Member Info for Stevo12

Sorry - slide 18 of 5 April presentation.

The commencement of shareholder returns in 2024 is also detailed on slide 19 of the company presentation on 5 April 2023.

Battle

I am sure Enquest are chomping at the bit to start buybacks and dividends but first they need to deal with the repayments of bonds in October, reduction in RBL and Payment for GE in July. This is approaching $300m of cash out of the door and until this is behind us In Q4 it would be reckless to payout to shareholders.

Sekford

One of the key reasons that EnQuest cash costs per barrel are high compared to other operators is their historic funding of acquisitions and investment. Due to cash and funding constraints it had to come up with creative acquisition approaches. As an example Enquest portrays Magnus as 100% owned and records 100% of revenue and profit from Magnus. In reality BP have retained a 37% working interest and ENquest pays BP 37% of all net cash generated by Magnus.

Also due to funding constraints Enquest has leased a lot of equipment including the Kraken FPSO which results in significant annual cash outflows compared to an organisation which funds such costs organically or through its debt capacity. Accordingly in 2023, Enquest will be paying approx $20 per barrel which is effectively funding purchase price of prior acquisitions of plant or equipment and is the reason the cash cost per barrel are high at close to $70 per barrel.

Guys

There is no need to guess the total cash spend in 2022 per barrel - it has been disclosed by the company at $60 per barrel (Opex, Lease, Deferred consideration on prior acquisitions, interest, ABEX, Capex, Tax and overheads).

It has also disclosed 2023 production projected at the midpoint of its 42-46k per day range is 7% lower than 2022 and operating costs are £25m higher and deferred purchase price payments on Magnus and GE will be £80m higher. All other things being equal this adds $10 per barrel to cash costs for 2023 giving the $70 I estimated.

EPL will become payable at roughly $60 per barrel as interest and ABEX are not allowable.

I agree with January’s FCF at various oil price points but note that this is before EPL payments which will reduce $80 pb cash flow to $100m and $90 cash flow to $210m. I also note that due to hedges the market price will need to be approx 20% higher to realise these prices.

Given that realised $89 per barrel prices in 2022 yielded $500m FCF, why is 2023 only $210m at the same oil price. Quite simply production is projected to be 1.1m barrels lower ($100m impact), Opex, Cap ex and contingent purchase price payments are $110m higher and EPL will be a little over $100m at $90 realised oil price (requires Brent to be $108 per barrel).

Accordingly EPL only accounts for approximately a third of the reduction in FCF in 2023.

Romero.

Not really a view from me on the investment appetite of NS companies. Just a summation of what Enquest has told us they will spend in 2023 converted into a per barrel amount based on the mid point of the company’s production forecast - no more or less. I personally find this useful to compare to other oilers and to understand the oil price needed to generate FCF.

Other may not but pretending these cash outflows will not happen is putting your head in sand.

January

You are excluding interest costs, deferred consideration on the Magnus and GE acquisition and finance lease costs from your analysis. You are also excluding CapEx and ab ex. However on the other side you are including the gas purchased for re injection and resold.

We know for certain that FCF for 2022 was £29 per barrel at average realised prices of $89 per barrel. Cash costs per barrel will increase in 2023 based on the company’s announcement - higher OpEx, more deferred consideration, increased CAPEx and AbEx and over 1 million barrels less production.

Sekford

In 2022 cash cost per barrel were $60 and realised price was $89 per barrel resulting in $29 per barrel cash surplus for 17.5m barrels - $500m FCF.

Contingent consideration higher in 2023. operating costs also higher even though over 1million less barrels produced. So looks like 2023 cash costs closer to $70 per barrel compared with $60 per barrel in 2022.

Tigar

Interest expense is not allowable against EPL profit. So yes we could still have an EPL tax bill with Brent at $65 and pay $35m tax.

Sekforde

I very much agree that strong upside to share price as debt gets repaid - as long as oil price stays north of $85. Don’t read too much into 2 months cash flows as EnQuest’s highlighted that Jan and Feb cash flows were $50m higher due to temporary working capital benefit which will reverse later in year, so really $43m for 2 months on high production levels.

The FCF forecast looks pretty simple - $100m for each $10 above $70 per barrel. Inflation and higher contingent payments have increased cash cost per barrel in 2023, together with lower forecast production.

I remain invested as certainly a 50% upside in 2023 through debt reduction is possible and any changes to EPL could easily added another 50% increase in SP.n fingers crossed for strong oil price in H2 2023.

Results were pretty much as expected with no great surprises. The write off of assets due to EPL was disappointing but not unexpected.

My only real concern is the committed cash costs for next year which are OpEx $425m, CapEx and AbEx $220m, Lease $152m, Contingent consideration $127m, Interest $100m (estimate), min and overheads $20m. This totals $1.044b or $65.25 per barrel excluding taxation from 16m barrels (44k per day). Accordingly it looks like we will need $70 Brent to cover costs with every additional $10 per barrel generating $100m FCF after tax. This is a high cash cost per barrel and we really need to be in the $90 per barrel range to be paying down debt at $200m per year.

Thoughts on key messages tomorrow? My predictions are as follows:

1. We know very strong cash generation in 2022 with 17m+ barrels of oil sales at $89 per barrel with in all in cash costs of $70 per barrel. Debt reduction continued during Q1 2023 but at a slower rate.

2. Large 2022 EPL related deferred tax charge and potentially asset write offs due to both EPL reducing cash flows and lower than expected production from some of the fields - resulting in negative or small post tax profit.

3. News on reduction of RBL facilities and plans to repay/refinance maturing bonds in Q3 2023

4. Forecast FCF in 2023 of approx $150-200m with “all in” cash costs per barrels in the $65-70 range and realised sales price forecast in $75-80 range post hedges

5. Debt reduction as a result of Bond repayment and reduction of RBL will be the key priority for 2023 with dividends and buybacks pushed into 2024.

6. No cash EPL payments in 2023 with tax payments due in October 24.

7. Warm words about potential EPL floor negotiations with government.

I have a feeling in my bones that while a comprehensive new O&G fiscal policy will not be announced until Q4, there will be something announced in the short term to protect the RBL facilities available to NS O&G and this can only be a floor price. I understand why this would not be announced today and take attention away from what is largely a renewables policy document.

The reasons for my fussy feeling is that firstly there are a couple of big projects requiring FID as noted on this Board, but also that Enquest has delayed the announcement of its 2022 year end results until early April. The core numbers such as FCF, EBITDA have already been announced along with 2023 guidance. However without an EPL floor, Enquest’s RBL is going to reduce significantly and together with bond repayments, it is going to have to work very hard hard to refinance. I may be reading too much in, but an EPL floor before announcing results changes the whole completion of 2023 and cash headroom for Enquest. Their CEO is also very well connected with Conservative Party and a key donor.

The only positives I can take out of the government announcement are that Acorn and Viking have been selected as CCS projects to be supported via Track 2 process. What that means in terms of funding is not clear.

There is also a recognition that we will need NS Gas until 2050 and the desire to maximise domestic production over imports. Also an acknowledgment that fiscal regime needs to support ongoing investment and that the current review into long term NS fiscal policy is due to report in 2023.

Accordingly looks like we are not going to hear anything on changes to EPL until Q4 but still possible that a floor is introduced prior to this.

Happy

The 2023 EPL is to be paid in 2024 so the $1b FCF forecast for 2023 is not impacted by EPL. The reduction from 2022 $2.1b FCF is due to reduced volume of oil produced, lower realised oil and gas prices, higher operating costs due to inflation and more cap Ex. The oil and gas price assumption used by harbour is looking pretty racey at the moment.

Accordingly it looks like 2022 FCF is an anomalous peak with high prices, high production and Low Cap Ex. The expiry of the gas hedges in 2024 will add potentially a $1b of FCF and without EPL we could be looking at much higher profit and FCF in 2024.

A sensible floor tomorrow will be transformational.

Londoner7

The reason the majority of Harbour EPL is payable in 2024 is because the previous Premier companies had brought forward tax losses and accordingly were not required to be part of the quarterly tax payment regime. This will be the same for the majority of Enquest legal entities as they have tax losses and will be outside the quarterly payment regime.

3dartfinish- Any change in tax rates after 31 December 22 can not be reflected in the deferred tax charge/liability at 31 December 22 - it has to be based on enacted tax legislation at 31 December.

Happy

How do you get to a 2023 FCF to EV of 1? 2023 FCF is forecast at $1b and EV is currently $3.5-4b

Dumbly

The deferred tax liability and resultant tax charge recorded by HArbour as a result of the EPL is a requirement and not an option and Enquest will have the same obligation. There is also a risk that Enquest will have to write down some of its fixed assets and reserves as a result of the EPL unless a floor is introduced tomorrow.

Accordingly the income statement could look quite messy for 2022 with large deferred tax charges and potential reserve write downs. However what will not change that 2022 EBITDA is close to $1 billion and Cash generated in 2022 of $500m. Also as a quirk of the tax payment on account system, ENquest will not have to pay any 2023 EPL until October 2024 - so EPL will not affect 2023 FCF generation.

My greater concern is that without a floor to EPL our RBL facilities are going to significantly reduce and along with bond repayments, it is going to be another year of all cash going to debt reduction and contingent payments on prior acquisitions.

Pearls

The reality is that the EPL was not driven by oil prices but gas prices and the resultant impact on domestic energy bills.

The question is what price floor will be set for Gas which has been wildly more volatile than Oil. Gas went up by almost 20 times from its 2021 low to 2022 peak. Oil roughly doubled for a week or so and has effectively been in quite a tight trading range (75-100) for most of the last couple of years.

NS Oil is also traded globally while most NS gas is used in UK. Hopefully if there is a floor it is then graduated and based on realised and not market prices.

Dumbly

The latest auction (AR4) was for electricity to be provided from 2026/27 for 15 year inflation linked contracts. The bids are made in 2012 prices to select the winning bids and inflation is then applied from 2012. The average cost across wind, solar etc was £48 per MWH in 2021 terms and the lowest was offshore wind at £44 per MWH. There are 34.12 therms in a MWH and accordingly average cost in 2021 prices is 141 per therm (apologies I had previously quoted the 2012 prices at 105p per therm) with offshore wind being the lowest bid at 129p per therm in 2021.

The highest price for gas powered electricity was £446 per MWH on 24 August 2022 (1307 p per therm) which was the absolute peak. Prices have fallen dramatically since then and Northsea gas is currently wholesale at 100p per therm.

The report from Carbon Brief which generated the 9xs cheaper quote is attached. It originally reported a 4xs cheaper headline but then updated for the 24 August 22 peak.

https://www.carbonbrief.org/analysis-record-low-price-for-uk-offshore-wind-is-four-times-cheaper-than-gas