Member Info for Stevo12

My reflections on today and what it means for the share price.

1. Harbour’s prospects (profits, FCF, shareholder return etc) for 2025 and beyond, both with and without the WD deal, have not changed.

2. The company is effectively debt free pre WD deal and the WD debt is very low cost at 1.8%, resulting in interest bill of $100m ( on EBITDA which should be close to $8-10b ) before debt is paid down from post deal cash flows to arrive at optimum equity/debt structure.

3. The 2C prospects are still attractive and value adding

4. So this is all about 2024 Cash flow which is lower than market expectation. Some decline in production was expected but probably $15-20k higher. This is not due to fields not performing or 2p resources being downgraded, having long term impact on production. So 20, 000 bpd lower production than market expectation results in lower revenue for FY24 of $465m and lower fcf of $116m (due to 75% tax). Cap ex is also $200m higher as Harbour takes advantage of current investment allowance before change in Government (net additional cost $18m).

The market cap has decreased by approx $260m which broadly translates to an expectation that 24 FCF will be $460m as compared to today’s guidance of $200m. Feels like a reasonable adjustment to reflect lower cash flows for 2024 with no changes to 2025+ expectations.

Helps me sleep!

The german regulatory review considers effectively 3 matters. Does the acquisition give the acquirer an unacceptable market share of the german domestic market, is the business being acquired a critical component of domestic energy, infrastructure, military etc security and finally is the acquirer from a hostile or undesirable county.

1. Harbour does not have German operations so no concern about increase in market share. 2. WD domestic German production is minimal and not a key energy supplier. 3. While the UK is no longer a member of the EU, classification of the UK as being an undesirable investor in German businesses would result in a huge political backlash. Germany and UK are cooperating closely on renewables and CCS and the UK will be a significant storage location for German carbon captured.

Accordingly German clearance is pretty much a formality - there may be greater challenges in Mexico where both companies have operations.

I meant to add that 30k bpd reduction has deprived hmg of addition $700m of taxes. Poor mr hunt must be crying into his cornflakes.

I also believe we are paying 2023 EPL in 24 and also starting to pay 24 EPL on account as we have now used tax losses and will move to the quarterly payment regime in H2 24. Accordingly as well as lower cap ex in 25, tax payments may also be lower.

Sek is entitled to his view and he rightly points out that forecast O&G assumptions look bullish in todays market.

I was trying to reconcile the 2024 and 2025 FCF forecasts and for 2024 Tax payments are up by $800m to $1.2b and FCF down by $800m. 30k BPD of lower production has reduced FCF by approx $900m and cap ex is up by $200m. Accordingly it looks like reduced gas hedges has benefited results by approx $1.2b.

Looking at 24 from a cash cost per barrel, we have OPEX at $18, Cap and ABEX at $24 and tax at $21 = $63 per barrel. Harbour are forecasting all in cash cost of approx $81 per barrel. What am I missing. Interest should be minimal

By the way a $5 fall in O&G price reduces FCF by a little over $70m due to 75% tax.

SEK - I would wait for Enq 24 guidance to call 24 FCF.

I am feeling flat with the 2024 forecast. I was not expecting a 30k bpd reduction in production and was hoping that the benefit of expiring gas hedges would offset higher tax. The oil and gas price assumptions for 2024 are pretty racy and only yield $200m of FCF - just enough to pay dividends. Tax is slightly lower than the $1.5b I estimated due to using some residual tax losses in early 2024.

The company have provided early 2025 forecasts, presumably to offset 2024 forecasts, which look much more positive.

I am not sure how market will interpret but I think a fall more likely than a rise.

Nitro

I would be surprised if we hear anything unexpected tomorrow regarding 2023, but this will be first guidance on 2024. I am certainly interested in 2024 production guidance and hopefully minimal decline. Also Opex and Capex guidance. Not sure whether 2024 FCF guidance will be given yet. If FCF guidance is given it will reflect impact of hedges expiring and also the “elephant in the room” the 2024 tax cost. First full year of EPL payment and possibly core tax if losses fully utilised in 2024.

That a lot of new information to be absorbed and hopefully a positive update. I will be up earlier than Christmas morning tomorrow!.

Krakenool

You are correct that Kraken has been producing for 6 years as opposed to 7. As Rom highlighted 62 % of Kraken 2P reserves have been extracted which increases the average depletion rate from 13 to 15%. This is in line with industry norms. OEUK highlight earlier this year that NS oil production will decline by 15% per year through to 2030 without significant new investment.

While you may not want to accept that Enquest production has declined from 61k BPD in 2020 to 44k BPD in 2023, despite spending $700m on organic and acquired reserves, it is an inconvenient truth. At the same time cash cost per barrel has increased from $33 per barrel in 2020 to what ever it will be in 2024.

In respect of other questions, I have only ever posted under my current user name and only in respect of my O&G investments. I have been clear that I have moved my investment in Enquest from Equity to 75% loan notes and 25% equity over last 2 years.

In terms of posting I have posted 51 times over last 30 days to Enquest, Harbour and Rockhopper sites, compared to your 75 times Kraken.

My personal reason for using these boards is to learn from other peoples perspectives and to have my own understanding and perceptions challenged as it is so easy to get stuck in a personal viewpoint. However unfortunately this Board is now starting to go the way of Harbour’s Board and unless everyone is willing to drink the same Coolaid, any challenge to the super positive narrative not matter how factual, is met with derision as opposed to reasoned argument.

Anyway this will be my last and final post on Enquest and I wish you all well with your investments. I remain invested in Enquest and will make a decision to increase or decrease once I see the 2024 guidance.

Not really Rom, but interested you are getting so bent out of shape. The link you have just forwarded highlights that 62.09% of Kraken reserves were extracted over the first 7 years of production. This is an average depletion rate of 13.2% pa and is consistent with the NS industry standard.

I always find it interesting how people react when historical fact and published expert data collides with uninformed opinion.

Sek

I was ultimately trying to rationalise why market is valuing Enq at $300m. I agree there is a value for Enquest producer and this should be added. This is really more of an art rather than a science as there are other moving parts such as Decom liability. The fundamental point I was trying to make in response to Kraken is that pre and post EPL market transaction has resulted in 2P reserves decreasing from $20 to £10 per barrel and this reduction has offset the benefit of debt reduction to date.

Where do you get your $0.5b 2024 FCF for Harbour? I was hoping there would be guidance on 18 Jan update. We know that the end of gas hedges will see increase in FCF by approx $1.5b, but Harbour will be paying full EPL and core tax in 2024 which partly offsets the value of hedges expiring. I would be very disappointed if Harbour gives guidance on FCF below $1b next week. Life would be so much easier if Enquest provided FCF guidance rather than make us put the jigsaw together.

Rom

I responded to a simple question from Tommo as to what is the natural decline rate for existing producing fields. I quote industry standard data that over the life of a field the depletion rate averages approx 13% pa, which results in 90% of oil extracted over 15 years.

You called it b*llocks without providing any evidence supporting your opinion that producing fields deplete at single digit %. I have provided the evidence behind my statement. Shows us yours.

Romeron

The 13% decline rate is the natural decline rate without spending new capital on extending field etc. Of course overall company decline rates will be less than 13% if it continues to invest in bringing new fields on line.

Kraken is a good example which has declined from 26.6k BPD to 13.4k BPD over 3 years with limited investment. A 20% PA decline rate.

Sek

The NPV of contingent consideration liability to BP re Magnus is based on company’s calculation at 31 December 2022 less estimate of Magnus payments in 2023. The valuation of Enquest share of Magnus 2P reserves is included with 190m of 2P reserves. I note the valuation of the Magnus contingent consideration to BP is a pre tax valuation and BP will be paying tax at 75% on receipts unless it has tax losses. The Enquest 62.5% of Magnus would be worth approx $720m gross less 75% tax or $180m net.

Unfortunately under current tax regime 2C reserves are pretty much worthless. How much did Enquest pay for Bentley 2P reserves- I recall it was $2m for 100m+ of 2c reserves pre EPL.

You have a point that tax loss benefit per year is greater than $80m Magnus payment. So agree that tax losses might be worth slightly more than Magnus liability - they have a similar gross value of approx $950m.

I would be surprised if the market is ascribing any value to Sullom voe yet.

Valuation of 6 x FCF is greater than BP. Shell, Harbour etc who have much lower risk/cost of capital. Harbour is valued at approx 3x FCF less net debt.

Romeron

Extract from study of Norwegian oil fields

“The Norwegian oil production can be broken up into four subclasses; giant oil fields, smaller oil fields, natural gas liquids and condensate. The production of each subclass was analyzed to find typical behaviour and decline rates. The typical decline rates of giant oil fields were found to be −13% annually. The other subclasses decline equally fast or even faster, especially condensate with typical decline rates of −40% annually. The conclusion from the forecast is that Norway will have dramatically reduced export volume of oil by 2030.”

Tommo

We will have a better view on all in costs per barrel once 2024 guidance is provided in mid Feb.

On decline rates 13% pa seems to be the rough benchmark for NS.

SeK

I have looked at 2P acquisitions in the pre EPL era, such as Enq acquisition of Golden Eagle where we paid $375m for 18m barrels of 2P reserves (a little over $20 per barrel of 2P). $20 per barrel of 2P was a a reasonable consistent metric pre EPL.

Post EPL the acquisition of NS 2P reserves has fallen close to $10 per barrel. Serica paid $10 per barrel for Tailwind reserves and of course the recently announced Harbour deal is valuing both the WD and Harbour 2P reserves at $10 per barrel.

Accordingly my $1.5b decrease in 2P reserve value for Enq is based on 190m of 2P reserves, less 20m for Malaysia, less 20m for BPs 37.5% share of Magnus profits/FCF. So simply 150m of 2P at $10 per barrel reduction.

Your question however is a good one. Why has reserve values decreased by more than total EPL payable until 2028. There are two potential answers to this.

1. The market is assuming EPL continues post 2028 in some form

2. Enquest 2P reserves are worth less than the pre and post EPL average for NS. This may be the case as Enquest OPEX for 2023 is $25 per barrel compared with NS average of $17. Accordingly the value of Enquest 2P reserves may have gone down from say $12 to $6 per barrel, or $900m.

As a triangulation, $6 per barrel 2P reserves for enquest would give a 2P reserve value of 190mx6 = $1.14b+$400m for tax losses equals $1.54 b gross value. Less $450m for current debt, less $450m of NPV for future Magnus payments, less $350m of further lease payments. This yields equity value of $300m which is pretty close to market cap.

Kraken

While debt has been reduced by well over a $1b in recent years, the value of Enquest 2P reserves also went down by approx $1.5b as a result of EPL. Thankfully reserve valuations cannot go much lower while debt will continue to fall (how much and how quickly is the question). Accordingly share prices should go up from here by debt reduction less the net depletion of 2P reserves.

I think one of the reasons analysts might be forecasting lower production in 2024 is that enquest’ a organic cap ex in 2021 and 2022 replaced only about 30% of oil extracted. Hopefully 2023 will show a better replacement ratio once disclosed in the annual report.

While I accept there are other factors (principally oil price expectations), if debt reduction was $200m pa and 2P reserves extracted was 16m barrels, which was replaced with 6m barrels of new 2P reserves pa. The value of reserves will have decreased by $100m, resulting in a net increase in equity of $100m.

As discussed previously, a removal of EPL would result in NS O&G 2P reserves increasing by approx $10 per barrel or over 60P per share for Enquest. Unfortunately not going to happen in 2024, but I cannot see EPL running until 2028 without significant modifications.

SeK

Not long to wait, we will get 2024 guidance in about a months time.

Production guidance is going to be key along with OPEX. Production has declined from 61k BPD to 44K over the last 3 years and keeping production in 44k range for 2024 will be a positively received by market.

Thanks Sek.

We now have the interest rate on all the debt instruments.

All other things being equal you are right. However oil price expectation for 2024 has moved over the last 4 months. In October 23, the futures market was offering hedges at $85 per barrel for 2024. Currently it is in the mid to high 70s per barrel Brent across 2024.

Hopefully the only way is up from here for oil price. Interestingly if the conservatives had applied the inflation adjustment to the EPL threshold from the end of the measurement period (2022), as opposed to 2024, the oil price would be below the threshold. Unfortunately I cannot see gas ever coming back down to 50p per therm so moot (for you VOR).

LOL on mute / moot. Need to check my English.

The point i am not getting over is that if you go into a fairly illiquid Enquest bond market and try to buy significant amounts of bonds at discount, the price soon rises. More importantly if we have generated the cash to be in a position to buy the bonds back, our credit rating will have improved and the market value of bonds will have increased.

However agree that the priority will be repayment of RBL. I am struggling to find the interest rate on the new $150m US loan notes - I have seen it somewhere but can not find any reference in disclosures. Any one know?