Member Info for Stevo12

Thanks citizen. Navitas is certainly a very ambitious company and hope they can pull this off. Huge value to unlock.

FID in 2024! Interesting that $1.3b spent on Sea Lion to date by Rock and Premier/Harbour.

Megla

I think you are broadly accurate. However the tax payments timing could impact the FCF but underlying you are very close to my estimates of 2024 post hedging and having used historic tax losses.

However what is also interesting is the resilience of Harbour to changes in oil price. If oil dropped to $55 per barrel and gas 75p per therm, Harbour would still be able to fund $1b of Capex and be marginally positive FCF. This is a much more resilient position than other independent NS producers.

Sekforde

No details provided by the company re working capital adjustment but they were clear in highlighting the $50m working capital benefit in Jan to Feb 23 will reverse during the remainder of year. I think it is very difficult to extrapolate FCF from a couple of months due to timings of kraken lifts, tax payments in Jan, payments for CAPEX etc.

I certainly hope that Enquest does a better job in replacing 2P reserves in 2023 than they did in 2022 with only 2m of 2P reserves added for over $100m of capital expenditure.

Sekforde

I have used 31 December as a point of valuation. Net debt had reduced to $624m at the end of Feb but it was highlighted that this was partly due to a working capital antimony of $50m which will reverse out during the year. Accordingly $43m real reduction over first 2 months but equally reserves will have reduced by 2 months production of approx 3m barrels. Thought best to keep clean and use the 31 Dec 22 numbers which are reported and audited.

I agree that tax losses would be worth more if Enquest are able to acquire producing fields and use them more quickly. However I would see this benefit accruing as we complete a transaction nit in anticipation of a potential transaction. I have used a 15% discount rate to better reflect the cost of capital in calculating present value of reserves and tax losses. Our debt is trading at close to 10% and cost of equity is 20%+.

Enquest should be the best performing O&G share over the next year if oil trades at $85+ and the worst if it trades at $75 or lower. Very, very sensitive to oil price due to our high committed cash cost per barrel and bank covenants come under pressure at $75 oil.

I should add that the reason I remain invested here is that the company will pay down $280m of deferred consideration and lease liabilities in 2023 along with reducing debt by $200m. Even without a change to EPL this should translate to an increase in market value which will hopefully be reflected in share price.

Sekford

You also need to take into account that in valuing the business the other financial liabilities such as deferred consideration, finance leases and decommissioning.

My calculations is that 190m of 2p reserves is worth about $1.3b at $7 per barrel. Thankfully the lease and deferred considerations are offsetable against EPL and as such the gross liabilities of $636m and $482m translate to a post tax liability of $212m. The tax relief on decomm is 50%ish and accordingly our gross liability of $737m translates to $368m net.

Accordingly my personal valuation is $1,330m-717-212-368= 33m + tax asset of $500m = $533m.

The valuation of reserves has reduced from about $15 per barrel pre introduction of the EPL based on OP of $75 and Opex of $25, yielding $50 pre tax and $12.5 after tax. I have discounted the cash flows at NPV15 to give a valuation of $7 per barrel. Buying producing reserves at $7 per barrel when capital costs for new reserve development is over $10 pre tax relief (which for Enquest would be $4.60 per barrel) is a great opportunity for Enquest as post tax cash flows would be $32.5 per barrel acquired while tax losses last.

Real opportunity to increase the value of tax losses if acquired 2P reserves bring forward their usage by a few years.

Mrc

Had a re-listen and you are correct that 1/2 the 2022 EPL was paid in dec 22 - sorry I missed that first time round. Looks like very little ($35m of EPL) payable in 2023. Looking at the tax note and cash flow statement there has been about £20m of regular UK taxes paid per year in 2022 and 2021 in spite of the tax losses - not sure what for. However safe to add $15-20m to my previous FCF estimates and puts Enquest FCF in the $180-300m range taking the lower and upper guidance at $85 oil. This really shows the impact of 4,000 bpd difference between the upper and lower production estimates with a relatively fixed cost base.

EPL payable in 2024 for 2023 in range of $120-160m (depending on daily production and $85 oil) which will be first full year of payment and all other things being equal would reduce FCF to $100-170m range.

Nitro

The EPL deferred tax liability established is purely an accounting entry and will be released / credited to the income statement over the next several years to bring the accounting tax charge to 75% of profit before tax. Without this credit to income statement each year the tax charge would be over 75% of accounting profits as depletion and amortisation costs are not deductible for tax purposes.

In summary, ignore it from a cash flow perspective - purely an accounting entry. 2023 EPL payable in oct 24 and tax losses should offset core UK 40% tax for 2023 and some of 2024. Accordingly only 2022 EPL tax payable in 2023.

I should have added that shareholder returns scheduled for 2024 following required RBL repayments and Bonds in 2023

Useful presentation from Enquest. Helpful guidance on 2023 FCF which at $82 per barrel realised price (approx $85 pre hedges) generates FCF in range from $160m at 42k per day to $280m at 46k per day. This excludes any 2023 EPL payments which were confirmed to be payable in late 2024, but incudes $70m of 2022 EPL payments.

The required debt and bond repayments in 2023 (not included in above) were confirmed at $240m so will need to use current cash balances to fund in low and mid range forecast.

Other key matters noted:

1. No material cash inflow or outgoings on new energy and infra business for several years

2. Acquisition of existing NS production a definitive target to use historic tax losses

3. Nothing to be concerned about regarding board resignations - although Ian looked a little uncomfortable

4. Lots of engagement with gov on EPL and price floor has been trailed but timing uncertain.first fulll year impact payable in Oct 24.

5. No great appetite for investments outside of Uk and Malaysia - using UK losses priority

6. Kraken lease costs fall by 2/3 from 2025 and Enquest producer may be used on Bressay if a partner can be found

Priceless. What a wonderful utopian vision painted for us by the good people at Justoil. However I draw the line at sharing a tent unless Glamping at Glastonbury.

Tigar

The total future payments on Magnus are detailed in note 27 on page 58 of the 2022 financial results announcement. The forecast remaining payments are detailed at $940m, which I think includes the GE payment and puts us close or at the original $1 billion cap.

This is not a bad thing in that as you note if Enquest is forecasting paying BP a further $900m related to Magnus, Enquest will also generate approx $2.4b of cash flow from its effective 63% working interest. The discounted value of the Liability to BP is $566m which indicates the pre tax cash flows from Magnus retained by Enquest are worth about $1.4b. Before EPL this would have translated to a post tax value of $840m, post EPL $350m. This just highlights the massive impact of EPL on O&G asset values.

Romaron

Hopefully we learn a bit more on Wednesday. I was not aware that Howard Paver who only joined the Board 4 years ago had previously indicated he want to step down - where was this previously disclosed? This is a very brief tenure for a senior NED.

You are correct that a healthy board should bring different perspectives and there should be debate and challenge. However 3 NEDs resigning outside of normal transition is unusual and the fact it was not announced as part of the annual report released a few days earlier even stranger and indicates it was relatively short notice.

Romaron

Hopefully we learn a bit more on Wednesday. I was not aware that Howard Paver who only joined the Board 4 years ago had previously indicated he want to step down - where was this previously disclosed? This is a very brief tenure for a senior NED.

You are correct that a healthy board should bring different perspectives and there should be debate and challenge. However 3 NEDs resigning outside of normal transition is unusual and the fact it was not announced as part of the annual report released a few days earlier even stranger and indicates it was relatively short notice.

Sekford

There are too many unknowns for 2024 at present but the 2022 financial statements highlight that lease payments and deferred consideration will be $65m less than 2023 and there will be no compulsory debt repayments. The big unknowns are what rate of decline will we see on production rates (Kraken will certainly decline in 2024), the impact of inflation on production costs and of course changes (hopefully positive) to dreaded EPL. I think reasonable to assume capex and abex will remain at similar levels to 2023 and there should be a $30m ish reduction in interest cost.

Accordingly without a change to EPL or a significant acquisition I think the approx $100m reduction in lease, deferred consideration and interest should offset inflation and declines in production levels giving us approx $200m of FCF. I would expect at least $100m would be returned to shareholder via dividends and buybacks. The temptation will be to invest in “new energy” side of business but pressure from shareholder to start returns will be irresistible.

Re tax losses - it seems crazy that they are probably our biggest asset and materially exceed the market cap of the company. This is good and bad news in that MR market is currently saying that without the tax losses out liabilities (RBL, Bonds, decommissioning, lease liabilities and the further $900m forecast to be paid to BP for Magnus) exceeds the market value of our assets. We need to turn this around and $200m of FCF in 2023 and 2024 should move the shore price forward very substantially.

Sekforde

I agree with you that $100m shareholder return very possible in 2024 if oil prices hold in mid 80s. This is why I remain invested.

There has been some positives since December 2022 such as the reserve replacement rate detailed in the year end report. I think the key negative that has impacted the share price is the reduction in the RBL and the requirement to repay $200m RBL in next 12 months. This has put an unexpected strain on liquidity in 2023 as detailed in the going concern statement and a push back of shareholder returns to 2024. The going concern statement highlights that an average oil price of $77 is required to remain covenant compliant under the current business plan (although remedial actions could always be taken if oil prices got close to that level).

I should highlight that the $70 per barrel cash costs for 2023 is not my number but the guidance provided by Enquest. They have provided us with 2023 Opex, Capex, Abex, Lease payments, Magnus and GE payments and Interest costs, together with the production guidance (the only estimate I have added is EPL costs). I have just added up the numbers and divided them by the mid-point of the production guidance. Might not be a popular number but it is the company’s guidance on cash outgoings in 2023.

Romaron

I think you are correct in that the delay for releasing financial results was probably due to a dispute among the directors. I had assumed (hoped) that it was due to an impending EPL floor announcement which would impact the RBL and forward guidance. However it appears that it was over something else - possibly the quantum of asset write downs as a result of EPL or the forward guidance. I don’t think it would have been the shift towards SVT and renewables as this is not imminent and 2 of the 3 resigning NEDs are not deep O&G experts.

Certainly AB’s downbeat appearance was not the usual AB. He looked and sounded very browbeaten.

Please stop creating new accounts to spread your drivel. Groupthink joined the board today and posted 33 times - have you not got anything better to do than contaminate a HBR board with your absolute nonsense. I am fed up of having to block you nutters.

Non-exec director rotations are normally managed in an orderly way with new non-execs interviewed and appointed to replace a non exec at the end of their term. They transition is usually pretty seamless and not more than 1 per year unless for illness. For 3 directors to resign including the Senior Independent NED and also chairman of the audit committee without replacement is highly unusual. I have only seen this before post merger when the two Boards are integrated, a major difference on strategic directions or a significant difference on year end accounting, management or Remco matters.

Given the financial statements and Remco have only recently been approved, it is unlikely to be a result of remuneration or accounting disagreements and is more likely to be a disagreement on future strategic direction. Your guess on the reason for the possible disagreement is as good as mine.

However I do believe that AB is an honourable and thoughtful leader and that there is zero chance of asset sales (although possibility of partnering with a major on green initiatives) and very little risk of an equity raise. I cash see a number of deals with limited upfront cash payments and revenue share / deferred payments similar to Magnus. Buying NS producing assets at 50% of pre EPL valuations is smart as the EPL will be amended at some point. This is the third time a NS WFT has been tried and prior ones fell away after 1-2 years.

Sekforde

The deferred consideration and the lease liabilities are classified by Enquest as financial liabilities as required by financial reporting standards. The definition of net debt is at a company’s discretion and Enquest exclude lease liabilities and deferred consideration. This is perfectly acceptable as long as the definition is disclosed by the company (which they do).

In terms of 2021, I did review the FCF but noted that the Capex was $100m lower than 2023 and the Magnus and GE payments were $17m in 2021 compared to $120m in 2023. I recall approx $50m of interest on the bonds was also not paid and rolled over into the debt.

Opex per barrel is also $6 highest in 2023 or approx $100m pa more. Accordingly based on Enquest guidance, cash outflows in 2023 are projected to be $350m higher than 2021 (excluding EPL) and income at $80 realised at 44,000 per day (being midpoint of guidance) will be $180m higher.

While Enquest have not given a specific 2023FCF guidance they have given all the info needed to calculate it subject to average Brent oil price. They have also disclosed in the 2022 viability statement that they have sufficient cash and facilities to meet their required debt repayments with oil at or above $77 per barrel.

My interpretation of the guidance is FCF of $200m pre EPL at $85 Brent. It is not clear what the EPL cash payments will be in 2023 but I am assuming zero as the Enquest legal entities should be outside the quarterly payment regime and 2023 EPL should be payable in Oct 2024. Required debt repayments in 2023 are approx $325m and accordingly 2023 FCF and $125m of cash reserves will be used to meet debt repayments.

2024 looking much more positive with lower deferred consideration and no mandatory debt repayments.