Roundtable Discussion; The Future of Mineral Sands. Watch the video here.
SEK
I fully agree that by interims 2025 at the latest shareholder returns will have commenced. the million dollar question is whether Enquest go aggressive and start returns in 2024 or remain conservative and wait until 2025.
In terms of net debt at end of 2025, I expect the JV cash balances to have also dropped (I struggle to understand why Enquest offsets third party cash against its gross debt) and the December 23 working capital timing benefit to reverse. I am also hoping for at least one acquisition which should have rapid payback.
I am hoping AB will be bold and start buybacks now with interim 2024 dividend in late summer if he is confident in 2025 FCF
Kraken
Enquest reported a loss after tax of $625m in 2020 and a loss of $450m in 2019. There was a profit in 2021 of $377m but a further $41m loss in 2022. The large losses of the past are due mainly to asset write downs.
The ability to declare dividends is not actually based on the distributable reserves of the group but of the holding company which is normally easier to manage. I am sure management will have taken or are proposing to take actions to ensure that there are distributable reserves available.
Just taken a look at 2023 AGm and shareholders gave management authority to buy up to 10% of shares via buyback upto June 24.
No authority is needed for interim dividends with final dividend approved at each AGM. Dividends can only be paid if company has distributable reserves which might not be the case with losses over last several years. This can be fixed with capital restructuring but this takes time and court approval,
Jan
I have always been supportive of a “steady as you go” policy to pay down debt to a more manageable level (probably in $300m level) before shareholder returns in late 2025.
However the current and prospective government policy calls for more radical action. The level of buybacks will be capped by approved levels at last AGM (I have not gone back and looked at AGM resolutions) but normally in 10-12% range. An increased level can be approved at next AGM.
I agree that that the initial rounds of buyback will likely enable those looking to exit to jump ship, but in a relatively illiquid market it would drive up share price after initial exits.
It feels like we have hit or approaching maximum negativity regarding Enquest and O&G more broadly (even the ever optimistic Kraken sounds like he is close to capitulation) and this is normally a good buy signal. Whilst the night looks long and dark, it will change and a more sensible O&G policy will be implemented - probably 2025/26 at the earliest.
In the meantime if Enquest can generate $100m a year FCF per year on average to 2029 ($10 per barrel after EPL) and split 50:50 between debt and shareholder return, then certainly an SP of 40p plus is attainable. I am assuming that Labour see sense on removing investment allowance.
Taverham
Accept there are other costs, but the majority of these, excluding VAT, are a component of the daily fixed charge and not the per unit cost of energy.
It will be interesting to see over next couple of quarters if gas prices stay low whether the unit cost of gas and electricity returns to pre Ukraine prices. This would also drive down inflation but I fear that as renewable subsidies grow, energy prices will never return to pre Ukraine levels.
A good sign would be competition returning among the suppliers.
Kraken
You are sounding more depressed than I am!
I am sure Enquest are running a worst case scenario if Labour implement their policy to remove all investment allowances against EPL. This will likely look like no new investment as the post tax FCF will not be sufficient to cover investment and future decom costs. This is the scenario that Romeron put to AB at a recent AGM.
This scenario could generate increase FCF for a few years as we save $150m plus on CAPEX and pay additional $70m of EPL, but production will decline pretty quickly and Decom will be accelerated. Would this managed decline result in significant dividends? I guess we would have to pay down bonds first.
In reality I can not believe Labour will be allowed by Unions to implement a policy which will destroy thousands of jobs. Labour are proposing a tax which is over 100% of profits generated over asset life - surely reality will bite at some point.
Separation of Veri for listing or sale would be interesting. Not sure how you would put a value on it though as revenues probably 7-10 years away. Might be a few grants for feasibility studies but need to part of the government selected track 1 or track 2 (there might be track 3 at some point) to get access to material government funding. However all could change under new Labour Gov.
The selected Track 1 and 2 projects should be delivering CCS by 2030 with a ramp up to 2035. I have not yet seen clarity from ENQUEST and Veri on their timelines to revenue. Not sure how much Enquest is currently spending on Veri but if it is significant I would prefer a dividend.
What really rattles my cage is that no one is talking about the fact that wholesale electricity and gas prices are now lower than they were before the start of the Ukraine war. Gas is 2p per KWH and wholesale electricity is 6p per KWH and yet households are being charged almost 4xs the wholesale price. I appreciate there is a lag between wholesale prices and retail prices catching up but the revised price cap in April only marginally reflects the current cost of gas and electricity.
Also interesting that the latest offshore wind farm auction is guaranteeing a minimum price that is 80% above current wholesale electricity prices.
My only concern with the update was the lack of 2P reserve additions. HBR produced 35m barrels of oil but only added 1m of new 2P and produced 38m BOE of gas but only added 17m BOE of new 2P. This is the third year of really low reserve replacement ratio which is a key KPI of most O&G companies, but HBR is silent.
Yes there has been a good addition of pre FID 2C reserves but for the $700m plus a year of CAPEX over last few years, I would expect more 2P reserves to be added.
Happy they have reset the gas price to 75p per therm which has not had major impact on forecast cash flows, but scratching my head a little on 2024 gas hedges. Not sure when these were taken out and pretty poor rate.
Londoner
my calc for 2025 EPL payment for 2024 earnings as follows
EPL Tax allowable uk costs 26.4+(12.7*1.29)+11.9=54.7
Tax at 80 oil = 80-54.7* 10.7 = $270m x 35% =$95m
Very early estimate but lower than 2023 EPL due to higher CAPEX and higher OPEX.
VOF
Very happy to have a little wager on 2024 FCF.
I was not so much crestfallen but frustrated with management that they provided guidance in early summer 2023 on EPL and OPEX and then a few weeks later updated with material revisions. Thankfully it was positive revisions but worrying that guidance was materially wrong.
I don’t think I am being negative, I am just summarising what management has told us (except for interest expense). Of course you can assume that management will get it wrong again and you may be correct.
I think the wager should exclude proceeds from disposals or acquisitions as these are unpredictable. I will wager for FCF (exc acquisitions or disposals) of less than $100m for 2024. £50 to nominated charity?
Thanks Sek
Agree that each $1 oil price over $80 per barrel is worth approx $11m FCF for 2024. I have no idea what the average oil price for 2024 will be but understanding impact of oil price on FCF will allow us to flex later in year.
1. On asset disposal proceeds, I prefer to exclude in estimating operating FCF as there is also a high likelihood there will be acquisitions in year. Great to have the $44m in bank though
2. On EPL, I am giving management the benefit of the doubt in that 2022 EPL was first year and had the complexity of a partial year. The tax returns for most groups are completed in the summer for a December year end and it was most likely that it was in July/ August 2023 that the 2022 EPL was fully calculated. Going forward the approach and methodology will be better understood and there are no complexities around partial years. Accordingly I would expect that management can estimate 2023 EPL with reasonable accuracy in the 2023 financial statements. We will see details of 2023 EPL charge soon.
3. I am putting my figure in the air a bit on interest. We will have a better idea with the release of 2023 financial statements which will disclose interest earned on cash deposits. I have a gut feeling tha average cash balance is lower than month end reported cash balance (as it it for most groups).
4. There was something odd with 2023 OPEX. In November 2023, management told us it would be $400m for the year and then it turned out to be $370m a month or so later. I am guessing there were some big credits related to Kraken FPSO failure. Management originally estimated 2023 OPEX at $425m and I think it is dangerous to apply an inflation based increase to 2023 and assume management will get it wrong again.
5. ABEX will be based on the programme agreed for the year and most of this will have already been subcontracted. It will go up and down based on approved programmes and at this stage I think we have to trust management to know better than us.
Agree that if 2025 production was 1,000 BPD higher than 2023 it would add approx $20m of FCF for 2025 (related EPL payable in 2026)
Let’s revisited when we get the 2023 financial statements.
Thanks for input
VOR
Good question - In terms of how the 2023 FCF of $236m rolls into 2024 of $50m.
Well there are few moving parts. Management has disclosed that OPEX, CAPEX and ABEX are going to be $95m higher than 2023. EPL actually paid in 2023 was $25m ($35m paid in late 2022) and so EPL approx $125m higher if 2024 EPL is $150m per H123 disclosure. These 2 components reduce 2024 FCF by $220m. On the positive side lease costs are down by $20m in 2024 and there was $50m golden eagle payment in 2023, partly offset by the year end temporary working capital benefit of $40m.
Taking the above together, we would expect without production change or oil price change, the 2024 FCF should be $190m less than 2023 or approx $46m.
Kraken
I have tried as best to mirror how Enquest treat BP Magnus entitlement. We know that 100% of Magnus production and OPEX is included in Enquest reporting and the we pay BP 37.5% of the operating profit less their share of CAPEX.
There could be a small error if Magnus OPEX is lower or higher than $26 per barrel average but we know that based on H123 that Enquest is paying BP $40 per barrel, after Cap Ex. So probably $50 per barrel pre CAPEX.
Has the OPEX cost for Magnus been disclosed?
Red
Interest on $620m bonds is approx $70m per year and I have assumed that interest earned on cash deposits will equal interest payable on RBL (hopefully RBL paid down during year). The interest on leases is included in the $127m lease payment.
Assumption is slightly aggressive but hopefully manageable by Enquest and we should know a bit more when we get full year 2023 financials.
Cheers
Aimoil
The legal challenge would be based on the threshold for WFT. Currently it is the average price over the 2o years ending 2022 and the deliberate flaw is that there is no adjustment for inflation, whereas labour and material costs have risen for the O&G industry as all other industries over the last 20 years. To add insult to injury, inflation to the 20 year average is only applied from April 2024 and so 2023’s 10% plus inflation excluded.
The reality is that Joe Public and the politicians don’t care until it comes home to bite them in several years time. The only response will be if there is significant job losses due to lack of investment.
Londoner, Sek and others
I have been pulling together some FCF forecast for 2024 and 2025 and would appreciate your review and challenge on my workings.
I have used the following production assumptions
UK production 35,000 BPD = 12.8m BPY
Malaysia production 8000 BPD = 2.9m BPY
Total 43,000 bpd = 15.7m BPY
Magnus BP entitlement 5.6k BPD = 2.1m BPY
Malaysia PSC and Gas 4000 BPD = 1.85m BPY
Enquest UK FCF entitlement 10.7m BPY
Malaysia FCF entitlement 1.85m BPY
And I have used the following cash cost assumptions and cash cost per barrel
Opex $415m / 15.7 = 26.4 per barrel ( 2023 $23pb)
CAPEX $200m/15.7 = 12.7 (2023 $9.1)
ABEX $70m/ 10.7 = 6.5 (2023$5.5)
Interest $70m/10.7 = 6.5 (2023 $7.3)
Lease $127m/10.7 = 11.9 (2023 $14)
This generates a UK cash cost per barrel, excluding EPL, for 2024 of $64 per barrel (2023: $59) and a 2024 pre EPL FCF of $171m at average $80 oil. In addition Malaysia FCF estimated at $30m post tax. So I get to approx $200m operating FCF pre EPL. EPL estimated at $150m for 2024 (2023 $25m). This excludes any asset disposal proceeds or significant temporary working capital adjustments.
I see 2025 cash cost per barrel reducing by $8-10 per barrel due to lower Lease, CAPEX and interest and I have EPL reducing from $150m to $95m. An approx $150m improvement in FCF in 2025.
So my very broad conclusions are $50m FCF in 2024 increasing to $200m in 2025. This excludes and business purchases or disposal.
Appreciate you thoughts and challenge.
Kraken
Tax losses are safe but can only be used against core 40% tax and not EPL.
The reality is that this all about creating enough headroom in the 5 year OBR review to sign off on current year tax cuts. Tories will not be in office in 2029 and potentially labour would have introduced this extension anyway. An additional year will cost Enquest $100m+ in 2029 which you can probably discount back to $50m reduction in equity value today and some of this will have already been reflected in share price following labour announcement.
It feels that O&G is a punch ball at the moment and not sure it will change unless Unions constrain Labour.