Member Info for Stevo12

Unfortunately I could not join the calm today. I see from posts that confirmation on timings of buybacks was confirmed and still looking to acquire producing assets. Any insights provided on:

1. Bressay gas development - cost, timing and benefit

2. Ability to invest in organic growth under labours proposal to remove investment allowance

3. Interest by third parties in farming in to Bressay and Bentley

4. Any details on huge Asian gas opportunity referenced by AB at Davos

5. Likely timings of dividends

6. Separation of “Green” business to attract ECG investors

Management were clear in the recent presentation that they will progress the Bressay gas project through FEED, FDP and FID though 2024 with FID expected late 2024 or early 2025.

There is a lot of work to do on Bressay Heavy oil FDP and FEED pre FID and I suspect this will not commence in earnest until Labour are in office and make their O&G policy clear. Enquest has been awarded development licences for Bressay and Bentley and when Labour says no new licences, I presume they mean no new development licences (they have been deliberately opaque on this). If Labour refused to issue production licenses after awarding development licences, the government would be exposed to compensation claims for costs incurred and lost profit.

However Labour can achieve the same outcome if they follow through on removing investment allowances.

I suspect the telegraph article has conflated the gas project with the wider Bressay and Bentley development. Management were pretty clear in the presentation that Gas first and then they will turn their attention to Heavy oil. Also Enquest can not afford to go alone with Bressay and I think they will struggle to find a major partner (40% minimum) until after Labour’s O&G policy is clear.

The noise is good though and Telegraph a clear supporter of O&G and sceptic of renewables.

Pleased to see that in recent round of press interviews by RR that she has not mentioned EPL or O&G taxation. Her focus was on Non Doms, Private schools and tax avoidance. Hopefully a recognition that Labour’s proposed changes to EPL would pretty much prohibit new investment, result in significant job layoffs, accelerate production declines and actually raise less tax in medium term.

Twallgyoff

Accessing Bressay gas cap has the double benefit of reducing emissions as well as replacing expensive diesel.

I am sure the economics work on a standalone basis and the reduced emissions is the icing on the cake. Sounds like it will be 2025 before up and running.

Twallgyoff

Accessing Bressay gas cap has the double benefit of reducing emissions as well as replacing expensive diesel.

I am sure the economics work on a standalone basis and the reduced emissions is the icing on the cake. Sounds like it will be 2025 before up and running.

Kraken

For calculating 2024 FCF break even, I have used the OPEX, CAPEX, ABEX, EPL, BP Magnus and Lease payments as disclosed by the company in either guidance or the financial statements. I have estimated interest expense based on the disclosed bond rates and estimated interest income based on cash balances. Details provided in previous posts.

Are you think of the $60 hedges the company has in place? Management have previously stated that if oil dropped to $60 or lower they would reduce CAPEX and OPEX in response to mitigate cash flow impacts of low oil prices

MRC

I agree that production of gas from bressay to replace kraken diesel looks nailed on. However production of Bressay heavy oil is another matter and at still at an early stage of evaluation. A first phase production of oil from Bressay of 35m barrel is looking likely to cost approx $700m (based on Rockrose disclosures) and would require Enquest to fund approx $600m.

If Labour implements its stated policy, it would simply be impossible to generate a positive return unless oil over $100 per barrel.

What I do not understand is what is required to recover the gas cap from bressay and can this proceed irrespective of developing and extracting the heavy oil. Questions for AGM

VOR

As disclosed in the 2023 financial statements, The sale of 15% of Bressay, FPSO and $85m of kit was completed in late 2023 and the purchase price paid by Rockrose was funded by a vendor loan from Enquest. The condition of the sale was that if Bressay does not progress through FID then Enquest is required to buyback the 15% plus the $85m of kit and repay Rockrose the $108m advanced.

As a result of the uncertainty that Bressay will progress to production, Enquest has not recognised the sales revenue or profit on sale to Rockrose in the 2023 financial statements. It will recognise the revenue and profit once FID is approved. Enquest has been very transparent in its financial statements and have a read through yourself.

There is a very big difference difference between recognition of revenue/ profit on disposal and treatment of cash. In early 2024, Rockrose repaid $108m of the vendor loan which increased the cash balance and facilitated the repayment of the RBL. The financial statements include a liability for the amount repayable to Rockrose if Bressay does not progress but this is not included in the company’s definition of net debt (not a bond or liability to bank). Enquest has fully complied with accounting standards in recording the Rockrose transaction and the definition of net debt is the company’s own definition and has consistently excluded such items as finance lease liabilities and amounts owed to JV partners related to cash advances etc

It is also important to recognise that it is neither in Enquest or Rockrose’s interest to formally declare that Bressay is not going to progress to FID and as far as I am aware there is no maximum timeline. If Bressay is formally abandoned or development rights expire, Rockrose will be faced with a $106m tax bill to fund from $108m repayment from Enquest.

The reduction in net debt in Jan/feb reflects the $108m of cash received from Rockrose on repayment t of the vendor loan and, excluding this receipt, Enquest was FCF negative for Jan/Feb as a result of the working capital benefit referenced by management at 31 December reversing.

Hope this helps and as I detailed in a posting last week this is a very smart transaction which results in $58m interest free loan from HMRC.

Kraken

Kraken

Gas will come from US in form of LNG and also from our good friends in Norway who are very supportive of their O&G industry.

Ed seems very happy to import LNG at 4X the carbon footprint than support domestic supply.

VOM

Management have been very transparent in disclosing and and accounting for the Bressay/Rockrose transaction in their 2023 financial statements. They have disclosed that the 15% sale to Rockrose is contingent on Bressay progressing and they have not recognised the revenue on sale. As discussed previously, it is effectively an interest free loan from HMRC.

Your bet is looking very good at $90 oil. I calculate that Enquest FCF breakeven is $75 in 2024 and $65 in 2025. So potentially $180m FCF in 2024 at $90 oil. This is trading FCF and excludes the $58m cash from Rockrose and also reversal of 2023’s working capital benefit (this reversed in Jan/Feb 24). My forecast was based on $80 oil which is looking very conservative, but oil markets have a habit of surprising and if geopolitical risk reduces, oil prices will adjust quickly.

I would certainly be tempted to hedge anywhere near $90 if not too expensive and lock in the FCF for 2024.

VOR

Indeed we will see how it plays out in the lead up to the election. However if Labour follows through on their current stance the maths are pretty straight forward.

Rockrose have effectively got an option on Bressay, they will also get their $108m back if it does not proceed and accordingly they are not taking much of a risk. In addition the investment to date has been cash neutral to Rockrose due to investment allowances.

Bressay is unfortunately a hostage to labour policy. Except for accessing the gas cap (I have no idea how you do this!), Bressay and other new NS fields would be financially unviable to develop if Labour remove all investment allowances against EPL as well as raising the EPL rates.

I do believe there is a high probability that labour (driven by Union objections) will tweak its policy and only remove the super allowance. This will be even more likely if gas prices remain subdued for rest of 2024 and consumer energy bills fall further.

Under this scenario Bressay should be viable but we will need another partner to take up to 40% interest.

VOR

Agree that if Enquest seeks to buy back US bonds in open market it will drive up prices but more likely there would be off market purchases from larger bond holders. Not sure how many holders there are of US bonds but it will be relatively small number and easy to approach holders to test appetite to sell.

I can not see this happening in 2024 as Enquest focuses on acquisitions and organic expansion.

Rom

Bond prices only move for two reasons; either the company’s default/credit risk has changed or the risk free market rate has changed.

The market expectation is the risk free rate will fall this year as Fed, BOE etc reduce base rates but government treasury yields have not moved much yet. Accordingly the increase in the value of bonds is more likely down to Enquest default risk decreasing on reduction of debt in 2023 and repayment of RBL, together with FCF forecast fro 2024 and 2025.

Of course if Enquest was acquired by a company with an investment grade credit rating, the default risk on Enquest bonds would fall dramatically and the price of the Enquest bonds would correspondingly increase significantly.

Keeping an eye on the bonds always provides good insight as less emotional and better informed than the equity market. However the relatively small movement in Enquest’s Uk and US bond prices to date looks more like a minor adjustment for improving Enquest credit risk.

Great post Londoner and summarises a potential off ramp for Labour. If Labour would also allow decom to be offsetable against EPL, then it could work in maintaining NS investment. The problem is that Labour need to raise more tax from NS.

While we all feel robbed by a WFT when there is no windfall. I would just compare the amount Enquest pays to Malaysian and UK governments.

2022 - Malaysia 126m; UK $39m

2023 - Malaysia $120m: UK $25m - estimated

2024 - Malysia $130m; UK $175m - forecast

The underlying 2024 UK payment of $175m includes one off $50m on Bressay and so, while recognising the UK benefits from tax losses, Enquest from 2024 onwards will be making very similar payments to Malaysia for 8k BPD of production as it will to the UK for 35k BPD of production.

While there is a clamour to invest overseas, beware you are not jumping out of frying pan into a much hotter fire.

Apologies. I did not realise gains on gilts were not subject to CGT. You learn something everyday if you are lucky!

Redbuffet

You could indeed buy low coupon government bonds which will give you a capital gain rather than an income tax liability.

Low coupon Gilts maturing in 2026-2028 are currently providing a capital gain of approx 4% a year which is not bad and if you have capital losses or you are not using your annual CGT allowance is equivalent to a 7% interest income.

I am hoping that the Enquest bonds will rise in price as company debt reduces and BOE interest rates fall over the summer as well as paying 10% yield.

Romeron

Labour were questioned on this specific point. Namely were they going to remove the super allowance which brings the investment allowance up from 75% to 91% or remove all investment allowances in calculating the EPL charge.

Labour confirmed that it proposed to remove all investment allowances in determining EPL but would continue to allow investment allowances against core corporate tax. As Enquest has tax losses this would mean it would have to fund the whole cost of developments.

Labour could change this in the manifesto and just remove the super-allowance, which would result in an investment allowance of 78% rather than 91% and Jo Public would be none the wiser. However the reason for the increased tax rate and removal of investment allowance was to raise more tax to fund Labour’s energy policies.

Sek

Enquest has been reporting $300m+ cash for last couple of year ends and has not used this cash to fully repay RBL until Jan/Feb 24, using $108m proceeds from Bressay transaction.

The reality is that like most groups the working capital and cash balances fluctuate throughout each month as creditors are paid, oil deliveries settled etc. As I have noted previously the reported cash balance is far higher than average cash balance, with interest receivable on cash balances for 2023 totalling $6.5m. This indicates an average cash balance of $120-130m across 2023 and there are probably days during month when balance significantly lower.

Accordingly it is understandable that Enquest has not sought to repay bonds or retire RBL in 2023 as cash is need to fund working capital peaks during each month. In addition Enquest can not use the JV cash to repay debt.

I don’t think there will be any bond repayment during 2024 but possibly 2025 if no acquisition opportunities are identified. Also if Labour leave tax alone there will be a need to fund organic projects such as Bressay oil in 25/26. If labour follow through on their proper WFT narrative, then minimal investment and lots of cash generated in 2025 to potentially repay bonds early.

SEK

I have assumed that the bonds and term loans run to 2027 and the interest expense on these loans and bonds is pretty much locked in at approx $70m. I am also hoping in 2025 there will be dividends and buy backs which will use some of the cash generated. A $10m reduction in interest expense in 2025 requires net cash to increase by $200m at 5%.

In 2023 the interest income on cash deposits (which IR confirmed were attracting interest at 5%) was $6m which translates to an average cash balance across the year of approx $120m. This compares to the $300m plus cash reported by Enquest at various reporting periods which indicates a lot of cash window dressing and explains why RBL was not repaid earlier. We know a substantial portion of the cash sits in JV vehicles (and does not wholly belong to Enquest) and can only be used to fund JV related CAPEX, as opposed to repaying debt. Accordingly I can not see any of the bonds and term loans being repaid early in 2024 or 2025.

As you note, Magnus payments are a reduction in the contingent consideration liability but are a cash cost and impact FCF. How management got the Magnus accounting past their auditors amazes me, as in all reality BP have retained a 37.5% working interest and is paying for 37.5% of current and future CAPEX on Magnus and receives 37.5% of Magnus cash flows for rest of field life.