Member Info for Stevo12

Londoner

my calc for 2025 EPL payment for 2024 earnings as follows

EPL Tax allowable uk costs 26.4+(12.7*1.29)+11.9=54.7

Tax at 80 oil = 80-54.7* 10.7 = $270m x 35% =$95m

Very early estimate but lower than 2023 EPL due to higher CAPEX and higher OPEX.

VOF

Very happy to have a little wager on 2024 FCF.

I was not so much crestfallen but frustrated with management that they provided guidance in early summer 2023 on EPL and OPEX and then a few weeks later updated with material revisions. Thankfully it was positive revisions but worrying that guidance was materially wrong.

I don’t think I am being negative, I am just summarising what management has told us (except for interest expense). Of course you can assume that management will get it wrong again and you may be correct.

I think the wager should exclude proceeds from disposals or acquisitions as these are unpredictable. I will wager for FCF (exc acquisitions or disposals) of less than $100m for 2024. £50 to nominated charity?

Thanks Sek

Agree that each $1 oil price over $80 per barrel is worth approx $11m FCF for 2024. I have no idea what the average oil price for 2024 will be but understanding impact of oil price on FCF will allow us to flex later in year.

1. On asset disposal proceeds, I prefer to exclude in estimating operating FCF as there is also a high likelihood there will be acquisitions in year. Great to have the $44m in bank though

2. On EPL, I am giving management the benefit of the doubt in that 2022 EPL was first year and had the complexity of a partial year. The tax returns for most groups are completed in the summer for a December year end and it was most likely that it was in July/ August 2023 that the 2022 EPL was fully calculated. Going forward the approach and methodology will be better understood and there are no complexities around partial years. Accordingly I would expect that management can estimate 2023 EPL with reasonable accuracy in the 2023 financial statements. We will see details of 2023 EPL charge soon.

3. I am putting my figure in the air a bit on interest. We will have a better idea with the release of 2023 financial statements which will disclose interest earned on cash deposits. I have a gut feeling tha average cash balance is lower than month end reported cash balance (as it it for most groups).

4. There was something odd with 2023 OPEX. In November 2023, management told us it would be $400m for the year and then it turned out to be $370m a month or so later. I am guessing there were some big credits related to Kraken FPSO failure. Management originally estimated 2023 OPEX at $425m and I think it is dangerous to apply an inflation based increase to 2023 and assume management will get it wrong again.

5. ABEX will be based on the programme agreed for the year and most of this will have already been subcontracted. It will go up and down based on approved programmes and at this stage I think we have to trust management to know better than us.

Agree that if 2025 production was 1,000 BPD higher than 2023 it would add approx $20m of FCF for 2025 (related EPL payable in 2026)

Let’s revisited when we get the 2023 financial statements.

Thanks for input

VOR

Good question - In terms of how the 2023 FCF of $236m rolls into 2024 of $50m.

Well there are few moving parts. Management has disclosed that OPEX, CAPEX and ABEX are going to be $95m higher than 2023. EPL actually paid in 2023 was $25m ($35m paid in late 2022) and so EPL approx $125m higher if 2024 EPL is $150m per H123 disclosure. These 2 components reduce 2024 FCF by $220m. On the positive side lease costs are down by $20m in 2024 and there was $50m golden eagle payment in 2023, partly offset by the year end temporary working capital benefit of $40m.

Taking the above together, we would expect without production change or oil price change, the 2024 FCF should be $190m less than 2023 or approx $46m.

Kraken

I have tried as best to mirror how Enquest treat BP Magnus entitlement. We know that 100% of Magnus production and OPEX is included in Enquest reporting and the we pay BP 37.5% of the operating profit less their share of CAPEX.

There could be a small error if Magnus OPEX is lower or higher than $26 per barrel average but we know that based on H123 that Enquest is paying BP $40 per barrel, after Cap Ex. So probably $50 per barrel pre CAPEX.

Has the OPEX cost for Magnus been disclosed?

Red

Interest on $620m bonds is approx $70m per year and I have assumed that interest earned on cash deposits will equal interest payable on RBL (hopefully RBL paid down during year). The interest on leases is included in the $127m lease payment.

Assumption is slightly aggressive but hopefully manageable by Enquest and we should know a bit more when we get full year 2023 financials.

Cheers

A relisting in Norway might be more appropriate and O&G valuations are high

Aimoil

The legal challenge would be based on the threshold for WFT. Currently it is the average price over the 2o years ending 2022 and the deliberate flaw is that there is no adjustment for inflation, whereas labour and material costs have risen for the O&G industry as all other industries over the last 20 years. To add insult to injury, inflation to the 20 year average is only applied from April 2024 and so 2023’s 10% plus inflation excluded.

The reality is that Joe Public and the politicians don’t care until it comes home to bite them in several years time. The only response will be if there is significant job losses due to lack of investment.

Londoner, Sek and others

I have been pulling together some FCF forecast for 2024 and 2025 and would appreciate your review and challenge on my workings.

I have used the following production assumptions

UK production 35,000 BPD = 12.8m BPY

Malaysia production 8000 BPD = 2.9m BPY

Total 43,000 bpd = 15.7m BPY

Magnus BP entitlement 5.6k BPD = 2.1m BPY

Malaysia PSC and Gas 4000 BPD = 1.85m BPY

Enquest UK FCF entitlement 10.7m BPY

Malaysia FCF entitlement 1.85m BPY

And I have used the following cash cost assumptions and cash cost per barrel

Opex $415m / 15.7 = 26.4 per barrel ( 2023 $23pb)

CAPEX $200m/15.7 = 12.7 (2023 $9.1)

ABEX $70m/ 10.7 = 6.5 (2023$5.5)

Interest $70m/10.7 = 6.5 (2023 $7.3)

Lease $127m/10.7 = 11.9 (2023 $14)

This generates a UK cash cost per barrel, excluding EPL, for 2024 of $64 per barrel (2023: $59) and a 2024 pre EPL FCF of $171m at average $80 oil. In addition Malaysia FCF estimated at $30m post tax. So I get to approx $200m operating FCF pre EPL. EPL estimated at $150m for 2024 (2023 $25m). This excludes any asset disposal proceeds or significant temporary working capital adjustments.

I see 2025 cash cost per barrel reducing by $8-10 per barrel due to lower Lease, CAPEX and interest and I have EPL reducing from $150m to $95m. An approx $150m improvement in FCF in 2025.

So my very broad conclusions are $50m FCF in 2024 increasing to $200m in 2025. This excludes and business purchases or disposal.

Appreciate you thoughts and challenge.

Kraken

Tax losses are safe but can only be used against core 40% tax and not EPL.

The reality is that this all about creating enough headroom in the 5 year OBR review to sign off on current year tax cuts. Tories will not be in office in 2029 and potentially labour would have introduced this extension anyway. An additional year will cost Enquest $100m+ in 2029 which you can probably discount back to $50m reduction in equity value today and some of this will have already been reflected in share price following labour announcement.

It feels that O&G is a punch ball at the moment and not sure it will change unless Unions constrain Labour.

Kraken

I put my hands up. I did get the second half of the year FCF projection significantly wrong. However, in my defence, it was based on material errors in management’s guidance around OPEX ($55m) and EPL ($15m) and also cash flow benefits from timing of loadings and cash advances from our JV partners, that will most likely reverse in 2024.

Of course i would like to see shareholder returns in 2024 but not at the expense of buying good producing assets and using tax losses. I would expect that Enquest could get cash payback in 12-18 months - where else will you get that return if funds were used for buyback or dividends.

I do however believe that H12024 will be strong FCF and will get close to the 0.5x debt/EBITDA metric as CAPEX will be back end loaded and $150m ish of EPL paid in October 24.

Not too long now before we get management guidance on shareholder returns and all i am saying is that personally i wont be too disappointed if shareholder distribution is in 2025 as long as the money is used to buy quality producing fields with rapid payback. Both would be great but not sure this is realistic.

Sek/ Kraken

I am not sure it is the type of shareholder return that will be the key factor, but the fact that the company has reduced debt to a level that it can commence shareholder returns (in whatever form) that will drive share price forward.

I am hoping the year end results will give a little more clarity on FCF / debt reduction expectations for 2024. The key message i took from the trading update was that 2024 would year of investment to benefit from current investment allowances pre Labour, in addition to buying another producing field.

My gut feels is that with increased EPL, CAPEX, ABEX and OPEX in 2024, partly offset by first phase of lease reduction (with larger lease reduction in 2025) and reduction in JV Cash (due to increased CAPEX programme), there will be marginal debt reduction in 2024. This will particularly be the case if there is an acquisition of a producing field.

2025 is looking much more interesting for shareholder returns, with reduced lease costs and higher production. The messaging with this years annual report is going to be really important.

Thanks therapist.

Pretty good start to year and hopefully a blip on Magnus.

Rom

Was the Waldorf comment of $10b capex and 40-35 OPEX for kraken or the overall portfolio.

Alex

You are forgetting to deduct the $5.3b of debt from your EV of $7.2b which would result in share price of £1.

It also looks like 2024 EBITDA will be below 2023 based on management announcements but all depends on gas prices and to a lesser extent oil.

I don’t think an EBITDA multiple of 1 is realistic and equally the EBITDA multiple of over 2 applied to WD is too high. Based on previous discussions on this board a valuation of 1.7x EBITDA would be the upper end based on Norwegian listed groups. I cannot see any real logic for Harbour EBITDA multiple to be upgraded to 1.7xs but let’s say that reflects some synergy values. 2024 EBITDA of combined business looking in the $6.8-$7b range, giving an EV of $11.6 -11.9b and an equity value of $6.4-6.6b and share price of £3-3.13.

I think this is the realistic outcome on completion. Anything more is a bonus.

Good for harbour but crazy that deal are cutting down ancient forests in Canada and shipping belts to burn in the UK and emit more CO2 than a gas plant but because the CO2 is attributed to Canada due to location of trees rather then the UK as the user is absolute senseless nuts. We are subsidising Drax by $4b because the CO2 is allocated to Canada. The fact they are planting a new tree that will take hundreds of years to recapture the CO2 that is release in a few months from felling a mature tree seems to be lost.

The world is going crazy and the fact that Hunt appears to be considering extending EPL when a government lead consultation concluded a couple of months ago that a legitimate windfall tax regime needed after end of EPL. This has now got nothing to do with windfall, but government thinks they have a sector with no public sympathy (due to climate change and Shell/BP profits)and is quite sticky in terms of existing fields, which can be taxed to near death to allow OBR to sign off on tax cuts.

Rom

It is going to be really interesting to see how this plays out in the run up to the election.

Whether tories challenge both the achievability of a decarbonised grid by 2030 and more importantly the cost myth is the question. Voters inherently like the sound of green energy until they understand it is going to double or treble their energy bills and they will have a pylon at the bottom of their garden.

What will become increasingly clear is that there is lack of capacity to lay the underwater cables to connect NS to grid. Also the building of many thousands of miles of pylons and cables across or green and pleasant land is going to meet with planning objection and supply constraints. Further and most importantly labour has not detailed how it will have backup available (battery or hydrogen) available by 2030 for when the wind does not blow.

I hope the tories are laying a trap as labour will be unlikely to back further away from green promises.

Asartara

I have been taking a closer look at VAR energy per you recommendation.

Just one question. Have you bought through a uk platform as I was struggling with ii and hl.

Var is another good proxy to compare the WD valuation. 100k bpd lower production than WD in 2023, but with approx $1b higher revenue and EBITDA than WD, spending $3b in 23 and 24 on capex and paying $1b in dividends. Market cap of $7.3b and $2.5b debt results in EV of $9.8b and EBITA multiple of 1.75 (similar to bP aker) 2025 BOPD target of 500k BOPD based on in-progress development projects.

Looking at the positive side of the deal for WD, if the equity element is valued at actual harbour share price, assume $1b of fcf pre completion and debt value is $0.5b less than headline price, the purchase price reduces to $8.6b and EBITDA multiple 1.9, compared to harbour and other NS oilers valued at less than 1xs 23 EBITDA.

Just shows how much the tax uncertainty is impacting values.

You are correct Londoner that the projects approved by WD will receive the additional investment allowance uplift.

A very similar additional incentive is included in the EPL which results in both Norway and UK O&G investments being effectively 90%+ funded by the state. The additional uplift in the UK continues until 2028 under the Tories, however will likely be removed under labour.

If labour would commit to no change to the current EPL, we would at least have stability and predictability and a slightly more attractive tax regime than Norway.

It is interesting that we have frequent references to oil price movements on this board and yet the majority of our production is gas and will increase to approaching 2/3 following WD deal.

The oil price seems to gravitate + or - 10% around the mid $70 per barrel, while gas gyrates from 150p to 60p per therm over relatively short time periods. I would suggest the volatility of gas is much more impactful on HArbour than oil prices. It will be interesting to look back in a couple of years time to see if gas prices in 2022 and 2023 were an anomaly away from a 20 year trend line of 50-60p per therm gas. What I find interesting is that even at 60p per therm European gas is still 4 times more expensive than US gas - a massive advantage for US industry and cheap energy is the US is one of the key drivers for the outperformance of US economy in 2023.

When will our politicians realise that energy cost and availability is a key driver of economic performance.