Member Info for Stevo12

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.

RedB

No impact on 24 FCF even if labour implements it stated policy from 1 Jan 24 - Enquest pays EPL 10 month after year end.

Impact on 2025 is approx $80m less fcf. If new policy is effective from 1 jan 2025 then no impact on 2025 FCF.

Dan222

It is not the additional 3% tax that is the killer it is the removal of investment allowances. Under current policy the UK Government effectively plays for 91.4% of the capital cost of new O&G developments (for those companies without historical tax losses) and then takes 75% of profits while in production. While not ideal but for the operator, the current “deal” is the the operator funds approx 9% of the costs of developing a new oil field and they get to keep 25% of the profit from production.

The Labour proposal is that the operator pays for 55% of the cost of developing a new field and receives 22% of the profit from operations. The inconvenient truth is that for most fields the 22% profit from operations will not cover the 55% upfront capital cost of developing a new field and the decom costs.

Kraken

My take is that In very broad terms EPL has reduced the value of 2P reserves by approx $10 per barrel which has reduced Enquest’s value by close to $1.7b. The reduction in debt has broadly offset the destruction in value created by EPL. The other issue is that while debt has continued to reduce in 2023 and hopefully further in 2024, Enquest CAPEX over last 2-3 years has not replaced the oil reserves it is extracting and the approx 15m barrels of oil extracted in 2023, without replacement, will have reduced the value of reserves and market cap by approx $150m. Equally the FCF generated will enhance the market cap and at present we are broadly in equilibrium with FCF post EPL similar to reduction in value of reserves through extraction.

Accordingly if FCF is $150m in 2024 and 15m barrels is extracted without replacement, we should not expect market cap to increase. I struggle to understand why the CAPEX over last few years has added virtually zero 2P reserves. The reserve replacement ratio is a key metric for O&G companies and Enquest has avoided mentioning this for last couple of years. Question for AGM?

Be careful what you wish for. The Indonesia tax regime is more punitive than the UK and has deterred investment over last decade. Hopefully `mubadala can convince government to develop a fairer tax policy.

Claire production has declined quite rapidly and in 2023 was 60k BOPD and so approx 12k BOPD for chevron. A big investment was made in Clare phase 2 not that long ago and they will also likely have tax losses as well.

Would have loved to put faces to a few familiar names but i am on hols for the agm. Hopefully next year if we are all still around and invested!

I have a few questions to add to the list but will post nearer the time.

NSS

35% signed up before issuing the prospectus is pretty high. PIs and most II investors have not yet had the opportunity to vote to support the deal

NSS

I believe today was more about the progression of the WD acquisition and the approval by the German regulator, which was a potential stumbling block.

The FCF in Q1 was $300m before $200m of tax payment and so slightly ahead of the annual forecast of $1.1b FCF before $1b tax payment. The realised price for gas detailed in the presentation was 69p per therm and so a typo in the announcement as highlighted by Londoner. Updated Forecast for 2024 of small FCF/debt reduction after $200m dividend is consistent with prior announcements.

Increase in FCF in 2025 to approx $500m due solely to lower CAPEX. Again as previously announced.

Londoner

I has the same thought re average realised gas prices. It must be a typo as the average gas price has been on average above the hedge price for 2024 and I don’t think has been as low at 49p per therm. My gut feel is around 70-75p per therm would be average for Q1

I

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.

Rom

I would add Waldorf, RockRose and Neo to the list.

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.