Member Info for Stevo12

Thanks Sekforde. Was the Q&A from the 14 Sep audio cast or earlier?

The reason i post on these websites is to understand other peoples thinking and to have your own assumptions challenged.

My workings for cash cost per barrel for 2022 are as follows. Opex $425m, Cap and ABEX $220m, Interest $90m, Lease payments $151m, Magnus $80m, GE $50m, EPL $75m, Malaysia tax $150m. This totals $1,241m cash outflow which translates to cash outflow per barrel $73.8 - $81.1 based on company’s forecast production range of 42-46k per day.

I have based Malaysian 2023 tax estimate of $150m based on $125m paid in 2022 to reflect the increased production in Malaysia in 2023. Interestingly we will be paying twice as much tax in Malaysia than the Uk EPL with Malaysia only accounting for less then 20% of oil production.

Please, Please challenge the above and provide an evidential basis as to your reasoning. This is how we all improve our knowledge and understanding.

Cash cost for 2024 should see a reduction in lease costs and GE $50m is a one off. However EPL will be approx $75m higher and hopefully OPEX inflation can be offset with efficiency. The unknown is production guidance.

Sekforde

I have re listened to the latest audio presentation including Richard Hall’s operational commentary and I did not pick up on any mention of organic cap ex maintaining production in 46k range in 2024 and beyond.

Where did you pick up on Criag Baxter comments?

I do think there will be acquisition of 2P reserves which will hopefully offset the natural declines of Kraken and 40 year old Magnus field. We just need to pay well below $10 per barrel for 2P

Still in kraken but more in Enquest bond than Enquest Equity. Nice 10% cash return and covers off down side risk. If I was not invested I would not research. I will re listen to the presentation regarding maintaining oil production for foreseeable future as this is a key assumption.

On gas sales there is some organic gas generation in 2022/23. Enquest sold $512m of gas in 2022 of which $453m was purchased for Magnus injection and resale. So fully agree that there is $50-60m of net gas revenue (about 5% of group revenues) from organic production. However 90%+ of gas revenue is a pass through.

Sekforde - agree that Opex is going to be higher (profit lower) in 2nd half by $100m ish but equally revenue and profit will be $70-100m higher as a result of oil price holding in the 90s. So profits subject to EPL should be broadly similar in 1st and second half if we hit the top end of the 42-46k guidance.

On US strategic petroleum it is exactly that to provide a strategic buffer in case of emergency and it has already been depleted to record low levels. Us policy is to build it back up once prices stabilise in $70s. Us government policy is not to trade oil for a profit - it can just print money - however it might release further reserves to bring oil prices down ahead of 2024 US election.

I do however believe that Swedish delisting provides a short term price depression and I have been pondering whether to buy more equity and when.

Apologies for typos. On Train and using my phone with fat fingers!

I meant to add that development costs are running at $20 per barrel pre tax benefit or £11 per barrel after EPL tax benefit. I think we will see deals to buy 2P reserves in late 2023 and 2024 at $6-10 per barrel. Accordingly cheaper to buy than develop for Enquest. Different model for HArbour and Serica where, after tax benefits from developing a barrel of oil, there net cost is 90p if labour do not pull investment allowance..

Apologies for typos. On Train and using my phone with fat fingers!

I meant to add that development costs are running at $20 per barrel pre tax benefit of £11 per barrel after EPL tax benefit. I think we will see deals to buy 2P reserves in late 2023 and 2024 at $6-10 per barrel. Accordingly cheaper to buy than develop for Enquest. Different model for HArbour and Serica where after tax costs of developing a barrel of oil is 90p if labour do not pull investment allowance..

Sekforde

I hate to come across and Mr Negativity but a few issues you really important matters you are not considering

1. Malaysia sales represent approx 20% of Enquest revenue (8,200 bpd) and we only received $43 per barrel in first half 2023. This is due to Malaysian production / royalty requirements and we paid Malaysia over $120m in production entitlements and tax in 2022 (and you think Jeremy Hunt is the Devill Incarnate!!). Malaysia revenue is reported net of production entitlement charge and was approx $65m from 1.5m barrels for the first six months. This reduced our average realised price to approx $65 pbll from 8.2m barrels of production in their first half year with oil averaging in the high $70s pbl.

2. Gas revenue is purely a pass through. We bought approximately $200m of gas in first half, used it for injection and then resold it. This has no meaningful impact on FCF or P&L account but grosses up sales and cost of sales.

3. FCF in second half of year will likely be negative at anything below $90 oil due to Opex $100m higher, tax outflow of $70m in Q4 as opposed to $35m inflow in Q1, $50m payment to GE. These 3 items alone represent $250m higher cash outflow in second half and production will likely be lower in second half than first half. Best we can hope for is break-even FCF in second half (harbour are forecasting negative second half cash flow)

4. I agree with you that first half 2024 should be a strong period but even if oil prices hold at $90+ this will only be on NS and not Malaysian oil. The second half 2024 will see $150m EPL payment and again probably flat FCF - this is the new normal.

5. The Oil futures market is effectively the average projection of all oil buyers and sellers - it is the market. My take, and it is only my personal view, is that the oil traders are not expecting OPEC+ (mainly Saudi and Russia) to maintain their self imposed cuts below the agreed quotas in 2024. Also potential recession fears in west remain as interest rates continue to rise and China stutter. We all have our personal view of where oil prices might be, but if you think the market is wrong for 2024 you can make a fortunate (or lose one) in oil forward contacts.

2. Enquest production has declined from over 70k per day in 2019 and unfortunately spending $160m a year on infill and nears field extensions is not going to maintain production at 45k BPD for medium term. I don’t know whether the 15% decline in NS in 2023 is indicative of the future and I am not going to second guess, but the best we can hope for is to roughly replace 1/2 the oil we extract if we spend $160m per annum.

Again I am not trying to be negative but just realistic based on the facts that Enquest have shared with us. My personal best estimate is a $100-120m reduction in next debt in 2023 and a similar number in 2024 due to $150m EPL payment partly offset by $50 GE payment in 2023. I have used $86 oil as the base case which generates $78 PB

Sekforde

Take a look at the tax note in the 2023 half year statement in the financial review section which states:

“$76.0 million current tax charge associated with the EPL that will be payable in October 2024 (noting that the EPL was substantively enacted in July 2022).”

I think it is safe to assume that second half will be similar to first half which is why I have used $150m as estimated 2024 EPL tax payment.

Comparing 2022 EPL and 2023 EPL is not easy as the tax rate is 40% higher and taxable period is 70% longer (12 rather than 7 months). However profits are approx 25% lower. FCF is not a particularly good proxy for taxable profit as interest and decom is not allowable and, as a result, the effective EPL tax rate is over 50%. However we really do not need to try and calculate the EPL, the company is telling us what the EPL is for first 6 months and when it will be paid.

What we know on a macro basis is that North Sea oil production is declining at somewhere between 15% and 30% pa, depending on the level of future investment. Enquest NS production declined by about 15% in first 1/2 2023 and, while an element of this relates to Kraken problems, the decision by the company not to invest in Kraken will result in an ongoing decline in production (as noted in the half year report). The big question is what the rate of decline will be for Magnus over next few years.

I fully accept that Enquest could maintain output if it acquires new producing fields or develops significant new fields (Bentley etc). However low levels of organic investment in existing fields will slow but not stop the inevitable decline in production. I do not see the appetite or capacity to invest in new fields until EPL has been amended and there is a more supportive environment to NS.

On impact of $5 uplift the gross revenue for 2024 will be $76m higher or which approx $12m will be payable to BP and $22m more EPL (although note until 2025).

Sekforde

You are correct I rechecked and I had picked up the WTI oil futures and not Brent which is $4-5 higher.

The oil futures market is just like any other market and reflects the average price expectation among buyers and seller. Some are traders and others O&G companies looking to lock in prices. The reason the future price is lower than current spot (backwardation) is that buyers and sellers of these futures on average are expecting oil prices in 2024 to be lower than the current spot.

The market may be wrong and it might be correct, but it is the best guidance there is at to the most probable future price.

Sekforde

$65 per barrel all in cost pre EPL for 2024 still looks like a good estimate.

Looking at the Oil Futures market for 2024, Brent is averaging $82 per barrel. Current in day oil prices are largely irrelevant to valuation of future cash flows and the futures market provides the most reliable forecast/projection of future oil prices. Certainly this would be the prices of any hedges taken out today for 2024.

So at $82 oil and 42k bpd production would yield pre EPL FCF of $260m. 2023 EPL payable in 2024 is estimated by company at $150m, leaving $110m to pay down debt/ distribute to shareholders. My gut feel is that shareholder distributions will not start until debt down to $250-300m. If oil stays in the mid 90s and the Oil Futures market is wrong, then of course debt reduction will be more rapid.

Sekforde

$65 per barrel all in cost pre EPL for 2024 still looks like a good estimate.

Looking at the Oil Futures market for 2024, Brent is averaging $82 per barrel. Current in day oil prices are largely irrelevant to valuation of future cash flows and the futures market provides the most reliable forecast/projection of future oil prices. Certainly this would be the prices of any hedges taken out today for 2024.

So at $82 oil and 42k bpd production would yield pre EPL FCF of $260m. 2023 EPL payable in 2024 is estimated by company at $150m, leaving $110m to pay down debt/ distribute to shareholders. My gut feel is that shareholder distributions will not start until debt down to $250-300m. If oil stays in the mid 90s and the Oil Futures market is wrong, then of course debt reduction will be more rapid.

Sekforde

Enquest 2P reserves are 190m barrels. Current NS valuation of reserves are in the $8-10 per barrel range or $1.5-1.9b range (down from $4b pre EPL). However this valuation would be reduced by Magnus liability, debts, lease liabilities and possibly Decomm liabilities. On the positive side the tax losses have a discounted value.

I should add that it will be interesting to compare to Serica’s results and valuations when announced next week. Similar production but Serica should have no debt, deferred consideration or lease obligations and similar tax losses.

Onedb

Even with reduced RBL, HBR will have borrowing capacity of approx $1.5b.

Also big oil have always been willing to provide creative funding packages including vendor loans, deferred payment mechanisms etc which effectively results in majority of payment from future cash flows (such as Magnus).

The problem is, and none of us like to admit it, is that without the tax losses, Enquests equity value is negative. EPL has had a bigger impact on ENQ than many other NS O&G as the value of our 2P reserves have more than halved, but our liabilities (debt, lease, deferred consideration, decomm etc) have remained the same. However the tax losses are a real asset but utilisation of them against profits of an acquirer is not easy or automotive.

The question is will ENQ be willing to buy producing reserves at current rock bottom prices and use its tax losses. It feels the greater priority for management is reducing debt to avoid being squeezed if there is an oil price dip in the future. The worst case scenario is oil falls to below the EPL threshold but gas holds above the threshold.

I

Kraken

My gut feel is that Hbr would only bid for Enquest is there was a distressed situation due to a future oil price crash.

I don’t think the issue is the price for the shares at 20p, 30p pr 40p it is that they would be taking over the obligation to pay BP $500m re Magnus, $600m of debt and $500m of lease liabilities and over $600m of decommissioning liabilities.

In a PMO like restructuring a number of these obligations would be extinguished / renegotiated and of course equity holder would be royally shafted. I am not predicting this is going to happen and I dearly hope it does not. However I cannot see HBR taking on all of ENQ obligations when they could potentially buy production and reserves from Big Oil without attached liabilities.

Surprised that a further $100m buyback was not announced with half year. At least we will see what share price sets at without buybacks sweeping up sellers.

.

Sekforde

Apppreciate Kraken maintenance pulled forward but there is the other 70% of the portfolio.

On additional $10 oil, after the payment to BP of approx $10 and EPL $25m, it will leave approx $50m for Enquest.

The EPL of $150m is based on the charge declared by Enquest for first six months of $75m. My estimate is EBITDA of $399m for the first half less Magnus payments of $52m, less cap ex allowance of $105m, less lease capital payments of $40m equals EPL taxable profit of $202m which at 35% equals $71m as compared to $75m declared.

2024 FCFCis difficult to estimate until we get production guidance and I would expect a decline in the 10-15% range. $90 oil will greatly help.

Sekforde

Second half FCF in O&G is normally lower than first half due primarily to maintenance shutdowns, tax payments and capex profile.

On the upside a $10 higher realised oil price will add a further $50m of FCF in 2nd half. On the downside we will be paying $50m to GE, 2,000 less BPD in 2nd half would result in $30m less FCF (not sure on timing of Magnus payments). So my best estimate is that full year FCF is most probably in $180-200m range pre taxation.

EPL in $150m range but wont be payable until 2024. So once we get into fully paying EPL in 2024 onwards, FCF is probably in $50-100m range pa until EPL is amended. Unfortunately, we will start to see ongoing declines in production in 2024 onwards due to lower capex.

Read page 9 and 10 of half year statement. ReSale of gas purchased primarily for Magnus injection totalled $200m for first 1/2.

Enquest are buying gas for injection into the wells and are selling the surplus gas not needed. The gas sales are included in£732.7m revenue.

While positive operational performance and good news on Kraken, the financial outcomes are worse than I was expecting/hoping for.

In particular the $75m EPL charge for the first 6 months. Debt reduced by $125m for first 6 months and assume similar 2nd half performance then $250m reduction in debt for the year before $150m EPL charge and $50m Golden Eagle payment. Accordingly minimal debt reduction once EPL is paid (which is not until Oct 24).

The EPL charge is way higher than 35% as a result of EnQuest’s high interest and decommissioning costs - more like effective rate of 50%.

I think this is the key reason for the share price drop is the realisation that EPL will take approx 1/2 to 2/3 of FCF which will leave approx $100m per annum (at $78 oil) to pay down $700m of net debt and shareholder distribution now unlikely for several years unless EPL amended.

I don’t want to be bearer of bad news but unless oil price stays around $90 it is going to be tough to materially eat into debt. An increase in the oil price of $10 to $90ppb results in additional FCF of $104m pa after EPL. At this oil price we would be starting to pay down debt at $200m per annum and could probably afford to provide a $25-50m shareholder return but I can’t see this happening until debt down below $500m which is 2025.