Member Info for Stevo12

Not sure if everyone saw the updated S&P credit grading and report following the new term loan being finalised in Sept last year

Worth a read

https://disclosure.spglobal.com/ratings/en/regulatory/article/-/view/type/HTML/id/3055103

Unfortunately i do not believe the analysts have updated average interest costs since the 7% sterling loan was replaced by the new US term loan in Q3. I do not recall whether the new US term loan is fixed interest or variable This will all be detailed in the 2023 financial statements when published.

The credit adjustment spread is described but not quantified in the financial statements.

Unfortunately once the company starts buying bonds in the open market the price goes up. There is also a circular argument in that once a company has enough cash to redeem debt, the credit risk drops and the price of loan notes goes up. Realistically early redemption under the terms of bonds is most likely.

All a mute point at mid 70S Brent.

Do you have any idea what the cost of the credit adjustment spread is?

Mrc

I dug out the new RBL interest costs which is. “Interest accrued at 4.00% plus a combination of an agreed credit adjustment spread and Secured Overnight Financing Rate (‘SOFR’)”. What is not clear is the cost of the credit adjustment spread. Anyone have any idea?

Mrc

My recollection is that the new RBLfacility was libor plus 7%. I have tried to find where i picked this up from but i am struggling. I will listen again to the webcasts.

The interest rates on all the bonds are disclosed in the company’s financial statements/ announcement and they have redemption clauses prior to 2027 maturity. The interest rates on the bonds range from 9 to 13%.

New Year’s resolution !

Agree the $450m EBITDA for second half is ambitious but trying to be more positive! Higher OPEX in H2 could have an impact

Londoner

I have H2 EBITDA $50m higher than H1 due to realised oil price being $7-10 higher than H1, with production being 2k BPD lower.

Tommy

Correct there is a tax deduction equivalent to 121% of capital expenditure, resulting in EPL being reduced by 42p for every £1 spent.

SEK.

Certainly. While the EPL was applied to profits for the last 7 months of 2022, i will use the last 6 months for simplicity and extrapolate for 7 months.

EBITDA H122 = $443m, Capex 61x121% = 74m, Magnus 46m, finance lease $88m. profit subject to EPL =$235m @25% = $59m. Extrapolated for 7 month 2022 EPL =$69m. Actual EPL $60m.

On interest rates, bonds range from 9% to 13%, RBL between 13-14%.

VOR

On EPL tax rate I am drawing a % equivalency rate with the 40% historic O&G rate.

taxable profit is at its basic level the difference between revenue generated and tax deductible expenses. As the EPL does not allow interest and decom as a deductible expense, the taxable profit on which the 35% is applied is higher that the taxable profit for normal 40% tax.

Perhaps I can clarify with a working example - the taxable profit for Enquest for 2023 is estimated at 270m (after lease cost, Magnus payments, capital allowances etc - see below) and at 40% tax we will generate a $108m tax liability which will be offset against tax losses to pay zero. EPL will be charged on a higher profit of $420m (due to interest and decom not being allowable) and will generate a tax liability of $420m @35% or $147m. A higher tax change than the core 40% tax rate and equivalent to 54% normal tax charge. This is how deceptive and malicious the EPL is and so impactful on O&G companies with relatively high interest and decom cost.

By the way, I believe the above examples will be pretty close to Enquest actual for 2023. In very simplistic terms and as a rough proxy, EPL will be 50% of pre tax FCF from 2024 onwards.

2023 EBITDAX and taxable profit estimate

EBITDA $850m - $150m lease - $80m Magnus - $90m interest - $200m cap allowance- $60m decom = taxable profit of $270m.

SEK

I agree that any form of shareholder returns would be a huge sign of confidence as well as a statement that the previous debt restrictions on distributions have ended.

I do fear that your might be disappointed that interest expenses will not drop as much as you expect in 2024. Enquest will be paying approx $10m more interest on the $600m of bonds, as they replaced $150m 7% bonds with 13% bonds. Interest rate on RBL will have increased but with say $150m average lower debt, so may be $10-15m saving. We earn very little interest on the cash at bank which is normally indicative that average monthly cash balance is much lower than year end and half year reported cash balance.

We need a strong H1 24 FCF to provide confidence that Enquest can generate FCF even with Brent in the mid to high 70s. We await management 2024 guidance!

To add to the debate, a company always faces 3 choices with cash generated:

1. Do i invest in the business to maintain or grow? - yes if you believe the return on that investment is greater than your shareholders could generate elsewhere.

2. Do I pay down debt? Yes if you are over leveraged resulting in an elevated credit risk which drives an uncompetitive cost of debt and cost of capital.

3. If I still have cash left after 1 and 2, return cash to shareholders via dividends or buybacks.

There are advantages and disadvantages to both buybacks and dividends but, as Romeron notes, it is largely a mute point as i think the very best we will get this year is a narrative which describes the pathway to shareholder returns. I do agree that there could be a significant event in Q1 - will it be an acquisition which we definitely push the dividend/buyback can down the road or a disposal/merger.

Romeron - unfortunately Enquest’s EPL rate is closer to 50% due to interest and decom not being offsetable.

Romeron

Firstly the green eco warriors never mention gas, where 90% plus of NS gas goes from field to British homes. There is some exporting in the summer when UK gas usage drops and this could be quickly brought to zero with some storage.

Oil is more difficult because of the different grades produced which can only be processed at specific refineries. Unlikely to be any new refineries due to capital cost. We just need a simple message around efficient inter-connectivity between UK and Northern European refineries resulting in lower CO2 than shipping crude half way around the world.

In my view the UK government should act to remove consumer energy price volatility. Firstly renewables and nuclear pricing should not be linked to gas prices and should be fixed on an inflation linked basis. Secondly I would not object to UKstate run energy company having the right to buy all UK gas at a fair inflation linked price agreed at FID, providing an equitable return on investment. Effectively a government price hedge. Oil a little more difficult but not as volatile and we are all use to petrol prices going up and down.

Sek

I think you are pretty close in your FCF forecasts. I just worry a little on some of the cash flow timings on items that we don’t understand such as Magnus payments, Malaysian PSC and royalty payments etc which can materially distort short term FCF.

I think reasonable to predict hitting 0.5 ratio by half year if oil holds in high 70s/low 80s. However if we are hit with $150m EPL payment in October 24 it may result in management being more cautious.

My hope is for share buyback rather than dividend at these prices and in many ways I would be concerned if there is not at least a small buy back in 24 as it displays lack of confidence.

I do think there is an announcement coming soon. Management were clear in September that they had 3 or 4 deals in discussion. It might be a sale/merger to realise tax losses and access cheaper finance (harbour will only be paying slightly more interest on their $4 billion+ of new debt than Enquest does on its $600m of loan notes). However I would be happy with a new no cash upfront 10k BPD end of life field as long as Enquest is operator.

FCYY

All good intent but until EPL amended all just warm words.

Banbury

Multi country Regulatory approvals take time but should not be a problem as we do not have overlapping businesses except for Mexico. I am sure our man in Mexico will be helpful in this regard.

Harbour will look very similar to BP Aker which has a market cap of £14b.

Mansadman

Golden Eagle would have been a great deal if it had delivered the 11k bpd disclosed in the prospectus. The fact that production fell to 6k within a few months of deal and now is 4k bpd is the problem. The question is did Suncor know this drop was coming and was Enquest mislead or did Enquest also know.

To be fair to Enquest the EPL has also impacted the field economics, but a 60% drop in production in a little over a year!

Apologies guys, Solan nothing to do I with Enquest. Should not post after too much vino..

The principal point though is that Enquest should stick to what it is good at. The production asset write offs over he last 4 years have been over $1.3b.

SEK

There is certainly a contradiction as the company wrote down the Golden Eye investment in the 31 December 2022 audited financial statements by $36.1m. These results were released 1 month after the trading statement presenting Golden Eye as a great investment with 14 months pay back. The write down at 31 dec 22 was a result of management’s forecast that the total projected net cash flows from golden eagle over the total field life will be less than the purchase price. The company has booked another write down of Golden Eagle at 30 June 2023. Accordingly latest estimate is that we will recover $60m less than paid over total field life, as compared to plus $100m disclosed in original prospectus.

Also in addition to the cash paid to Suncor we took over $120m of Suncor’s decom responsibility.

Agree Magnus has been magnificent. The forecast is that Enquest will earn approx $2b of FCF over Magnus field life. Huge kudos to AG.

I think Bresssay and Bentley is too early to call and I expect we will find that the majority of the value is attributed to FPSO rather than the field. I really worry about Enquest’s ability to develop a new field. Solan and Kraken have been financial disasters and the principal reason we have almost $3b of losses. I would certainly prefer to find an experienced operator who will take 60% equity and give Enquest a free carry. We need to focus on taking operatorship of end of life fields and extending life and deferring decom. If management had stuck to their skill set we would not have lost $billion on Kraken and Solan.

I do not believe management are fraudulent but are certainly pushing the envelope in a number of areas - particularly around production entitlement on Magnus and Malaysia.