Member Info for Stevo12

Apologies for typo. Good luck or look!

Londoner

Pleased you are also taking a good luck at this.

The problem with the disclosed info on page 54 is that it is the average for the produced oil and gas and also the WD trading activities that are not coming with the deal. The amount of traded oil and gas exceeded $3b in 2023 and as such distorts the average realised oil and gas prices.

The realised price on produced oil and gas (the business coming over to Harbour) is not disclosed and I have estimated based on average oil price across the year and the 19m barrels of oil hedges, an average realised oil price of $72.6 per barrel. I have used averaged realised price per BOE of $41.5 (EBITDA 4.2b/118m barrels production = $35.4+6.1 OPEX= $41.5). Gas price is then $25.3 BOE equivalent.

I recognise there is one significance assumption above, namely the averaged realised price of oil.

However the one indisputable factor is that EBITBA per barrel for WD is $35.4 which compares to $42 for Harbour and WD has a higher tax burden per barrel than Harbour (pre Labour).

Accordingly I am still struggling to understand why the deal values WD production at $95 per barrel of annual production while Harbour is valued at $48.5 per barrel of annual production. Just does not make sense even though WD has more Reserves the averaged life of the developed reserves is similar to Harbour at 7 years.

I think part of the reason the price has been falling is that the profitability and performance of the WD business has become clearer with recent announcements.

The recently announced financial statements of WD has highlighted that WD is generating similar EBITDA to Harbour as a result of gas/oil mix with WD earning very low gas prices in Argentina and middle east. I have looked in detail at WD’s FCF for 23 and while reporting a small negative FCF, adjusting for 2022 tax payments in 23 and interest expense, The adjusted FCF is broadly similar to Harbour’s $1b for 23.

While WD,s 2P reserves looks huge at 1.3b, approx $780m are developed and in production. The balance still needs capex to develop.

Ultimately due to very low pricing of gas overseas, particularly in Argentina, the vast majority of FCF is generated in Norway and looking at 2024 and beyond, I think the WD business has very similar FCF potential to Harbour.

Accordingly I am struggling to understand why Linda has agreed to value the WD business at 3 times the value of Harbour. I think the initial euphoria has faded as the details of the deal emerge. Taking developed 2p reserves of 780m, these reserves are valued at $14 per barrel and after tax, I think they best the business will free cash flow is $8-10 per barrel.

It will be interesting as the q1 and q2 24 results for WD are released and the FCF and profitability per barrel becomes apparent whether there will be the same support for this deal. I have gone form the deal fully pricing WD to significantly overpricing the WD business.

Nitro

Agreed that this is a deal needed by both sides and merger is the right route. Just feels that WD have come out of this with a better deal than Harbour.

The question will be in due course how the market values the WD 2P reserves and FCF. If WD production generates lower FCF per barrel than Harbour's, there is no reason for the 2P reserves to be valued higher than Harbour’s reserves. If this is the case then not sure what this means for share price.

On the positive side the debt coming across has a very low interest rate and interest expense will be lower than $100m pa for a number of years.

I do however trust in Harbour’s management to strike a good deal and I hope that I am missing something.

I have had a good read through the WD results and a. Little confusing as they inclorporate some activeities that are not coming over to HArbour. However my key take always are as follows:

1. WD’s EBITDA per barrel of production is $35. Thus surprised me a little as it compares to Harbour’s EBITDA per barrel of $42 and WD have much lower OPEX per barrel of $6.1 compared to HArbour’s $16 per barrel. Digging a little deeper WD has a similar realised oil price per barrel but WD is only realising an average of $25 per barrel equivalent for gas. This is equivalent to 34p per therm compared to Harbour who in 2023 realised 58p per therm, even with very poor hedges expiring this year. It appear this is primarily due to very low prices on its non European gas sales.

2. Zero FCF in 2023 after CAPEX $1.2b, Exploration $0.2b, Admin $0.3b, Interest $0.35b, tax £2.2b.

3. Accordingly while BPD production of WD is double Harbour, EBITDA is only 50% higher due to much lower gas prices in international markets. For deal purposes, Harbour is valued at 3.60 per share or $3.3b as compared to WD at approx $10b. I am struggling to understand how WD is valued at 3x Harbour when it is only generating 50% higher operating cash flows. I recognise the 2P reserves are much higher but they are not being extracted as quickly as Harbour and a significant amount of WD’s 2P is undeveloped and in regions where gas prices are poor.

I can see why ABNOC walked away at this price and I have said before this is a very full price. It feels like harbour is between a rock and a hard place and needs this deal for scale and diversification.

While I admire the ambition and intent of Enquest/Veri to turn Sullom Voe and the Shetlands into a green energy super hub with CCS and Hydrogen production powered by windfarms, this scale of project would be a challenge for the likes of Shell or BP to fund and deliver. We are seeing BP partnering up with Harbour on the Viking CCS project and both BP and Shell involved in other Tier 1 and 2 CCS initiatives but not SV.

SV has not been selected as a Tier 1 or 2 projects (I don’t think it even applied) and accordingly it will not be prioritised for public sector funding and without public funding, it will be difficult to get private sector funding. This initiative is beyond the financial means of Enquest as we fight a UK tax regime intent on destroying NS O&G.

I just hope they have a partner lined up with billions to spend on a green dream.

I think it is worse than nationalisation. Ed expects the private sector to fund 55% of upfront capital, receive 22% of the operating profit during production (which might just cover the borrowing cost of the upfront capital) and then pay for 60% of the decommissioning. The tax take will be greater than economic value created and is akin to being asked to go to work and paying £110 tax on every £100 of earnings.

This is cleverly a strategic play to close down the NS as quickly as possible and push the UK towards renewables. Unfortunately it will just drive us to rely on imports.

Neversell

In a share based merger the value applied to each others equity is to some extent irrelevant, the key issue is the relative split of the equity in the enlarged group.

Perhaps I can use a simplified example, if there were two apple traders who are in discussions to combine their businesses. One trader has 100 apples and the other has 40 apples. Both parties could agree there apples are worth £1 or £10 each but it is irrelevant, it is the equity interest in the new business that is important which would be 40/140 and 100/140 (assuming same type of apples)

Applying this logic to the WD/ Harbour deal. WD brings 1,000 million of 2P and Harbour 400m 2P. WD is valuing its 2P at approx $9b (adjusted for the pre deal cash generation) or $9 per barrel. Mr market is currently valuing Harbour at $6.30 per barrel and the 3.60 valuation uplift agreed in the deal effectively increases the value of Harbour’s 2P to $8.70 which then determines the equity split in the enlarged company (after adjusting for debt).

Accordingly the £3.60 price allocated to the Harbour shares is purely to arrive at the agreed equity split of 45:55 after adjusting for the WD debt. The same could have been achieved by reducing the value ascribed to the WD 2P reserves to be closer to HArbour’s.

It is not a prediction of the share price now or in the future.

The same equity split could have been achieved by valuing WD 2P reserves at a comparable value to Harbour which would reduce the disclosed purchase price, but would have still result in WD receiving 921m shares or 55% of the enlarged group.

Tamov

There is rarely only one reason for share price moves. I do not believe the market believes there is any risk of the deal being blocked by regulators in Germany or elsewhere. My personal gut feel is that it is a combination of medium term gas prices softening and the Labour O&G policy which renders any new NS development uneconomic from 2025.

I still believe while we are not picking up the WD assets on the cheap, There are real synergistic benefits created from the deal which will be shared 55:45 between WD and Harbour shareholders. These synergies will not be material cost reductions but slightly more subtle such as cheaper debt, reduced risk due to diversification, access to different scale of institutional investor, ability to take on future acquisitions and sweep up distressed businesses etc, financial muscle to participate in new field developments etc

It is very difficult to put a value on these synergies today, but they are real and will translate to a share price rerating both pre and post deal. The scale of the post acquisition 2P and 2C reserves is clear and the shape of the balance sheet (including debt) is visible. I think the big question the market will be looking for clarity on will be the post acquisition FCF in 2025 to 2028.

Fog

My statement that the deal is fully priced refers to the total purchase price relative to 2P reserves and FCF.

This deal is principally an equity swap and in essence can be broken down as follows from a Harbour shareholder perspective:

1. We are exchanging 100% equity interest in Harbour for 45% of enlarged group.

2. We are taking on $2.2b of WD’s debt ($4.9b at 45%)

3. We are likely paying approx $1b in cash dependent on WD FCF until completion of which 45% will be borne by Harbour shareholders

Placing a £3.6 value on the 921m shares to be issued is purely notional to arrive at a disclosed valuation of WD. The key question we should be asking is whether 45% of WD is worth what we are paying, which is 55% of Harbour equity plus $2.65b of cash equivalent. 55% of harbour today is worth $1.4b, plus the $2.65b cash equivalent results in total consideration for 45% of WD of $4.05b. This values WD at $9b or approx $9 per 2P reserve.

This looks reasonable compared to other listed O&G companies in Norway. However this compares to Harbour which is currently valued at $6.30 per 2P reserves. While WD’s OPEX is lower than Harbour by approx $10 per barrel, after tax this is worth $2.2 per barrel and Uk and Norway tax regime are broadly similar (pre labour amendments). Accordingly WD 2P reserves are valued approx $0.5 per barrel higher than Harbour’s in the deal.

On a FCF basis it is more difficult to compare with limited information available on WD.

Accordingly my conclusion is at we are offering a full value to WD shareholders which is presumably reflective of a competitive bid process and the value to Harbour shareholders is more in the diversification, scale and credit rating as opposed to picking up cheap assets.

The deal looks even better when you factor in the Labour plans for NS O&G

Londoner

You are correct on a number of points. The 360p is a notional price and has no real meaning. The market value of the shares at the date they are issued on completion will determine the value of the consideration. It may be above or below 360p.

We should also note the bonds are well below market rate at 1.8% and will be fair valued on acquisition. The interest cost on these almost $5b of bonds will be less than Enquest pays on its $800m of gross debt and falls into Harbours playbook of take on large debt on Acquisition and materially play down over 2-3 years.

Your note on comparison to Aker BP is relevant given the oil/gas mix and while gas seems to be the flavour of the day, I personallly prefer the lower volatility of oil. However BP Akers market cap also reflects significant debt and EV comparisons might be more relevant.

As i have noted previously this is a fully priced deal given WD’s less than exciting FCF, but it feels like an essential transaction for both parties.

Romeron

I think we will start to see bids for offshore wind that reflects the reality of a rising (rather than falling) cost of construction and operation. Unfortunately the bids and the wind farms do not have to bear the cost of intermittency and while wind represents a minority of energy supplied to the grid and there are gas fired power stations to step in when the wind does not blow (up to 10 days Una row), there are no material cost implications.

However once we have achieved the Labour dream of a decarbonised grid by 2030 with wind representing 80% of energy input to the grid, the system will require storage and that is the hugely expensive and uncosted element in the system. Battery storage for other than a couple of hours is massively expensive and green hydrogen is both expensive, inefficient and unproven.

I find it interesting that Germany is now building new gas fired power stations as their green dream meets reality. When will the UK wake up.

Thanks RedB.

Still scratching my head a little as 2022 financial statements showed annual lease payments decreasing by $25m in 24 and in 2025 a further $40m. There are other leases in addition to Kraken FPSO but timing does not quite tie up with the end of the original lease in April 25.

The 2023 financial statements should clarify but the key message is that lease costs will drop very significantly as you note.

Thanks dumbly. Reassuring.

A really good question Wiggly. While we know the decom liability is large at $700m, the timing of cash costs is not clear.

Enquest is in the process of completing decom on a number of retired fields and this should be largely completed in 2004/25. The decom or Kraken, Magnus and Golden Eagle etc are many years into the future and we could see a reduction in Decom cash costs in 2025-2030.

Enquest will be getting a tax refund for approx 40% of the decom costs incurred in 2024, but not sure if the $70m forecast is gross or net of the tax refund.

The labour tax policy could accelerate the timing of decom if investment is frozen.

Also the only other interested party was UAE state controlled O&G company. Would German regulator prefer to sell to European business or Middle Eastern?

sek

i am willing to give up a few pence for a bit more certainty. a couple of weeks ago i was close to folding but i am now thinking that i will move more back into equity if the financial statements and the next 2024 update are still looking as positive as recent update. i am in particular looking at the 2023 financial statements for further insight into the following:

1. lease payment schedule for 2024,2025, 2026 and beyond. the 2022 accounts highlighted a reduction in 2025 but not the 70% referenced

2. 2023 epl charge to be paid in october 24

3. 2p reserve replacement in 2023. it has been poor over last couple of years and i would like to see what we have got from the $160m spent in 2023

4. thre is something not quite right with the cash number presented. we know that the jv cash is restricted for jv purposes (capex) and includes cash belonging to our jv partners (which is treated in net debt calculation as belonging to enquest), but i don’t understand if we have so much cash why the 9% rbl is not materially paid down. we can redraw the facility if we have an acquisition to finance. while management has been transparent in highlighting the 2023 cash position benefited from a reversing working capital timing benefit of $40m, i am assuming there is a degree of window dressing with the month end and certainly reporting period cash higher than the average monthly balance.

this will be visible in the interest income reported in the financial statements. given cash will have been earning 4% plus on any corporate account, we should see as high level of interest income. the interest income in the first half year was quite low indicating the average cash balance was far lower than the reported cash balance.

this is important to me as i want to understand the underlying net debt and i am expecting the jv cash balances to decline significantly by end of 2024 as enquest pulls forward as much capex as possible into 2024.

5. i am interested in further updates on the huge gas opportunity referenced by ab at davos. i am hoping it is not malaysia as gas belongs 100% to petronas and enquest receives a handling fee (not sure how much). i am a little frustrated that enquest counts malaysian gas (although less than 1k bpd) in its production numbers when we have zero equity interest and i am going to be mighty ****ed off if the forecast 2025 growth in bpd is due to malaysian gas for which we are purely paid a handling fee.

6. a bit more info on bressay, although assuming it is a dead duck until we have clarity from labour and also plans for svt.

6. outside of enquest’s control, i am hoping we will get a step back from labour on their ill thought out policy (although not holding my breath). i am also concerned on oil supply demand balance in 2024 which relies on opec (or saudi ) discipline in holding back capacity. fundamentals look much stronger for 2025 plus as lack of investment will eventually bite

Anas Sarwar reference to energy giants making 10Xs more profit was a reference to British Gas who don’t pay any EPL and increased their profits from £70 to £700m. Nothing to do with NS O&G. Stunningly stupid

sek

agree that 2025 should generated a very strong fcf year with significant debt reduction/ shareholder return. my back of the ***packet cals shows 2025 being over $200m higher fcf than 2024, with $100m coming from reduced capex, $30m reduced epl, $40m lower lease costs, $40m from 2k bpd of increased production. there will be increases in opex.

i am anticipating there will be no debt reduction in 2024 as the company uses $70-100m of fcf to acquire producing assets. enquest should be able to purchase 10m of 2p for approx $75m which should yield 1.5m barrels of annual production (4k bpd) resulting in cash generation in 2025 of $80m. while worth $80m to enquest, the seller would only lose $20m of fcf if full tax paying.

accordingly i can see 2025 being a bumper cash year with a sensible acquisition contributing to fcf of approx $350m which would result in significant market rerating and shareholder returns.

i promised myself that i would make a decision to hold, twist or quit following the announcement. i am not not yet ready to twist and will wait to see the update with year end results and whether labour reverse their “proper windfall tax”. so its a hold for me but will twist if my expectation of 2025 is confirmed by company during 2024.

SeK

Extract from financial review for 1/2 year 2023

“The tax charge for the six months ended 30 June 2023 of $131.8 million (2022: $142.4 million tax charge), reflects a $45.5 million non-cash deferred tax impact on the Group’s profit before tax, $10.3 million overseas current tax charge and a $76.0 million current tax charge associated with the EPL (noting EPL was substantively enacted in July 2022).”

I agree that Enquest could get pretty close to the 0.5 threshold by 30 June 2023 as I anticipate increased CAPEX will be back end loaded and EPL payable in second half of year. I think that management will look to where they will be at 31 Dec 24 in commencing shareholder returns.