Member Info for Stevo12

Mrc

You are correct, I do not know how far away Enquest are from FDP. However if they were actively pursuing FDP they would be talking about it much more in various announcements and would be spending a lot of cash. My assumption is (and it is only my assumption) that since Harbour and Equinor pulled out of Bressay, it has been put on ice.

If a fairer tax regime (or at least more predictable) is introduced post next GE, then chance of projects progressing.

Dumbly

There are specific O&G rules that exempt 50% cap for ringfenced tax losses.

FID would be fine to book losses. But FID is so much more than a credible plan - all finance is signed up, partners are contractually committed and orders placed for FPSO and required kit.

We are a million miles away from an FDP let alone FID and partners (Eqinor and harbour) have asked away from Bressay.

Mrc

Because the losses were incurred pre 2017 by Xcite and were subsequently acquired by Enquest, unfortunately they are ringfenced to profits earned from bentley. Heavy oil field allowances impact the quantum of initial allowance available not how losses are carried forward

Dumbly

Comments as follows

1. Yes the losses have a cash value of $920m pre discounting. For accounting purposes always recorded gross.

2. There are various ring fencing rules within the OG sector for tax loss utilisation, but basically the 50% restriction of loss utilisation does not apply. There would be different rules on acquisition but for now assume no restriction on loss utilisation

3. Assuming $500m taxable profit (post investment allowance) but before interest of $100m per annum. EPL would be $175m and tax loss utilisation $160m pa (500-100*40%). EPL does not reduce profit subject to core tax.

4. So probably 6ish years of life if oil trades in 90-95 range.

5. Very bold statement from IR that Bentley will be subject to FID in 2025!

BP’s contribution to ongoing Capex will be treated as a reduction in gross Capex and not income. Most likely is that it deducted from the payments made to BP for their 37.5% of FCF.

Enquest will not pay EPL or core tax on BP’s share of Magnus profit, but equally will only get investment allowance for 62.5% of Capex spend

Tigar

Have a read through note 22 - contingent consideration -in the 2022 financial statements, which states that enquest and BP share 50:50 in 75% of the FCF from Magnus.

BP is responsible for funding 37.5% of Magnus ongoing Cap Ex and receives 37.5% of pre tax FCF (up to $1billion). It has been previously confirmed by management that BP is responsible for paying tax on its 37.5% share and payments to BP by Enquest are effectively a deduction against Enquest taxable profits.

Accordingly BP does not benefit from using Enquest carried forward tax losses

Romaron

Yes $0.9b of tax losses are included in financial statements. Bentley losses and another $300m of other losses are excluded on the basis no current ability to use them.

Dumbly

Tax losses are used on a FIFO basis and certainly pre 2022 the losses were being added to each year due to both capital expenditure and trading losses.

It is possible to go back through the financial statements over last 6 years to identify losses arising over last 6 years but not sure it is worth it. The financial statements show our tax losses had an undiscounted book value of $900m and are a major asset of the business. Without these losses we would be paying tax at 90% plus and would be unable to repay debt.

The challenge is to use the loss shield to repay debt and remove high interest costs over next 3 years.

Tigar

That is not the way the Magnus deal works. We pay BP 37.5% of Magnus FCF until we have paid a deferred consideration of $1b. From a tax perspective we are only taxed on 62.5% of Magnus profit (from both a core tax and EPL perspective.). BP is responsible for taxes on its Magnus payment.

You are right from a financial reporting perspective that Enquest reports 100% of production, revenue and profit and then puts the BP 37.5% interest through as a balance sheet movement to present higher production/ revenue etc. This is legitimate accounting (due to $1b backstop) although pushing the envelope somewhat. However do not be fooled, BP has a 37.5% share of future Magnus FCF and the question is what payment would BP accept to give up their 37.5% interest in FCF which would improve Enquest FCF by approx $80m pa..

Romeron

Basic rules as follows:

1. Tax losses incurred pre April 2017 can only be offset against the activity that generated the loss. For example Bentley tax losses can only be offset against taxable profits from Bentley. I do not know how much of total Enquest tax losses are pre April 2017 and as such restricted.

2. Tax losses incurred post 2017 can be carried froward and offset against other group companies future profits, but on an acquisition there are a whole raft of rules which restrict or prevent usage. Most of these are avoidable if there is a real ongoing business of similar size and scale and not just a shell company. There is however a maximum 50% cap on the amount of taxable profits that can be reduced through use of tax losses post acquisition.

Much easier for Enquest to buy 2p reserves and use its tax losses than be acquired.

I would have thought the most logical activity would be for Enquest to buy out remainder of BPs interest in Magnus FCF which would allow use of core tax losses, while paying EPL.

Yes in bed with flu and feeling v grumpy

Kraken

I did not get it wrong, management got it wrong by putting out incorrect guidance on 5 september that Opex was going to be $425m and EPL payment $75m. It is the revision of these number down by $40m which will move Enquest from FCF breakeven for H2 to $30-40m positive.

I presume your approach is just to ignore management guidance and make up your own numbers. Good luck there. Hopefully the new CFO will be better at forecasting.

BaysilH

I have the gross benefit of the various hedges falling away at $1.5b (assuming average gas 1.20p per therm). A great boost for profit and cash , but we also need to recognise that Harbour is due to pay first full year EPL payment in Oct 24 which, based on interim statement is in the $600-700m range.

However there may be an unfortunate curve ball coming in that as Harbour uses up the last of its tax losses it will be required to move from paying tax 10 months after the year end to quarterly payments in year. This would unfortunately see Harbour paying the 2023 EPL and the 2024 core tax and EPL in 2024. It all depends on the timing of using the last of the historical tax losses. Hopefully we will get a guidance on this with the year end results. the 2024 tax on the hedging benefit alone will be over $1b and if 2024 is not the double tax years then 2025 will be.

This maybe why Harbour is being cautious with buy backs as well as preserving funding for acquisitions. There would certainly be value in a target with uk tax losses but tax planning is quite complicated and EPL rules include penalties on transferring fields between legal entities.

However good problem to have to solve.

Sekforde

Before anyone gets bent out of shape and accused my of deraamping, the following statements are factual and not opinion.

In order to hit $250m FCF (excluding golden eagle payment) for 2023, Enquest would need to generate $78m FCF in November and December. Production entitlement is approx 1m barrels per month (adjusting for BP Magnus entitlement and Malaysia PSC) and requires FCF of $39 per barrel.

Enquest cost per barrel - Opex, Interest and Lease, Capex and Decomm costs are approx $67-70 per barrel and would require oil to average over $100 per barrel to generate $80m of FCF over the 2 months.

Is it possible to achieve close to $250m with Oil in the low $80s? Well yes if Enquest can delay the Magnus payment into early January or make Capex payment in Jan rather than December. BP and suppliers would probably be supportive of a few days delay.This will however be visible in the balance sheet.

I do not have enough info from company to comment on 2024 and as ever the oil price assumption is key along with managing/ maximising production levels, WE will get guidance with the year end results including the 2024 EPL payment.

Tommo

Net debt at end of October was $7m lower than at 30 June 23. As I have stated previously my forecasts were based on information provided by management on 5 September and repeated in subsequent shareholder presentations, namely that Opex would be $262m for the second half of the 2023 and the EPL payment would be $75m on 31 October. Now reduced to $237 and $60m

While I am pleasantly surprised that there is additional $40m of cash coming in this year, I am equally concerned as to the accuracy of management’s guidance given it was only relatively recently updated. You can only base forecasts on info provided by management but if this proves to be unreliable they will start to lose credibility with analysts and institutional investors.

A little bit of positive news for Kraken, I have a very old friend who is now senior in one of the more influential trade unions ( I wont mentioned which one). We had dinner earlier this week and he noted that their view, and he implied other unions too, was that the need for supporting ongoing NS oil and Gas development was essential from a jobs, fiscal and security perspective and that the trade unions were pushing Labour for a grown up debate on transition and energy policy.

He accepted that the Labour Party was playing the green card strongly in the run up to the GE, but a much more supportive view would emerge post election. We talked about EPL and he thought it was here to stay (until 2028) but should be modified to reduce impact. He also noted that the Labour Party policy is to amend the investment allowance to bring into line with other UK business where 100% of Capex is allowed as a year 1 deduction, as compared to the 121% currently available to O&G investment. He understood there was no intention to remove it entirely but to remove the additional favourable benefit that O&G receive. This would result in tax bill being reduced by 75p for each £1 of CapEx as opposed to 91p currently for those companies without tax losses.

Accordingly I am comforted that Labour will not be the disaster to NS O&G that many people think and the Trade Unions will moderate any policies or actions that threaten NS jobs and investment.

I have acknowledge that my forecast of zero FCF for second half of 2023 is now wrong and $45m positive second half FCF of $45m looks achievable. However I do not just pick numbers out of the air. My forecast was based on information provided by Enquest less than 2 months ago that Opex for 2023 would be $425m (revised to $400m) and the EPL payment would be $75m (as opposed to actual payment of $60m).

I can only base my forecasts on the data and the forecast provided by the company and if Enquest revises its estimates then this will impact my model.

Sekforde

The reduction in EPL payment for 2022 was an unexpected surprise and may well result in 2023 EPL to be paid in Oct 24 being below my $150m estimate. I hope we will get guidance from the company with the 2023 results. CapEx has been higher in 23 than in 22 which should help reduce the EPL, but equally profits in 2nd half of 2023 have been higher than forecast due to Opex being $25m lower and oil prices being higher - which will increase EPL for 2023. The honest answer is there are just too many moving parts to come up with a reliable forecast until we see 2023 results.

On interest, I am not expecting a big reduction in 2024 as the loan note interest will have increased due to the 7% loan notes being replaced with very high yield bonds. The RBL debt has reduced but the interest rate may be higher due to increase in BOE rates during 2023 and unlikely to drop much in 2024.

I did take a look at Kraken and lease costs and they start to fall in 2025. The future lease payments are disclosed in the financial statements for the next 5 years.

The route to reducing interest is to accumulating cash from 2024 trading and redeeming the high yield loan notes ASAP which has to be a priority over shareholder returns given the interest rate and that they are not an allowable expense against EPL.

Thanks Redbuffet. I have taken a look at the loan note agreement and you are absolutely correct. Accordingly agree that a merger could reduce interest cost by $30-40m following repayment of loan notes from Harbours RBL. This could be worth $100m plus in market cap of combined group.

Kraken

You really are clueless. Provide some insight or argument to challenge other views as opposed to just petty name calling.

Please share which of my observations are incorrect and why. I would be very happy to have a debate.