Member Info for Stevo12

I was doing a little digging into the 9xs cheaper quote. It was based on a comparison of the government fixed pricemfor recent round of wind farm bids and is 105p per therm (guaranteed and inflation linked for 15 years) as compared to one day in August 22 when the wind did not blow and, combined with Ukraine effect, gas prices were close to 900p a therm. This was a short spike and gas prices are now down to 100p a therm and below cost of wind again.

The quote was accurate for a day but is now utterly false and misleading. Also a long term inflation linked guarantee for 15 years is worth a lot. If UK gov guaranteed gas at 105p for 15 years with inflation based increases or Oil at $80, I am sure many O&G producers would take that hedge.

At $65 Brent and 100p therm gas, HBR still generates $400m FCF - enough to fund dividends and buy backs.

If O&G stayed at these sort of level for any reasonable time period the EPL would have to be removed. HBR is well placed to survive prolonged depressed oil prices - others less so. However second half of this year looks positive for Oil prices unless banking meltdown happens which looks unlikely.

I think it could go lower but price is looking increasingly attractive but waiting to see if we avoid a nasty recession.

The tailwind deal had a number of conditions that had to be satisfied. The most significant being the continued availability of the tailwind RBL facility which are now being cut across the sector. The reduction in this facility would give Serica the ability to walk away from this crazy deal. The value of cash today relative to 2P reserves has switched massively in favour of Cash.

Will Serica Board have the balls to walk away if Tailwinds facilities are cut - I doubt it.

The slightly good news is that at sub $70 oil Enquest will be paying very little, if no EPL due to tax deductibility of leases, Magnus deferred consideration, Opex and Capex. The real risk is the requirement to take out Letters of Credit for Abex (which requires cash deposits) as a result of the reduction in value of 2P reserves and squeeze of RBL facilities.

Without a floor to EPL we could face a painful credit squeeze while still having positive FCF.

I think this is why AB needs to wait to see the government energy security policy and presume he will have been given a steer on direction of travel. The decisions have been made by Sunak and Hunt but looks like it will not be released this week due to other news flows

I am pretty confident there will be a reasonably significant announcement that will likely cover renewables as well as O&G. My bets are:

1. investments in CCS projects will be offsetable against EPL with clarity provided re wave 2 CCS projects selected (will Viking and Acorn be selected?) - highly likely

2. Price floor introduced at $70 oil and 80p therm gas. In reality need to decouple oil and gas but introduces more complexity. Hopefully some phasing above $70 but again more complexity. Really needed to avoid a collapse in RBL facilities such as Enquests - 50:50 at best

3. A. Guarantee that EPL investment allowance will be maintained if FID pre next election - in a similar way to decommissioning. Operators can claim compensation from government if subsequent governments change tax rules. Possible.

Dumby

O&G companies tend to focus on their OPEX cost per barrel, but the maths is pretty straight forward. In 2022 Enquest realised oil price was $89 per barrel from 17.2m barrels of oil sold. It generated FCF of $500m or $29 per barrel so costs were $60 per barrel.

These costs comprised of OPEX of $23 per barrel, CAPEX and ABEX of $10.5 pb, Lease, interest , deferred consideration and other costs of $26.5 per barrel. The difference between HArbour and Enquest is primarily their interest, lease and deferred consideration cost per barrel.

OPEX and Cap EX are forecast by AB to increase by $6 per barrel in 2023 and while interest costs should fall, deferred consideration will likely increase. I would not be surprised if cash break even next year was closer to $65 per barrel.

Smartie

Jeffff’s accounting comments are broadly correct. The deferred tax charge recorded in 2022 for EPL has no impact on future EPL cash tax payments, but will reduce the accounting tax charge in future years financial statements to be closer to 75% of reported profits. I have previously posted the accounting rationale for deferred tax charge so I wont repeat.

The good news is that we will not be paying the majority of 2023 EPL payments until October 2024 due to the previous Premier Oil companies being outside the quarterly tax payment on account regime. Great results that keeps $250m in our bank account for another 18 months.

Kraken

I agree that the delay in announcing results is due to government energy security announcement Later this month.

It will not impact the 2023 trading guidance as provided last month but could have a massive impact on available Facilities/cash. A floor on the EPL is the difference between a $250m or a $500m RBL facility and the ability to repay bonds in October 23 without scraping the barrel.

A positive announcement from the gov on EPL floor will provide the ability to commence shareholder returns in 2023. No change on EPL will require Enquest to batten down the hatches to meet compulsory debt repayments. A very different tone of message and fully understandable that Enquest need to see which way the wind is blowing before announcing results and 2023 guidance.

My estimate is that a $70 floor and graduated tax rates above $70 would add 5-10p to share price. No change to EPL probably takes us down another 5p if accompanied by a negative outlook Statement by AB

AIMoil

I fear that 2022 will be the high tide for ENquest in terms of $500m of FCF with oil averaging above $100 and Enquest realising $89 per barrel after hedges. My concern with Enquest is that its cash outflows, excluding debt repayments and tax, were $60 per barrel in 2022 and will likely be higher in 2023 due to inflation, higher deferred consideration and $40m more Cap Ex - say $67-70 per barrel. Accordingly the $29 per barrel of FCF in 2022 could easily be closer to $10 if oil overages $90 (which is still aggressive) and cash cost per barrel increases by $7-10. This would yield $170m of FCF pre EPL and would not be sufficient to service required RBL and Bond repayments in 2023 (requiring Enquest to use its cash reserves). I think the maturing bonds could be refinanced at around 10%, but really needs EPL floor to avoid RBL facility falling from $500m to $250-$280m.

Interestingly Enq’s 2022 cash costs of $60 PBL compares to $40 for Harbour who are 50% Oil/Gas which provides them a greater buffer for falling O&G prices.

Accordingly we still have some way to go for Enquest to deleverage to 0.5X and requires approx $300m of further debt reduction. At $100 oil this would be 12 months; at $90 oil then more like 24 months.

It will be interesting to see if ENquest give a FCF guidance with 2022 results. If Enquest uses the $85 per barrel used by Harbour for 2023 and reflecting the increased cash costs, I am guess $150-200m. This would give an EV/FCF of 5-7 which is not cheap.

Banbury

You are spot on re change of EPL. Interestingly Harbours realised price for Oil and Gas in 2022 was $67 per barrel and for 2023 the forecast is for it to reduce to $65 per barrel equivalent. These realised prices should be lower than any realistic EPL floor price if one is introduced.

The question will be whether prices are based on market prices or post hedge realised prices. If the later, we should be in a good position. Hopefully if there is a floor it will be staggered tax rate going from 0% at $70 per barrel to 35% at $100 plus.

A deeper dive into 2022 highlights our cash cost per barrel pre tax was $33 per barrel (Opex, CAPEx, Abex, Lease and interest) which increases by $6 per barrel in 2023. This is materially lower than many of the other NS Oilers.

On behalf of all accountants, could I clarify dickuphams post regarding the deferred tax charge. He is correct that the $1.5b charge is the increase in the deferred tax liabilities as a result of future profits being taxed at 75% as opposed to 40%,but perhaps I can explain the rationale to this accounting requirement.

The purpose of Deferred tax is to equalise the difference between accounting/ reported profits and taxable profits due to the timing difference between capital allowances (offseting the cost of CapEx in the year of spend against taxable profits) as opposed to accounting depreciation which amortises assets over their productive life (several years)

The deferred tax liability created and increased by $1.5b as a result of the tax rate change will be released to reported profits over next few years to reduce the accounting tax charge to be closer to 75% of reported profits. Without this credit the tax charge would be closer to 90% of reported profits.

The $1.5b is not an estimate of the future tax cash costs of the EPL which will be much higher. It is effectively the difference between future taxable profits and accounting/reported profits until 2028 at the effective 75% tax rate.

Hope this helps but after rereading and rewriting the above note I appreciate it still sound like gobbledygook.

Kraken

Unfortunately no spare cash available at moment for buybacks with $230m of compulsory debt repayments in 2023 and very little facility headroom.

If Enquest could Refinance the maturing bonds in Oct 23 then buybacks possible.

Tigar

Moodys are actually assuming that the RBL facility will reduce to $280m by 31/12/23. While it does sound a tad ironic that our debt is going down while the credit rating is deteriorating, the credit rating is more about headroom and the ability to continue to repay remaining debt.

Enquest’s committed cash outflows per barrel for 2023 is approx $60 excluding EPL (OPEX, CAPEX, ABEX, Interest, Lease and deferred consideration) and Moodys assume $70 oil which generates FCF of approx $160m pre EPL, as compared to the required debt repayments of $230m (RBL and bonds) and accordingly eating into the cash headroom by $70m. This excludes any EPL payments which will hopefully be deferred until October 24 like HBR. AT $60 oil which is Moodys 2024 forecast there will be negative FCF as 2023 EPL payment required

Enquest really needs oil at $85 plus for the business model to work. At this level Enquest is generating $400m of FCF before EPL and approx $200-250m after EPL which will facilitated at least a $100m pa of shareholder return and $100m for growth investment.

Good find and a useful analysis which explains why Enquest is reluctant to pay dividends or fund share buybacks this year.

I am sure the government did not consider that EPL would reduce RBL facilities and it sounds like the deferral of Kraken investment is largely because of lack of cash with bonds to repay in October and bank facilities being reduced.

Jan

Because of the timing of the introduction of the EPL it was not permitted under accounting standards to record the impact of EPL related deferred tax at the half year. The impact of the EPL on deferred tax balances will be recognised at year end (same as Harbour) as a significant charged against profit. Harbours charge was £1.5b and suspect Enquest will be $300m+.

I would not get too concerned about it as it is an accounting entry to harmonise accounting depreciation and tax allowances. EBITDA and FCF a much more important measure. However harbour have used it quite skilfully to blast the government and EPL for wiping out their profit. In reality HArbour still generated over $2b of FCF and payed down $1.5b of debt while returning $600m to shareholders.

Tamov

I do not believe the EPL will last - WFT taxes come and go and this is the third time there has been a NS smash and grab and all previous WFT’s were removed once investment levels declined. It will happen again but probably not until autumn budget at earliest but more likely march 2024. I anticipate that labour once in power will have a different and more pragmatic view.

I also think oil has a medium term rate closer to $100 per barrel than $85.

I am very happy to sit and wait for a couple of years with an 8% yield and buy backs / debt reduction driving increased share price. While fair value might be £3 today, i am expecting FCF generation to add 6-8p peer month to share price.

Tam

I have done a similar analysis and first I wanted to understand how the 2023 FCF forecast had fallen to $1m given no EPL to be paid in 2023. The differences are as follows. 1. Lower production of 15k per day ($400m), lower realised prices ($420m), higher capex ($200m), higher operating costs ($100m). Amazingly the 2023 forecast is to pay $100m less tax in 2023 than 2022, with $250m of EPL paid in Oct 24.

Accordingly without the EPL timing issue because of subsidiary outside of quarterly payment requirements (this will change in 2024) - FCF in 2023 $750m.

The detailed financial statements shows that our core UK tax bill was reduced by $750m due to loss utilisation and just over $500m losses remaining which should just about shield 2023 from core 40% UK tax. Looks like we will be full tax paying in 2024. Thankfully gas hedges expire as tax losses expire which should roughly balance each other out.

My thoughts on 2024+ at $85 oil and 150p therm gas and 193k barrel per day is $5b EBITDA, $1.2b cap and Abex, $3b tax and $0.8b of FCF unless EPL changes.

Accordingly I think Harbour is pretty close to fair value at £3 per share or 4xs FCF.

Dumbly

You are spot on. However the Energy price guarantee was estimated to cost £40b (£25b to April 23 and 15b from April toSept) and the EPL was due to raise $40b over 6 years. It looks like the EPG will cost in the £27b price range and very unfair that NS oilers to pay for excess profits made by Norway and the wind farms.

Dumbly

The problem is that it is gas prices that have driven the Energy Price Guarantee and the EPL.

Much less sensitivity to oil prices as does not impact voters domestic energy bills. We are all used to petrol prices going up and down and given the majority of the at the pump prices are taxes, then oil price movements have modest impact on petrol prices.

Chiro

It looks like the Suncor acquisition by Equinor was driven by both the tax losses it inherits and the ability to control the Rosebank development.

There is also 20k per day of production but i suspect the tax losses accounts for the majority of the acquisition price. The current acquisition of Tailwind by Serica placed more value on the tax losses than the 2P reserves - crazy times!!!

The FID by Equinor of Rosebank will be the litmus test for the future of the North Sea - a $5b development of 300m barrels. A deferral of this project would be huge and would result in a response from government re epl.