Member Info for Stevo12

Tigar

The prospectus and fund raising for Golden Eagle stated that production to Enquest would be 10,500 BPD. This was reconfirmed in the November 21 trading update. However, during early 2022 the expectation was first downgrade to 7,500 BPD and then to 6,500 BPD toward middle of 2022 and then further downgraded to 4.300 BPD in 2023. A 60% lower level of production than assumed in justifying purchase price and almost more concerning was the 40% drop in production within 3-4 months of the acquisition. Where was the due diligence? And to rub salt into the wound, we pay a further $50m because of oil prices rises with no link to actual production delivered.

UKb

Two reasons - we paid $375m which is over $20 per barrel for 2P reserves of 18m barrels. I expect 2P to be downgraded in the 2023 financials with an associated investment write off. If downgraded to 12m barrels of 2P we will have paid over $30 per barrel as compared to current market value of closer to $8 per barrel.

Secondly the real FCF earned is not great. I’ll use 2023 as an example. Production 1.55m barrels at contribution of $58 per barrel ($78-20 OPEX) yields gross contribution of $91m. EPL payable $32m and interest on $375m acquisition price at 11% of $41m. This leaves a return of $18m from $375m investment (less than 5%). Without the use of Enquest’s tax losses it would have been negative return.

2022 is better with production of 2.4m barrels at $65 margin or $156m. EPL lower at $22m and interest same at $41m generating a net return of $93m. So my best estimate is real returns to date of $111m when you factor in funding cost of acquisition and tax paid. Going forward the much lower than forecast production and EPL will provide a very meagre return for our investment. The reality is that the acquisition was partly equity funded which has a higher cost than the 11% on Enquest debt.

The company’s assertion is that the deal paid for itself in 14 months is profoundly absurd. At 6,500 barrel a day for 12 months, the gross revenue at $85 per barrel would be $200m and that excluded any OPEX, Tax or interest on cost of funding.

Hanks therapist. Unfortunately this is the agreement for the original 25% of Magnus.

I think we are probably over analysing the arrangement, the important thing is that if we are paying BP $80m per year, Enquest will be generating $150m of FCF from Magnus pre tax and $100m ish post EPL. This has been a great deal for Enquest compared with the dog that has been Golden Eagle.

Londoner

Thoughtful analysis and I agree with your core conclusion that Enquest is highly leveraged to oil price movements and in a rising oil price environment should outperform the other NS O&G companies. The opposite is also true in a falling oil price environment. Over next 3-5 years, there is a good probability of rising oil prices due to lack of investment. Next 12 months is more difficult to call. Enquest challenge is to tough it out for next 24 months and get debt down by $100m plus per year and will then be in good shape. If we could sell a further 60% of Bressay and FPSO in the short term and realise $150m quickly then all the better. I think this would be more likely post election in 2025 when Labour reveal their true colours towards NS. Personally I think we will get a more pragmatic response and an investable environment for existing licenses which will see Cambo, bressay and other discovered fields progressed.

By the way, following our previous exchange regarding whether BP is responsible for funding 37.5% of future Magnus Capex, I reread the original prospectus and it was not clear so I checked with IR. They confirmed that BP is entitled to 37.5% of FCF from both the fields and infrastructure on acquisition and also any new wells developed by Enquest and that they contribute 37.5% of the capital costs until they have received a net $1b. IR also confirmed the contingent payments are paid gross to BP and BP is responsible for core tax and EPL on their 37.5%.

Unfortunately I did not ask IR as to whether BP is responsible for 37.5% of decom cost of new developments. Apologies a nerdy point for most people on this board!

The more important point is that the 2023 financial statements will disclose the expected payments to BP in 2024 and 2025 at management’s oil price assumption. We will also get guidance on 2024 OPEX, CAPEX, ABEX, Lease payments, tax payments, bond interest and most importantly production. From this we can estimate cash cost per barrel and FCF (debt reduction) based on various oil price levels. Until we get this info it is really not worth trying to estimate 2024 FCF as there are just too many variables.

Dumbly

I don’t believe there are any restrictions on the cash received from Bressay FPSO sale. Apologies if I was unclear, I am referring to the $39.5m received from our JV partners for their share of future field capex in H12023.

FCFY

I should have added that the advance cash call does not flow through the income statement, it is a balance sheet item.

If you take a look at the 2023 half year statement the $39.5m is shown as a liability to JV partners and also a component of cash balance. It is not our cash and is our JV partners contribution to future field development costs. I am guessing that it largely relates to BP’s share of future Magnus CapEx and possibly Malaysian project. It might also relate to Kraken development costs planed for late 24/early 25.

Enquest will also be paying out advanced development cash to the fields were we are not operators (golden Eagle etc)

Sek

I don’t think we are going to get another refund of EPL in H124 - unfortunately. I have no idea whether there will be further net cash calls on JV partners in 2024. Enquest is currently holding $130m of restricted JV funds which can not be used to repay debt or fund Opex. There is a risk that there is higher spend of JV funds in 2024 than new JV cash calls which will impact disclosed FCF. Enquest should really disclose FCF excluding JV cash funding and JV cash expenditure.

FCFY

Extract from the half year announcement. Note 1 in financial review section

“EnQuest net debt decreased by $125.0 million to $592.1 million at 30 June 2023 (31 December 2022: $717.1 million) as a result of free cash flow generation of $140.0 million, which includes receipt of $39.5 million relating to a joint venture advance cash call and the March refund of the Group’s EPL instalment payment in December 2022”

Sek

The exchange loss had nothing to do with the EPL repayment, it relates to exchange rate movement on non-dollar cash balances and debt balances. I think you are looking at one of the debt cascade slides within the half year presentation which aggregated EPL refund with exchange loss on cash/debt and presented it as Other. The exchange loss was $15m and unrelated to EPL.

Also the JV advances can not be used to cover Enquest Opex. They are restricted to capital spend on specific future JV projects and represent our partners share of capex budgets.

Sek

There are a couple of matters you need to consider in your first 1/2 2023 analysis. Firstly the refund of the EPL paid in error in 2022 was $30m and not $15m. Secondly Enquest received an advance cash call of $39m from its JV partners in first 1/2 of 2023 and included in headline $140m FCF. This cash does not belongs to Enquest but is for future JV specific costs only and is ringfenced. Excluding the above non trading items, which are disclosed by Enquest management, FCF was $70m in first half. FCF in second half of 2023 looks stronger excluding $60m EPL payments and $50m golden Eagle payment. However Brent was averaging almost $10 higher in second half of year.

Kraken

When you say next year for shareholder returns do you mean 2025? I agree an interim dividend paid in nov 2025 is a possibility. However totally dependent on oil price and the reduction in analysts forecasts for 2024 oil price is probably driving the jeffereys SP forecast. If Brent can average $80 plus in 2024 then game on. In the $70s then it is going to be a struggle to materially reduce debt.

I will update Enquest 2024 cash cost per barrel forecast (broken down by all components) once Enquest release guidance on 2024 production, OPEX and Capex.

2024 Brent forecasts have declined by about $10 per barrel over the last 3 months which is more impactful on Enquest with our relatively high cash cost per barrel compared to other NS oilers.

Kraken

Companies are required to disclose in their financial statements each year their lease costs for the following 5 years broken down by next year, 1-2 years, 2-5 years and more than 5 years. The auditors are required to confirm this disclosure.

The 2022 financial statements show a lease reduction in 2024 and a further reduction in 2025 to 2027, but more like a 30% reduction from 2024 to 2025.

The 2023 financial statements will update this analysis and will provide both 2024 and 2025 lease payments as well as 2026-2028 lease costs. Suggest we reconfirm with IR once the 2023 financial statements are released.

Sek

All will become clear with the release of 2023 results and 2024 guidance.

I took a look at 2021 and 2022 2C reserve conversion and across the two years Enquest added 13m barrels of 2P reserves from CapEx and produced approx 36m barrels of oil. 2P reserves were retained at approx 190m barrels as a result of the 18m 2P Golden Eagle acquisition and reclassifying Malaysian 2P from net to gross to increase 2P by 11m.

I am hoping we will get more 2P in 2023 from the $160m capex as reserve replacement ratio needs to improve.

Sek

Future lease payments are detailed on page 163, note 27 of 2022 financial statements.

Rom

Correct. The EPL reduction is 121% of capex at 35% or 42p reduction in EPL per each £1 of capex.

The core tax is reduced by 121% of Capex at 40% or 48p per £1 of spend. For Enquest this will be added to our £1b of tax losses for use in a decade or so.

Accordingly new developments really do not work for Enquest. We need to buy producing assets.

Sek

Enquest has only given the EPL cost for the first 6 months of 2023 as far as I am aware. However much more accurate to use this as basis for 2023 estimate, rather than trying to extrapolate 7 months of 2022 at 25% rate.

The lease costs are forecast by the company to reduce from $151.6m in 2023 to $127.6m in 2024. A solid $24m saving.

While the $1.2b is gross value of reserves, the valuation of the shares would reflect the other obligations and assets that come with the legal entity, including debt, leases and tax assets. Debt and lease liabilities approx $1.1b liability and tax a $0.5b asset. This would as a very broad brush give a $600m valuation - above current market cap.

On year end debt it is really difficult to estimate 2 months cash flows which are impact by timing of loads and payment cycles. I am sure the company will do their best to present the best cash/net debt position possible. We should however recognise that over $100m of cash is in restricted JV accounts and can only be used for the specific purposes of the JV and an element belongs to the JV partners.

The guidance I am looking out for in 2024 is firstly production and secondly OPEX. I am hopeful that production can be maintained partly due to last years Kraken outage. However I suspect that OPEX could be materially higher than 2023’s $400m, which benefited from Kraken compensation (possibly $440m). 2024 Bond interest and lease costs will be disclosed along with forecast Magnus payment and RBL interest is estimable. Interest earned on cash balances will be interesting (very low in first half of 2023).

The EPL cost for 2023 to be paid in Oct 24 will be disclosed in 2023 financial statements. Management might get this wrong as in 2023 but we need to use their guidance and payments to Malaysian government will be forecastable

I very much welcome the bressay / viaro deal but I think the majority of the value is for the FPSO as opposed to 2C reserves. We still need a major partner with much deeper pockets and who are paying underlying tax as well as EPL. If Enquest progresses the project we would only receive 45p for each £1 of CApex, as opposed to say a harbour who would receive a 91p tax reduction for each £1 of expenditure. Enquest needs to buy producing assets to use tax loses not engage in another major development from scratch (remember how much money we lost on Solan and Kraken has also lost money). We are making good money on Magnus and we should focus on what we do well, namely extending the lives of established fields.

Also not sure we are adding 17m a year of 2P reserves a year. I don’t think 2P reserve depletion and replacement has been disclosed in 2023.

Sek

Hope you had an enjoyable Christmas.

In respect of your 2024 FCF forecast there is no need to estimate EPL, Enquest have told us that the EPL charge for first half year was $76m and should be similar in second half due to realised oil price being higher, offset by higher OPEX.

The Harbour deal has provided a useful proxy for the value of 2P reserves and the impact that EPL has had on valuations. Harbour’s 2P reserves are currently valued at approx $8 per barrel as opposed to $20 per barrel pre EPL (Enquest paid $20 per barrel for golden Eagle 18m 2P reserves).

Using 150m 2P reserves for Enquest (I have excluded 37.5% of Magnus as all FCF goes to BP) this is a £1.4b reduction in equity value or 75p per share. The challenge with Enquest is that its liabilities (debt, leases, deferred consideration) remained the same while the value of its 2P reserves decreased. The good news is value of Enquest tax losses have probably increased as oil prices recovered over last couple of years.

The reason I raise this is that the EPL will end, It might be 2028 but hopefully earlier. We just need to stay in the game. The impact of EPL changes on Enquest share price is much more substantial than any other listed NS O&G. Harbours share price might double, Enquest SP would 6X if EPL ended.

I can also see a Labour reversal of its energy policy post election driven by Union pressure/ realism.

On hols and promised myself I would not be spending time following the market, but impossible to not take a good look at this deal.

Firstly while it had been muted that Harbour and Adnoc were looking at this deal, I assumed it would be just too big for Harbour to execute. So kudos to Harbour leadership and a demonstration that they are highly regarded in the O&G sector.

My take on the deal is that it is a win:win for both sides. Valuation metrics are interesting with Harbour’s 2P reserves valued at $9.30 per barrel at £3.60 per share, compared to $8.15 for WD’s 2P reserves at Q4 24 completion (assuming FCF from June 23 to Nov 24 is close to $2b). This is certainly not the very one sided PMO deal, but it takes HArbour to a very different level with investment grade credit rating, FTSE 100 status, global diversification and real scale..

Interesting how EPL has impacted deal values. NS 2P reserves were achieving $20 per barrel pre EPL and HArbour was valued at $6 per barrel of 2P prior to this deal.

I was hoping that HArbour shareholders would have retained the 2024 FCF, similar to WD’s shareholders, but looks like we will have to settle for $100m interim dividend.

I would expect the SP to be much closer to £4 on completion as the various regulatory hurdles are cleared and Oil and Gas remain at or above current levels. Should be a positive 2024 for HArbour.

Kraken

Enquest is required to hedge a minimum quantity under the terms of the RBL and It has chosen low cost, $60 puts as downside risk management to comply with RBL. In essence Enquest is exposed to future market prices with a $60 backstop.

Do you ever read management guidance? They tell us OPEX, Cap Ex, Decomm. They disclose current and future lease payments and interest expense. They provide everything you need to calculate FCF cost per barrel which is $65 and I have provided details of these calculations in the past. It is not negativity it is just reality based on management information.

I have been invested in Enquest for a number of years and have moved from equity to mix of debt and equity in mid 2022. I have not added or sold since.

Anyway that is it for me - off to airport.

All

I have enjoyed the debate this year and i have certainly learned a lot from this board. The principal reason for these boards is for PIs to share knowledge and insights and for us to challenge our own thinking. Group think is probably one of the most dangerous conditions.

The family and I are heading to sunny climes until the new year and I’ll be checking back in after Christmas.My final thoughts for 2023 and 2024.

1. O&G is a good place to be invested for next 5 years, but diversified across majors and minors and also US upstream. Mix of high yield debt and equity also de-risks.

2. Labour will not be as bad as feared for NS O&G thanks to sensible Unions (never thought i would say that!)

3. Real risk that OPEC gets frustrated again with US oil growth and flushes the market again to bring oil down to $40 for six month to curtail US production growth. Saudi could add 2m per day of production relatively quickly. Unfortunately would not impact gas much and EPL not be impacted. Although could trigger a debate.

4. Enquest has a high cash cost per barrel (probably the highest in NS) - i estimate that pre tax cash costs are $65 per barrel and we pay EPL on oil price above $50 per barrel. Need to get cash cost per barrel down by $10-15 though reduced debt cost and lower leases.

5, surprised and a little disappointed that Enq did not lock in 2024 hedges in the mid 80s, rather than go for $60 floors. We could survive a $40 six month flush but why not secure a price where enquest has guaranteed $20 per barrel FCF?

6. Expect at least 1 deal by end Q1 24 to buy NS production - 10k BPD

Best wishes all for Christmas and speak again in new year