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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.
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.
SEK
The main reduction in costs I have assumed in 2025 are Lease $90m, EPL $75m, CAPEX $70m, Interest $10m (main reduction in 24). Cost increases are Magnus $50m and OPEX $20m. The recent RNS highlighted (page 60) that Magnus payments would reduce to $46m in 2024 due to CAPEX programme and then increase to $95m in 2025.
I have added 1,000 barrels a day for 2025 to be conservative. I worry that 2025 growth may be Malaysian gas which is reported by Enquest as production but we only receive a modest lifting fee.
Reading the accounts in detail yesterday, I was struck by the poor reserve replacement. In 2023 Enquest spent $150m and for that we moved 4m barrels from 2C to 2p and added zero 2C. Similar story in 2022 with a lot of capex not adding any reserves. NS 2P reserves have reduced from 174m to 147m over the last 2 years and you can only defy gravity for so long.
Kraken
If Bressay does not go ahead we actually get back more than the EPL we paid, if Labour do not remove the investment allowances.
If Bressay does not proceed, Enquest is required to buy back the 15% share of FPSO and spare equipment for $141m and receives a tax allowance of 46% which reduces the EPL payable by $65m. So a $15m profit and an interest free loan of $58m as a downside.
Sounds too good to be true but it due to the use of tax losses and the investment allowance at 91% vs tax on profits of 75%.
MRC
Agree on Bressay gas but heavy oil extraction a whole different ball game. From the presentation earlier this week, it sounded like Bressay gas for Kraken was next 12-24 months.
Not sure how much gas is needed to power the kraken FPSO and what infrastructure is needed. Presumably not a major investment.
Just heard back from IR (impressed they are working on bank holiday) and i only asked about EPL payable on Bressay transaction and IR confirmed EPL is $50m based on the gross proceeds ($141m) and that $108m had been received from Rockrose to date. Balance due from production cash flows.
The transaction is contingent on Bressay going into production and if it does n0t progress, then $108m is repayable to Rockrose.
I was scratching my head a little to understand why Rockrose would want to acquire a bunch of old pipes and pumps sitting in the back of the store room for $85m and then it struck me. This transaction is not about buying into potential of Bressay (or at least not wholly) it is about leveraging Enquest’s tax losses. Let me explain.
Rockrose will receive an investment allowances which will reduce its 2023 tax bill by $128m ($141*91%) and accordingly Rockrose will be cash positive by $20m after paying Enquest $108m. Enquest is only paying tax at 35% on the $141m sale proceeds due to the tax losses ($50m) and accordingly the transaction is $58m cash positive for Enquest. Accordingly the net effect of the transaction is $78m of net cash generated for Enquest and Rockrose, being the difference between Enquest’s tax rate at 35% and the 91% tax allowance available to Rockrose.
The transaction is contingent on Bressay progressing (which is highly unlikely if Labour remove investment allowances) and if it does not progress, then Enquest is required to buy back equipment and 15% share of FPSO/Field. For Rockrose they will pay tax of 75% on the $141m sale proceeds ($106m) which will be funded by the return of the $108m from Enquest. On buying back the assets, Enquest’s EPL liability will be reduced by $65m ($141m*.46%) which will leave $43m to fund, having received $58m in net cash in 2024.
So the net effect of this transaction is that Enquest receives a $58m interest free loan from HMRC and Rockrose $20m by using some of Enquest core tax losses and leveraging the investment allowance uplift.
Pretty smart by Enquest’s tax advisors and I was wondering why the deal was completed a couple of days before the year end, whereas if completed in early Jan 24 the $50m EPL would not be payable for 20 months. I think the reason is to enable Rockrose to claim investment allowance in 2023 in case early election and Labour remove allowance before end of 2024.
Nice to get one over Jeremy.
Londoner
The vendor finance facility of $141.4m was to cover the original $57m and the later $85.6m equipment sale. Rockrose have repaid $108m in Jan/Feb and they have a further $36.3m to pay when Bressay is in production. Reading the details in the RNS, it appears that the $108m is repayable to Rockrose if Bressay does not go forward.
Unless i am missing something it looks fairly clear that Enquest received $108m in Jan/Feb. Can you provide a bit more detail on how you got to your $85.6m cash receipt from repayment of vendor finance loan. I attach note 19i from RNS below:
“(i)Additions relate to a vendor financing facility entered into with RockRose Energy Limited on 29 December 2023 following the farm-down of a 15.0% share in the EnQuest Producer FPSO and capital items associated with the Bressay development. $108.8 million was repaid in the first quarter of 2024 with the remainder of $36.3 million repayable through future net cash flows from the Bressay field. Interest on the outstanding amount accrues at 2.5% plus the Bank of England's Base Rate.”
Not sure where you have got your $85.6m cash received from?
Sek
I have used $175m EPL to be paid in Oct 2024 as disclosed in the RNS. I have broken this down as $125m underlying and $50m related to Bressay transaction. I can not see how EPL can be paid on Malaysian profits as relates solely to production in NS. I have reduced 2024 EPL to $100m (payable in oct 25) as a result of higher CAPEX in 2024.
Agreed with your conclusion on very healthy cash generation over next 24 months. However we need to recognise this is based on $86 oil and Oil markets have a nasty habit of surprising.
All
I have updated my 2024 FCF forecasts for 24 and 25 reflecting the latest information contained in yesterday’s RNS. I have used $86 oil as opposed to $80 used by the company and all other 2024 numbers are as disclosed by management (not mine!)
In summary, FCF in 24 of $130m pre buybacks and including Bressay farmdown. Key assumptions used 43k BOPD and oil $86. The main drivers of reduced 24 FCF are cash costs increasing by $263m in 2024 compared to 2023, which includes $150m additional EPL, Increased OPEX ($68m), increased CAPEX ($48m), Lower interest ($28m), higher leases ($24m), lower Magnus ($10m), higher ABEX ($11m). These are all as disclosed by management.
The $263m cash cost increase is offset by $20m higher revenue and $108m receipt from Bressay farm down.
Good news is that 2025 looks much better with $234m of FCF as a result of cash costs reducing by $185m of which $90m is reduced lease costs and marginally higher production. More assumptions in 2025 re CAPEX etc
BFaith/ Dumby
Extract from page 3 of yesterdays rns
“In December, EnQuest announced the sale of a 15.0% equity share in the Bressay licence and the EnQuest Producer FPSO for a total consideration of £46.0 million (c. $57.0 million). Subsequently the Group received $85.6 million for a 15.0% farm-down of capital items identified for potential use on the Bressay development. Through these transactions the Group has realised near-term value, expecting to yield c.$58.0 million post-tax cash flow in 2024, and delivered an important step in moving the Bressay project forward.”
As detailed above total sale proceeds $142.6m of which $108m received in cash post year end (balance to come from Bressay cash flows or subsequent sale of assets). Post tax net cash $58m and so tax $50m.
I will check with IR but Enquest have laid it out very clearly.
Aimoil
It is not the book value of the Bressay assets that matters but the tax carrying value. As a result of the 100% first year allowance the tax carrying value for Bressay and all out field assets is zero (this is why we have such large tax losses).
I have had a look at the EPL tax legislation and all field and associated asset sales are subject to EPL unless the field/asset is being converted for CCS. This can be avoid if you sell a legal entity (containing the asset) rather than the actual asset.
The financial statements also disclose that the net cash from partial Bressay sale is $58m ($108m received - $50m EPL). EPL is calculated on gross sale proceeds - $140m*35%.
The crazy thing is that if the transaction had been completed on 1 Jan 24 as opposed to late December, the $50m EPL would not have been payable until October 2025