Member Info for Stevo12

Sekforde

There is generally a state of backwardation or Cantango in the oil market. The difference between spot and future market price is essential the consequence of the market’s view (the aggregation of all trades) as to whether the oil demand / supply balance will be better or worse in the future than today. We know how sensitive oil is to small changes in demand/supply balance and both demand and supply are exposed to a lot of unpredictable influences.

You are correct that there are arbitrage processes which cap the Backwardation or Cantango amount but not eliminate them. As an example, when there is cantango an oil trader can buy oil at current price and simultaneously take out a forward contract to sell that oil in say 12 months time at a higher amount. They have to then pay to have oil stored and as long as price of storage is less than the cantango difference, there is money to be made. As the amount of oil in storage increases, the price of storage rises until it matches the Cantango margin and the market stabilises.

The markets view today based on the average of all future contacts being traded is that oil price will be high-$80s in January 24 and decreasing to mid $80s by end of 2024. If you believe oil prices will be $95 in 2024 and you are correct, you can make a fortune trading oil options by buying oil at $85 for June 24 delivery and selling at $95.

Generally the futures markets are more stable, while spot prices are much more volatile due to short term supply or demand changes (a hurricane, a war or pandemic destroying demand). O&G share prices movements are much more linked to changes in Oil futures pricing that short term spot rates.

Sekforde

The oil futures market beyond 18-24m is not useful guidance as volumes are very low.

The futures market is based on an option price and not the full payment up front.

Tamak

The future lease payments for 2023,2024, 2025 and beyond is disclosed in note 27 of the Enquest 2022 financial statements.

Re Malaysia, we know per the June RNS that PSC payment in 2022 was $77.8m, royalty payment 29.8m and corporate tax $14m. Malaysian revenue reported in 2022 was $159.6m (reported net of PSC and Royalty) which at 6,300 BPD yields $69 per barrel. PMC and Royalty payments of $107.6m is $46 per barrel.

In the first half of 2023 Malaysian revenue was $68.1m from 8,200 BPD or $45 per barrel (after PSC and Royalty payments). Average oil prices in H1 2023 was $79, so PSC and Royalty was approx $34 per barrel or $51m for H1 2023. With oil price higher in H2 2023, the second half payments to Malaysia will be approx $5 higher per barrel or approx $58m. Accordingly my best estimate of PSC and Royalty payments to Malaysia gov is $109m in 2023. This is very similar to 2022 as a result of production being approx 30% higher and oil price approx 22% lower.

Tarmak

Thanks again for your work on the forecast which I find really helpful. A couple of questions:

1. Lease payment due in 2023 disclosed by company are $151.6m in 2023, reducing to $127.6 in 2024. You are assuming a lower level of payments, where do you derive your lease payments from?

2. I have been trying to better understand the PSC arrangement in Malaysia. You have the PSC as 33% to Malaysia/ Petronas. I thought it was 50% but could be wrong. There is also a royalty of 10% of revenue pre PSC.

Good point Sekforde. The RBL facility will require Enquest to hedge a portion of 2024 production and it will be interesting to see what hedges are put in place for 2024. Hopefully current prices provides a good opportunity it’s to lock in some decent hedges.

Looking at the futures market, hedges in the mid 80s are available for 2024. However they may go for a floor and cap strategy or just a put option. We should know more in November.

Do we know what Harbours working interest is in Earn? Is it 50:50 with Dana.

Surprised on RNS from Harbour

Sekforde

Agree $400m FCF pre EPL for 2024 is possible if oil averages $102 for 2024 (same as 2022).

Personally I don’t think $100 oil is healthy for the economy and medium term oil demand. Oil in the high $80s keeps the industry below the political radar and does not trigger inflation.

$10 change in oil price impacts FCF by approx $140m pre EPL. The Brent futures market is selling/buying Oil in the mid to high $80s for 2024. see https://oilprice.com/futures/brent/

For once I agree with Kraken. Enquest could easily have gone the way of Premier Oil and reducing debt from $1.8b to $600m is a huge achievement. I would always prefer to be invested in a company where CEO has real skin in the game.

He has always come over as a very balanced individual with high integrity. Yes Enquest was far too highly leveraged, Solan was a disaster and Golden Eagle is looking like a real puppy, but Magnus was an excellent acquisition and Kraken is also a real success.

I wish I could have seen EPL coming!

Auson

You are correct that Enquest debt and equity will move in the same direction and the Loan notes are not a hedge. However the debt is much less volatile and generates yield and, in the worst case scenario, (as it did with Premier Oil) will convert into equity.

A short on Enquest equity would be a hedge against the loan notes but I personally see the most significant risk is oil price decline as opposed to company specific risk. I am overexposed to O&G via Big Oil (Total, Shell, BP and Chevron) as well as mid tiers in US shale and NS (Harbour, Serica and Enquest). I have offset some of this risk through shorting USO which tracks WTI as opposed to Brent. This short has been very expensive over the last 2 years but BIG Oil share price and US mid tiers have done fantastic - as would NS mid tiers if it had not been for EPL.

I have seen 3 tax raids on NS oil and the previous 2 were removed once the damage became clear and political rhetoric calmed. The EPL will be removed or materially modified but past episodes have shown it takes about 2 years.

Sekforde

Fully agree that without a change to the EPL this will be a slow but progressive journey with each $1 reduction of debt broadly translating to a $1 increase in equity value. The two key assumptions being whether CapEx of $120m per year sustains production and will oil hold at $90+. My personal view is that oil will in the medium term average $90+ but there could be some short term dips. On production, Kraken is on the decline and I do not know enough about Magnus and Golden Eagle to understand whether it is possible to grow production to offset Kraken natural decline. These are late life fields and I think a more realistic outcome is that production is maintained through acquisition of producing fields to use our tax losses. Another Magnus like deal would be perfect.

I should add that of the 45,000 BPD you reference in your $400m pre EPL calculation, BP receives all FCF for 6k+ BPD.

Krakenoil

As I have said many times in prior posts, Enquest’s provides one of the best upside opportunities for share price increases due to both its financial leverage and the EPL impact.

A removal of the EPL will result in a 4 fold increase in the share price immediately and two years of repayment of debt at $150m per year will translate to a doubling of the share price even if EPL is not amended.

This is why I retain some shares to be exposed to this upside. However I also hold Enquest debt to derisk the impact of oil falling into mid 70s. I hope oil will stay in the mid $80s plus but there is no certainty.

Kraken

I have been clear in the past that I am invested in Enquest with the majority (75%) in 9% loan notes which are currently yielding 10% and the balance in shares. I used to be 75% equity and 25% loan notes but I prefer the predictable yield and lower risk until there is greater clarity on the tax and investment environment.

I have posted what I believe is an accurate assessment of Enquest’s short term profitability and FCF based on info provided by the company and Oil price assumptions. I am sorry if this does not align with your perspectives and rose tinted wishes. However trying to discredit rather than debate and challenge other perspectives is both dangerous and normally an expensive trait.

I would like to read an informed, reasoned argument from you as to why you believe H2 2023 will generate significant FCF and how debt will be largely repaid in 2024.

Well why don’t you provide a balanced narrative on your posts rather than post an overly positive and misleading message..

The positive news is that the new term loan is available to 2027 but is very expensive.

Kraken.

While I am sure you will hate me for pointing out that the £111m of 7% retail bonds have been repaid by taking out a new $150m term loan in August 23 on which we are now paying 13% interest (7.9% plus SOFR).

I hope that we are able to repay this term loan in 2024 from FCF without significant penalty as 13% interest is abusive. This has to be priority over distributions to shareholders.

Kraken

Could you provide a breakdown of your $58 breakeven between Opex, CApEX, ABEX, Interest, Lease costs, deferred consideration on prior acquisitions, taxation etc.

My intention is to provide an informed and balanced debate and when i see uniformed comments, which are either out of ignorance or a deliberate attempt to misrepresent, i try to respond with facts.

I very much welcome a debate and I recognise I might have missed or misunderstood something. This is the reason for these discussions to make us all better informed. However for some on this Board they prefer not to debate but to try and dismiss views and facts which don’t align with their own perspective. This is very dangerous whether it be in investing or politics.

Jan

Just to explain a little better. Enquest originally had a 25% working interest in Magnus and negotiated with BP to increase its interest. BP provided various support to Enquest to fund the deal, including a vendor loan and BP retained an entitlement to 37.5% of future Magnus FCF up to a maximum of $1b.

This could have been treated as a 37.5% working interest or a deferred consideration for accounting purposes - Enquest treated it as the later which enabled it to disclose 100% of Magnus production, revenue and EBITDA and treat the payment to BP as contingent consideration (which is excluded from income statement).

The economics and cash flow are the same - BP receives 37.5% of Magnus FCF and is responsible for 37.5% of future Magnus Capex and also tax (including EPL) on 37.5% of Magnus profits. However Enquest is able to legitimately overstate its production and revenue (relative to its true economic interest) in respect of 37.5% of Magnus production and FCF.

Jan

Unfortunately not the case. Enquest reports 100% of Magnus revenue and profit and then pays BP 37.5% of Magnus FCF as a contingent/deferred consideration. This payment is treated as a balance sheet cost rather than an income statement expense.

However while this is legitimate accounting it is distorting the real economics as there is no way that BP will receive the $1b contingent cap. While you can exclude the BP payment from revenue and EBITDA, you cannot remove it from FCF.

Greg peck

Maintainable FCF look like it will be in $150m per year range after EPL payments with oil in high $80s. EV (debt plus equity) of $900m which is 6Xs FCF and a fairly high valuation compared to other O&G companies.

Without EPL the EV would roughly double and the share price would be 4 times higher. Enquest is probably the most leveraged to EPL due to the relatively high level of debt compared to other NS companies.

This is why I remain invested in Enq debt and equity. Any change in EPL will have disproportionate benefit to Enq share price and even if FCF is solely used to repay debt over next 2 years this will double share price.

The risk is that Enquest has operating cost which are $10 per barrel higher than competitors and relatively high lease and debt servicing costs compared to NS competitors. The big risk is if Oil fall back to mid $70s we will be screwed and will struggle to repay debt.

Tommo

Production for H1 2023 - NS production 30.5k Enquest, 6.7k BP. Malaysian production 8.2 = 45.4k.

BP have 37.5% interest in Magnus FCF until they have received $1 billion. Enquest discloses that it has a 100% entitlement to Magnus revenue and profitability but then pays BP 37.5% of Magnus FCF as a contingent consideration. This is legitimate accounting but distorts true economics of arrangement.

Tommo

Enquest NS entitlement is approx 30k BPD (BP have 37.5% working interest in Magnus) and not the 40k you have assumed in your calculation.

This would yield $700k per day from NS for 2nd half if oil averages $91, which generates $128m FCF for the second half year (pre Golden Eagle and EPL) and we know we have paid $50m in July for Golden eagle and we are due to pay $75m EPL at end of October. Accordingly a zero FCF in 2nd half is at the upper end of achievability.

This is better than Harbour who are predicting after $1.2b FCF in first half, $200m negative FCF in second half - principally due to EPL payments.

We receive approx $45 per barrel for 8K BPD Malaysia oil sales and our Opex is 25-27 per barrel with relatively high Capex currently and tax payments. Interim financial statements highlighted that Malaysia was FCF negative in H1 2023 and unlikely to contribute FCF in H2 2023.

Apologies I keep banging this drum but to raise expectations that debt will be materially reduced in 2nd half of year is simply misleading and will lead to disappointment.

The FCF dynamics of NS producers has now fundamentally shifted with FCF generated in first half of year and flat to negative in second half due to EPL payments. Our EPL payments will roughly double from the $75m payable in Oct 23 (related to 2022 profits) to $150m ish in October 24. The new dynamic is that production for 1st half of year is for shareholders and debt holders and the second half of year is for EPL (EPL is close to a 50% tax rate for Enquest).