UK tax on the sales proceeds as opposed to paying potentially zero tax by selling the company holding the reserves.

Accordingly purchase price potentially significantly different to reflect the tax impact on seller.

Enquest would still get full value for its losses applied against its own and acquired profits, but not quite as quickly by offsetting only 50% against acquired taxable profits.

These are all quite technical point and the key fact is that producing reserves are better in the hands of Enquest than another NS producer who does not have UK tax losses.

Redb and Dumbly

The 5 year restriction before tax losses of acquired companies can be used against the taxable profits of the acquirer was introduced to prevent/limit tax paying companies buying a business primarily to access its historic tax lasses. For Enquest this would have been the case with the acquisition of Bentley which had significant losses - I think the 5 years restriction for using Bentley losses is up this year or next. A bit of a mote point given Enquest has enough losses to cover multiple years.

In terms of restricting the maximum loss surrender to 50% of the profits of acquired company/business, this has been a tax rule for many years - I can’t recall of the top of my head when this was enacted.

Dumbly

In broad terms, Enquest losses would be available to reduce the taxable profits of an acquired company by 50%. If Enquest acquired a business with tax losses, these losses would not be available for Enquest to use for 5 years.

Tommo

The 2024 EPL payment to be made was disclosed in the 2023 financial statements (tax note).

EPL is paid on asset disposal unless they are sold for CCS purposes and the EPL is based on profit on disposal. However as all historical assets will have a zero tax base (having received 100% capital allowance on acquisition) it is effectively the same as sales proceeds.

On the Bressay disposal we not only sold 15% of Bressay producer to Rockrose but also some old inventory for $80m+ (pipes, pumps etc) for a total consideration of $140m of which we received $108m in cash and Enquest will pay $50m of EPL on sale in October 24. So net cash proceeds of $58m.

The $108m will be paid back to Rockrose is Bressay is not progressed.

Aimoil

The Oct 24 $175m EPL payment includes $50m related to Bressay transaction in Dec 23. EPL on 2023 results $125m.

My current best estimate is that at half year next debt will be a little over $300m and at year end approx $350m. There is always a potential working capital impact on FCF depending on timings of kraken offloads and over or under lifts which could be plus or minus $30-50m. My gut feels is that 2024 will see a reversal of the 2023 working capital timing benefit of $50m and the overlift position at end of April 24 will also likely reverse by year end.

The one area that is difficult to project is the JV cash balances (which are pre funding of approved CAPEX by our JV partners).

This is all before any acquisition of 2P reserves in the second half.

Oilviking

The big difference is that while BP Akers gross debt is approx 9 times higher than Enquest, its interest cost is only a little over double Enquest’s, due to a much lower interest rate (less than a third of Enquest’s).

In aggregate, while BP Akers production is approx 10x higher than Enquest, its net interest expense was lower the Enquest’s in 2023. Harbour post WD acquisition will have debt of $4b+ on 500k BPD of production but will be paying less interest on its $4b than Enquest pays on its $625m of debt. Serica is pretty much debt free.

The reduction of Enquest debt will have a double whammy of also reducing the interest rate on future funding. Having to pay interest at 10%+ is pretty expensive.

SEK

Fully agree and with $70m+ interest on the debt, which is not tax deductible for EPL purposes, the key priority for 2024 has to be reducing debt and/or purchasing producing reserves.

We also need to recognise that 2024 is a year of investment to add 2P reserves before investment allowance is reduced by Labour and to purchase producing reserves. I still have 2024 FCF sub $100m before any asset sales or purchase and after $175m EPL payment in October 24.

I am still trying to better understand the Malaysian free cash flow potential for 2024 and 2025 and comforted that Payments to Malaysian government reduced to $90m in 2024 from $125m in 2022.

2025 is the year when Enquest will have real choices to increase shareholder returns as well as reduce debts with approx $250m of FCF.

SEK

I agree that from a short term FCF perspective the impact of the additional 3% rate and reduction in investment allowances will not be felt until October 2026 as long as Labour do not apply the changes retrospectively (to 1 April 24) - I don’t think they will.

There will however be a significant reduction in organic CAPEX in 2025 and 2026 with monies being diverted to buying producing assets. Bressay and Bentley (exc gas cap) are now definitely off the menu until O&G tax policy changes and will this mean we have to repay the $108m proceeds we received in Q1? Hopefully not in 2025.

Overall I concur that 2025 and 2026 will be very positive FCF years (as long as oil remains $80+) due to low investment in new developments but at the expense of medium and long term FCF. The question to be answered by management is can the decline rates of existing 2P be replaced by acquired 2P reserves to leverage the tax losses. The answer should be yes.

The key challenge will be to repay as much of the $625m Bonds and High Yield debt as possible over the next couple of years, alongside acquiring producing reserves. There has been a degree of window dressing of the cash balance in recent years and a significant proportion of the reported cash balances is in JV bank accounts which is not accessible by Enquest to repay debt. Accordingly I would largely disregard the cash balance and focus on repaying the $625m of gross debt.

I had hoped that Unite and GMB Unions would have moderated Labour’s O&G policy but clearly the Green illusion is deeply embedded.

The cash cost per barrel for 2024 are not my numbers but the guidance Enquest has provided to the market. They have provided and reconfirmed OPEX, CAPEX, Decom cash costs and they also disclosed the projected 2024 lease costs, the 2024 BP Magnus payments and the EPL payment for 2024. The only element that is not directly disclosed is the interest cost but this is principally fixed via loan notes.

Kraken prefers to pluck a fantasy number from the air as opposed to use the company’s guidance. Do not rely on others, do your own analysis. All the information is provided by the company - you just need to divide the cost guidance provided by the company by production guidance.

I have a running bet with VOR that FCF for 2024 will be below $100m excluding any proceeds or payments from selling or buying assets. I will lose the bet if Brent averages $85 or higher. FCF for first 4 months of 2024 was $29m (excluding Bressay cash receipt) and we need oil well over $80 per barrel in 2024 to generate any meaningful operational FCF. Cash costs per barrel drop in 2025 with lower CAPEX and Lease costs and higher production.

I cannot see that this mornings announcement warrants the 8%+ share price increase. NS O&G generally up today but Enquest largest riser. Any bomb shells from AGM Q&A or is Labour about to announce a more supportive approach to O&G

REDB

The working capital anomaly was disclosed in the Feb update and the 2023 financial statements. I recall there was a $40m benefit which appears to have reversed in early 2024.

Over the first 4 months of the year, it looks like Enquest’s underlying FCF was approx $20m per month after adjusting for working capital reversal and proceeds from Bressay/rockrose arrangement. Annualising this to $240m per year before EPL payment would be approx $40m ahead of underlying FCF for 2023, reflecting higher 2024 OPEX and CAPEX offset by higher realised oil prices.

EPL payments likely in $175m region including $50m related to Rockrose.

I was hoping Labour would have backpeddled by now on removing investment allowances but hopefully a clear pro O&G policy from SNP and Union pressure will have an impact.

Higher FCF in March and April than I was expecting, although management highlight that this is partly due to overlift. My one concern is that excluding the $108m proceeds from sale of 15% Bressay and equipment, FCF from operations was $28m for the 4 months. I think this was partly due to reversal of the working capital anomaly at 31 December 2023.

I think the market is viewing the Bressay/ Rockrose transaction ($108m cash receipt) as a quasi loan as it is repayable to Rockrose if Bressay does not progress to FID, which is highly likely if Labour implement their WFT proposals.

This might be a helpful question at AGM as to whether WFT on Rockrose transaction of $50m is refundable if Bressay does not progress due to fiscal rules and ROckrose is repaid.