Member Info for Stevo12

I forgot to add that Serica’s cash cost per barrel for 2024 is approx $45 per barrel compared to Enquest’s $75 per barrel. However need to reflect that 50% of Serica’s production is gas which is currently realising approx $50 per BOE - so much less profit on Gas BOE.

SEK

I an invested in both Serica and Enquest and I do think comparisons of performance and market caps are useful. However I do not think you have fairly compared the two companies and my takeaways from today’s results announcement are as follows:

1. Adjusted for debt and cash balances, Enquest and Serica have similar EVs

2. Serica’ s FCF for 2023 was $195m after paying $183 of 2023 tax liabilities, including approx $100m of EPL. Enquest reported $300m of FCF but management noted that approx $100m was a result of working capital benefits which are non-recurring and will likely reverse in 2024. Also Enquest will not pay its 2023 tax liabilities of $125m (excluding. $50m Bressay EPL payment) until October 24.

3. Production for 2024 is similar at approx 43k BOPD but Enquest only has an economic and financial interest in 33k BOPD, while Serica has full entitlement to all its production.

4. Serica has limited finance lease liabilities and much lower decom liabilities than Enquest

5. Enquest 2P reserves are 175m compared to Serica’s 140m but, as noted above, Enquest has no economic or financial interest in approx 25% of its 2P reserves and so similar 2P

6. Serica inherited some pretty poor oil hedges with Tailwind that continue through to Q2 2024 which resulted in realised oil prices in 2023 of $70 compared to Enquest’s $82.

7. Serica 50% gas and personally I prefer the more predictable and higher value oil markets. However recognise there is a push to move into gas for ESG reasons

8. Serica CAPEX is adding more 2P reserves than its is extracting. In comparison, despite quite high capex over last 2 years Enquest has added close to zero 2P reserves.

9. Serica has lower OPEX for 2024 ($20 compared to $27 per barrel). However this would be expected with gas mix.

10. Serica paying $100m pa in dividends and $15m of buybacks

11. Similar level of tax losses - Enquest slightly higher.

As noted above I am invested in both Enquest and Serica but I have increased my Serica investment over last month - while Enquest is a hold. Higher percentage gain likely with Enquest shares if oil holds $85 plus, but lower risk with Serica and 12% dividend return. We all pick our own poison but I do not believe, based on above, that Enquest is undervalued compared to Serica.

Seric

NOQ

The Losses can be used against the TW profits post acquisition. At approx 25k BOPD of oil the TW business should be generating at leat $40 per barrel taxable profit after investment allowance which is approx $380m per annum. UK tax (excluding EPL) at 40% would be approx $150m pa and accordingly the $1.2m of TW tax losses (which are available to reduce tax payable by $480m) would be used over 3 years from the TW business alone.

The assertion by management at the time of the acquisition was that they would accelerate the use of the TW losses by offsetting against the Serica profits and we will see with the publishing of the results whether this has been the case for 2023.

NoQuestions

When a company acquires another company with tax losses it can not offset those losses against the current groups profits for 5 years. There are ways to mitigate this tax law but not easy. The losses will of course be used against TW taxable profits (excluding EPL).

Redb

My 2025 forecast fcf assumes a $70m drop in capex compared to 2024 as a result of Labour removing investment allowances (from $200m to $130m). I have not reduced it further as Kraken workover planned for Q1 2025 will have been contracted pre election. Reduction of capex likely much higher in 2026 if Labour remove investment allowances as currently stated.

Interesting 2025 and 2026 could be stella FCF years under a more aggressive labour policy before depletion rates start to really bite in 2027 onwards. If Labour stick with current conservative policy the capex could rise quite dramatically with progression of Bressay etc.

My gut feel is that energy policy could become a significant area of debate and differential in election campaign.

Redb

I have Enquest FCF break even at $75 oil for 2024 and $65 for 2025. This excludes proceeds from asset sales and working capital movements.

It is anyone’s guess where oil goes in the short term (next 6-12 months). It could go higher if conflict escalates or lower if we start to see global recession as interest rate hikes start to really bite.

SEK

I should have added that an acquirer would prefer an asset deal and if they are paying corporate tax and EPL, they will get to reduce their tax bill by 91% of the purchase price while Enquest will only pay 35% EPL on the purchase price.

Accordingly we might be in another situation similar to Bressay whereby a buyer pays say $200m for GE and its total tax bill is reduced by $182m resulting in a net cost of $18m and Enquest receives $200m less $70m EPL (payable in Oct 25). This could be another opportunity to exploit the difference between EPL payable on asset sales and the super allowance available to acquirers, together with using Enquest tax losses.

Could be wrong but just s thought.

SEK

It all depends on the sale structure. If the GE asset sits in a separate legal entity and Enquest sells the shares of the legal entity there will be no EPL payable and potential a capital loss on sale of the shares. This loss will not be offsetable against EPL.

If we sell the actual field as an asset deal (as opposed to the shares of the company owning the field) there will be an EPL bill of 35% of the proceeds payable in October 25 (similar to Bresssay). The reason being that Enquest would have taken a tax deduction on acquiring the field which would have added to the tax losses and resulted in a zero cost base.

I have no idea whether GE was acquired into a separate legal entity or into the main Enquest trading entity.

As Kraken notes, we have to trust management to structure any deal in the best interests of Enquest. That is if there is an intent to sell GE and it could all be another press misunderstanding.

The best way to pay down debt is to convert tax losses into cash though growing production. Selling producing assets at current market values for 2P reserves does not make sense and we should be buying producing 2P reserves which, with tax losses, will cash payback in 2 years.

Enquest is not in a distressed situation like others with debt in place until 2027 and with FCF in 2025 looking strong. accordingly no need to sell of assets into a depressed market. Debt should reduce to 0.5X target over next 2 years while still freeing up $200-300m to buy 2P producing assets.

Of course the potential sale has not been confirmed by the company and might be another non-story. However it also has not been denied which probably means there is some substance.

I am somewhat surprised by the proposed sale of GE. At the time of acquisition Enquest's 27% share represented 18m barrels of 2P and 10k BOPD production.

Given production has more than halved to 4.2k per day in 2023, 2P reserves will have also have fallen to say around 10-12m barrels. Enquest paid $375m including $50m earn out. EPL has reduced the value of 2P reserves by a little over 50% and production is also approximately half of anticipated volume. Enquest paid over $20 per barrel plus additional $50m. Current values of 2P in recent deals are below $10 per barrel and so I would say $100-120m would be upper end of deal values.

I recall GE had low ongoing costs of $20 per barrel. Accordingly at $80 oil GE will be generating $90m pa pre tax or $22.5m pa post tax for a full tax payer or $58m if using tax losses. Accordingly I am struggling to see why Enquest would sell $58m of FCF for any thing less than $250m. There is no way any buyer would pay this sort of price as they will want to benefit from the value of their tax losses (if they have them) - as Enquest would if buying producing assets.

Intrigued to se how this develops!

SEK

Agree that you cannot extrapolate from a couple of months results and the trading update around the AGM will give us a clearer indication on direction of travel for FCF for 2024.

I have long since stopped trying to predict oil price movements in the short term (6-12 months) and I am comfortable with my thesis that there is a systemic global underinvestment in Oil and Gas and this will result in a supply deficit in the medium term. Could there be a recession in the next 6-18 months that sees oil dropping - possibly - however over a 5 year horizon O&G looks like a good place to be. The good news is that Enquest is becoming much more resilient to future oil price shocks with debt fixed until 2027, lease costs falling in 2025 and discretion over CAPEX as operator.

I would certainly feel more comfortable if Enquest hedged a good portion of 2024 and 2025 production at these levels and locked in the 2024 and 2025 FCFs. I am probably more risk averse than most and would be happy to give away a few dollars of upside for downside protection.

Redb

Take a look at page 19 of the dec 2022 annual report and financial statements which’s details our working interest and decom share for all fields. It does not detail who the other parties are (ie Waldorf fro kraken) but a quick google will give you names of other parties.

The 2023 annual report will update this in near future but I don’t think anything has changed from 2022.

Apologies they own 30% of Kraken and 40% of Catcher (operated by Harbour) plus a collection of non operating interests in other fields.

I think they also have tax losses.

They own 40% of Kraken.

SEK

agree that if Brent remains at $90, cash generation from operations and including the Bressay funding should be in $220-$240m region. I am however a little concerned on cash generation in Jan and Feb which was negative $30m+ excluding the $108m received from RockRose and most likely reflects the reversal of the temporary $50m working capital timing benefit at year end. I am also expecting a reduction of JV cash balances as the capital programme is rolled out throughout the year.

The working capital reversal and JV cash balance movement could impact FCF by $100m which would be the reversal of the 2023 FCF benefit. However the key is whether oil remans at $90 and personally I would like to see the Middle East and Gaza situation resolved as soon as possible even if that does take $10 off Brent prices.

On the longer term, I do believe the world will be in a structural oil supply deficit and $100 oil will become the norm. The big question is whether Labour Gov want to support further investment in NS and the risk that labour will follow through on its current stated position is reflected in all NS oilers share prices. I hope like you that Labour will see sense but we need to see what is included in their Manifesto.

I think it is almost impossible to look beyond 2025 until we know Labour’s policy. Oil prices in the $90+ range are not going to help as Joe Public experiences petrol price increases. However gas is probably more impactful on public opinion as it drives energy bills and increased US LNG exports should keep a lid on gas prices in Europe.

SEK

On decommissioning - the well decommissioning programme for Heather and Thistle will be largely completed in 2024 but the topside (platforms) will be removed and decommissioned in 2025 and 2026 (I recall Heather first). I have no idea what it costs to ship these platforms to a scrap yard and what it cost to scrap them compared to plugging the wells.

The lease note in the financial statements discloses that leases costs fall from $160m in 2024 to $70m in 2025 ($90m reduction) and then presumably slightly lower in 2026.

I was struck by how open Craig was having watched the recording of the meet the investor call. It would be great if he could do these twice a year rather than once. I was comforted by his comments that there were ongoing discussions with Cons and Labour and that he was reasonably confident that the fiscal environment would ultimately support ongoing investment in NS. Unfortunately Labour and Cons have visited Aberdeen before with positive supportive words and then gone back to Westminster and reneged on their assurances - we will see what ultimately gets included in Labour’s manifesto.

Profit taker

Developing a new field costs approx $20 per barrel in NS. Rough estimate but pretty close.

I agree. Neo is too big a bite given level of debt and current appetite. However if Enquest want to “lead the way” in the North Sea and be upper quartile as frequently stated in recent management presentations, they will need to at least double current NS production to 70k+ BOPD.

Yes this could be achieved through developing Bressay and Bentley but this is going to cost $10b minimum to access the combined 500m barrels of reserves - scary amount of capital. However this would be more likely in 2027-2030 timeline and with a big partner if Labour change their stance on NS O&G.

Would Neo sell the fields they operate (about 20k BOPD) and can this be financed similar to Magnus with limited upfront cash? Who know and not really worth speculating. Leave it to management and i am comforted that they have not rushed into a quick but poor deal.

Dumbly

I have had a quick look at NEO Energy’s 2022 financial statements and key takeaway is that they have just under 300m of 2P reserves and are producing 80-90k BOPD with the majority being gas. Approximately 1/4 is operated.

However like most PE backed businesses it is also heavily indebted with net debt of $1.8b and a very substantial decom liability approaching $2b. Debt matures in 2025/26. Neo also has approx $1b of tax losses.

This would certainly be a transformational acquisition for Enquest and would put Enquest into top 3 NS producers but would require Enquest to take on a huge amount of debt which will need to be refinanced shortly.

Does AB have the apetetie for this scale of opportunity/risk?

Cheers