Member Info for Stevo12

Londoner

As the tax base cost is zero, EPL is $141m*35%.

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

VOR

My understanding is the RBL has been repaid using $108m of cash from Rockrose and $32m from Enquest’s cash reserves. This will save approx $13m of interest in 2024.

With $108m of cash received from Rockrose, a little surprised that net debt only reduced by $71m in Jan/Feb which highlights negative trading FCF of $37m. Presumably reflecting the timing of loadings.

SEK - I have had a more detailed dig into EPL and the reason EPL at $175m in 2024 is that Enquest is paying $50m EPL on asset sale to Rockrose, which is an absolute scandal.

Debt has reduced by

Good call and in particular the new CFO and Ops Guy came over very well. Key takeaways for me:

1. On the last call there were 3 or 4 M&A deals on the table. Felt more remote on this call but still a potential due to tax losses

2. No info on massive gas opportunity referenced at Davos. Malaysia is mainly a lift fee for Petronas gas.

3. Good news that Unions are getting involved.

4. CCS and hydrogen opportunity feels very distant - 10years plus

5. Bressay and Bentley still a possibility to develop but requires labour to retain investment allowances

6. EPL effective tax rate is closer to 60% ($175m for 2023) due to disallowable costs (primarily interest and ABEX)

7. 2024 an investment year but great to see start of shareholder returns.

Need to rerun numbers for 2024 FCF forecast now we have details on 2024 lease payments and EPL. Management have used $80 oil as their assumed rate. I will start their and easy to flex for higher oil price.

The Rockrose transaction takes a bit of unpicking. It appears than in addition to 15% of field and FPSO, Enquest has sold to Rockrose a 15% stake in other equipment. The proceeds for the sale were approx $140m and Enquest provided them the financing at 31 December 23 (no cash receipts). In Jan/Feb Rockrose repaid $108m of the loan and this is the key reason for net debt reduction at end of Feb. Excluding this receipt, net debt would have risen to end of Feb as a result of reversal of year end temporary working capital benefit ($50m+) exceeding operating cash flow.

Seems like a pretty smart transaction to me (although materially different to what was disclosed by RNS) but surprised Rockrose willing to put up $108m given uncertainty of Breslau development. There may be more to it and we may have guaranteed Rockrose that they will get their money back.

Unfortunately you are not reading it right. The 2024 EPL payment is going to be $175m as detailed in the tax note.

Still reading the accounts and trying to unpick the Bresssay transaction. Looks like we received over $100m in jan/feb. Any clues?

Just had a quick look at Ithaca transaction and in summary they are paying $630m for 100m of 2P reserves and mid 40k BOPD of production. The valuation of NS 2P reserves, on a debt free basis, at a little over $6 per barrel is very similar to Harbour.

No details on whether Ithaca will inherit decom liabilities.

Would not be so bad if Labour retains current investment allowance for platform electrification. Currently for every $1 spent on platform electrification, NS O&G companies receive a $1.08 reduction in their tax bill.

Sek

I am hoping that we will be getting more detailed guidance on 2025 with year end announcement. I interpreted the 2025 production guidance as moderate increase at 1-1.5k BOPD but not sure how much is Malaysia or Magnus and what our entitlement to increased production will be. Hopefully will know more later this week.

If 2024 oil price averages $86 rather than $80, the additional Uk FCF (based on 29k BOPD post BP entitlement) will be approx $60m with related EPL payable in 2025 of $21m. After royalty and corporate tax in Malaysia, approx additional FCF of $4m from oil price increase. This would take 2024 FCF to approx $110m and I would lose my bet with VOR.

Any view on oil prices beyond the next 2 weeks is equally valid but I am more confident on improved oil prices in 2025 and 2026 than 2024.

On net debt evolution, on the announcement this week I will be looking out for impact of reversal of year end temporary working capital benefit in Jan/Feb and receipt of proceeds from Bressay sale. I am expecting approx $25m per month of FCF in Q1 due to lower CAPEX and ABEX in early months with spend very back end loaded. I am also expecting a reduction in JV cash balances through the year linked to the increased capex spend but probably H2 weighted.

The unanswered question is will Enquest acquire 2P reserves and will this be for cash and timing of cash payback. The terms/ price will be better for cash than production sharing like Magnus but it all comes down to affordability. My working assumption is that if we acquire 2P reserves in 2024 that this will offset any FCF generated in year. The later in the year the acquisition, the worse from FCF terms.

2025 is still very provisional but will be better than 2024 from a FCF position and should eat into debt and fund shareholder returns

My other focus on the release of the annual accounts will be interest income on cash deposits. IR have told us the rate they are achieving and the level of interest will show us what the average cash balance has been and how much is window dressing

My BE figures are directly from management guidance on production, OPEX, CAPEX, ABEX and from disclosures in the financial statements on lease costs and interest rates on bonds and RBL. I have based 2024 EPL payment on charge for first half of year.

This guidance could be wrong but I will follow up with IR on why 2023 guidance was materially wrong so close to year end.

I disagree, I have alweays tried to give a balanced view or to balance the narrative.

when there is a board discussion which is totally focussed on the positives and ignores some of the very real challenges, I have honestly tried to add balance to the debate. I can see that it could be perceived that I am introducing negative angle. Group think is very dangerous and dismissal or hostility to alternative views is an unfortunate human trait.

I fully recognise that my call on H2 2023 FCF was materially wrong. However my forecast was based on management guidance in September and November 2023 and I still do not understand how management could get their guidance so wrong so close to year end. This reduces the confidence in 2024 guidance and whether we should use management guidance or develop our own which I think is dangerous as we do not have access to the underlying information.

Dumbly

I agree 100% that well priced M&A (which accelerates the use of our tax losses) is also my priority, just ahead of shareholder returns. It has been many, many moths ago that the Board told us there were several deals on the table but nothing has yet been announced. However I would prefer no deal to a bad deal, where we give away the Enquest specific tax benefits.