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Kraken
I put my hands up. I did get the second half of the year FCF projection significantly wrong. However, in my defence, it was based on material errors in management’s guidance around OPEX ($55m) and EPL ($15m) and also cash flow benefits from timing of loadings and cash advances from our JV partners, that will most likely reverse in 2024.
Of course i would like to see shareholder returns in 2024 but not at the expense of buying good producing assets and using tax losses. I would expect that Enquest could get cash payback in 12-18 months - where else will you get that return if funds were used for buyback or dividends.
I do however believe that H12024 will be strong FCF and will get close to the 0.5x debt/EBITDA metric as CAPEX will be back end loaded and $150m ish of EPL paid in October 24.
Not too long now before we get management guidance on shareholder returns and all i am saying is that personally i wont be too disappointed if shareholder distribution is in 2025 as long as the money is used to buy quality producing fields with rapid payback. Both would be great but not sure this is realistic.
Sek/ Kraken
I am not sure it is the type of shareholder return that will be the key factor, but the fact that the company has reduced debt to a level that it can commence shareholder returns (in whatever form) that will drive share price forward.
I am hoping the year end results will give a little more clarity on FCF / debt reduction expectations for 2024. The key message i took from the trading update was that 2024 would year of investment to benefit from current investment allowances pre Labour, in addition to buying another producing field.
My gut feels is that with increased EPL, CAPEX, ABEX and OPEX in 2024, partly offset by first phase of lease reduction (with larger lease reduction in 2025) and reduction in JV Cash (due to increased CAPEX programme), there will be marginal debt reduction in 2024. This will particularly be the case if there is an acquisition of a producing field.
2025 is looking much more interesting for shareholder returns, with reduced lease costs and higher production. The messaging with this years annual report is going to be really important.
Alex
You are forgetting to deduct the $5.3b of debt from your EV of $7.2b which would result in share price of £1.
It also looks like 2024 EBITDA will be below 2023 based on management announcements but all depends on gas prices and to a lesser extent oil.
I don’t think an EBITDA multiple of 1 is realistic and equally the EBITDA multiple of over 2 applied to WD is too high. Based on previous discussions on this board a valuation of 1.7x EBITDA would be the upper end based on Norwegian listed groups. I cannot see any real logic for Harbour EBITDA multiple to be upgraded to 1.7xs but let’s say that reflects some synergy values. 2024 EBITDA of combined business looking in the $6.8-$7b range, giving an EV of $11.6 -11.9b and an equity value of $6.4-6.6b and share price of £3-3.13.
I think this is the realistic outcome on completion. Anything more is a bonus.
Good for harbour but crazy that deal are cutting down ancient forests in Canada and shipping belts to burn in the UK and emit more CO2 than a gas plant but because the CO2 is attributed to Canada due to location of trees rather then the UK as the user is absolute senseless nuts. We are subsidising Drax by $4b because the CO2 is allocated to Canada. The fact they are planting a new tree that will take hundreds of years to recapture the CO2 that is release in a few months from felling a mature tree seems to be lost.
The world is going crazy and the fact that Hunt appears to be considering extending EPL when a government lead consultation concluded a couple of months ago that a legitimate windfall tax regime needed after end of EPL. This has now got nothing to do with windfall, but government thinks they have a sector with no public sympathy (due to climate change and Shell/BP profits)and is quite sticky in terms of existing fields, which can be taxed to near death to allow OBR to sign off on tax cuts.
Rom
It is going to be really interesting to see how this plays out in the run up to the election.
Whether tories challenge both the achievability of a decarbonised grid by 2030 and more importantly the cost myth is the question. Voters inherently like the sound of green energy until they understand it is going to double or treble their energy bills and they will have a pylon at the bottom of their garden.
What will become increasingly clear is that there is lack of capacity to lay the underwater cables to connect NS to grid. Also the building of many thousands of miles of pylons and cables across or green and pleasant land is going to meet with planning objection and supply constraints. Further and most importantly labour has not detailed how it will have backup available (battery or hydrogen) available by 2030 for when the wind does not blow.
I hope the tories are laying a trap as labour will be unlikely to back further away from green promises.
Asartara
I have been taking a closer look at VAR energy per you recommendation.
Just one question. Have you bought through a uk platform as I was struggling with ii and hl.
Var is another good proxy to compare the WD valuation. 100k bpd lower production than WD in 2023, but with approx $1b higher revenue and EBITDA than WD, spending $3b in 23 and 24 on capex and paying $1b in dividends. Market cap of $7.3b and $2.5b debt results in EV of $9.8b and EBITA multiple of 1.75 (similar to bP aker) 2025 BOPD target of 500k BOPD based on in-progress development projects.
Looking at the positive side of the deal for WD, if the equity element is valued at actual harbour share price, assume $1b of fcf pre completion and debt value is $0.5b less than headline price, the purchase price reduces to $8.6b and EBITDA multiple 1.9, compared to harbour and other NS oilers valued at less than 1xs 23 EBITDA.
Just shows how much the tax uncertainty is impacting values.
You are correct Londoner that the projects approved by WD will receive the additional investment allowance uplift.
A very similar additional incentive is included in the EPL which results in both Norway and UK O&G investments being effectively 90%+ funded by the state. The additional uplift in the UK continues until 2028 under the Tories, however will likely be removed under labour.
If labour would commit to no change to the current EPL, we would at least have stability and predictability and a slightly more attractive tax regime than Norway.
It is interesting that we have frequent references to oil price movements on this board and yet the majority of our production is gas and will increase to approaching 2/3 following WD deal.
The oil price seems to gravitate + or - 10% around the mid $70 per barrel, while gas gyrates from 150p to 60p per therm over relatively short time periods. I would suggest the volatility of gas is much more impactful on HArbour than oil prices. It will be interesting to look back in a couple of years time to see if gas prices in 2022 and 2023 were an anomaly away from a 20 year trend line of 50-60p per therm gas. What I find interesting is that even at 60p per therm European gas is still 4 times more expensive than US gas - a massive advantage for US industry and cheap energy is the US is one of the key drivers for the outperformance of US economy in 2023.
When will our politicians realise that energy cost and availability is a key driver of economic performance.
Tamovv and Londoner
Thanks for all your input and challenge, really helpful in advancing our understanding. You can bet your bottom dollar the IIs and hedge funds will be doing the same.
I have not listened to the WD analyst call, but reflecting on Tamovv’s comment that the CFO highlighted that tax in H2 would be below cash tax in H1 due to lower taxable profits in 24 than 23, driven by commodity prices. The €1b tax in H124 makes sense as it relates to 2023 profits and highlights that 2023 tax cash cost of €2.3b includes higher H1 tax due to higher profits in 2022.
My analysis of hedges and assumed O&G prices indicated an increased realised price (due to gas hedges),revenue and EBITDA for 2024, but if the CFO is giving guidance that the tax and taxable profit will be lower in 2024, we should use this guidance. Given EBITDA of $4.7b for 2023 and assuming it decreases to $4.5b in 2024 (€4b) would result in a $150m tax reduction to €1.85b for 2024, compared to cash tax of €2.25b in 2023.
I can equally see Harbour EBITDA being impacted if gas averages 60p per therm as compared with the 100p per therm assumption used by management. Impact would be $445m reduction in EBITDA but only $110m impact on FCF.
Accordingly taking WD CFO guidance of lower EBITDA for 2024 (estimated $4.5b) and Harbour gas price assumption of 100p per therm reducing to 60p (reduces EBITDA from $2.7 to $2.3b which includes the impact 28.5k BOPD lower production), results in combined EBITDA of $6.8b and EV at 1.7xs of $11.6b or MV of $6.3b after $5.3b debt or approx £3 per share.
While the analysis is interesting (at least to me), it should be recognised that there are a number of assumptions and ifs and maybes and should be taken with a serious health warning. it does highlight that the post acquisition share price of the combined business, if valued on similar metrics to Norways listed O&G companies which have strong credit ratings, could be in the £3-3.50 range. I think the initial thought of £7 is now unrealistic now we have seen the WD 23 detail and the HArbour 2024 guidance.
Baysil
Not disputing that Equnior is a great company with over $100b of revenue and a global super major. About a 1/3 of that revenue is from its oil and gas E&P business in Norway. It has a large trading and midstream business like Shell and BP and it generated $10b of profit in 2023 after paying $26b in taxes (almost all in Norway). Equinor generated $6.5b of post tax profit from its E&P operations in Norway.
Equinor production is 2.1m barrels a day of oil and gas of which 1.4m per day is from Norway. The Norway E&P is generating approx $11 per barrel after tax profit which is similar to BP Aker and pretty close to WD (adjusting for one offs).
What I am saying is that Norway has a very clear position. The state funds 78% of exploration and development costs and keeps 78% of the operating cash flows during production. An efficient Norwegian operator’s 22% share can generate a good return as BP Aker and Equinor demonstrate. At 2023 oil and gas prices, this is in the $10-11 per barrel FCF range (gas at current prices is closer to $8 per BOE and oil $13 per barrel.)
Harbour generated $15 per barrel FCF in 2023 but this was before full EPL payments. What I am struggling to understand why you would value a business at $10 per barrel of 2P reserves (including undeveloped 2P) which will earn you about $10 per barrel over next 10 years.
I think we all have differing views over renewables and CCS. My observation is that we are many years away from CCS revenues and the profitability and the business model is not yet clear.
Londoner
On 2023 WD oil, I calculated realised price of European oil sales at 19m barrels @66.3 and 14.9m barrels at average Brent of $82.3. This gives an average realised price for European oil of $73.3. LA and ME oil averaged $72 per barrel.
On gas I have average Europe realised price of $47.2 per BOE (67p per therm) and LA and ME at $21.3 and $23 per BOE.
I like your before and after analysis and effectively we are paying $2.8b (increased debt) to benefit from an additional $600m of EBITDA, which will be closer to $200m after tax. We could have acquired $600m of producing EBITDA for approx $1b (100m+ of reserves). So in very broad summary, we are paying $1.8b for scale, diversification and potential synergies.
I also recognise that WD’s 2024 gas hedges cover over 50% of European gas sales at 105p per therm providing a strong underpin for WD 24 EBITDA compared to Harbours 24 gas hedges at average of 62p per therm.
I will wait to see prospectus before deciding to fold or hold. There may be something we are missing.
I agree that the the uncertain UK tax regime is a drag on UK O&G valuations, but I really cannot see an outcome where UK tax regime is worse than Norway. Current NS O&G is significantly better than Norway but recognise Labour is worse.
Tambov
Was the amounts disclosed in the analyst call $ or €? I estimated 2023 tax paid of €2.3b included €0.4b related to 2022, so 2023 tax cash cost $1.9b. I think €1.7b is a good estimate for 2024 if EBITDA falls to €4b. This would however leave FCF of 4-1.7 (tax) - 1.4 (capex + exploration)- 0.2 (int) = €0.5b FCF for WD.
Your debt assumptions re harbour bond and net debt are consistent with mine.
I have had a more detailed look at WD 2024 EBITDA and I calculate it being higher than 23 due to gas hedges and oil price improvements. At 60p per therm and $80 oil, I calculate revenue €0.7b higher partly offset by €0.2b higher OPEX. This should result in 2024 EBITDA of €4.7b ($5.1b). This improvement is almost all Norway related and will be taxed at 78% but should result in 2024 FCF of $0.7-1b.
Asartara
It is not clear what debt was assumed to have been left with the business on the IPO so very difficult to compare apples and apples.
The actual net debt at 31-12-23 of WD was €2.4b as compared to the approx $6b being transferred to Harbour
Zebbo
There are so many unknowns with CCS. What we do know is that 2030 is the earliest potential date for CCS to commence. What we don’t know is how CCS will be priced and how much will be paid to the capturing process and how much will be paid for transport and storage.
While government have announced some big intent (£20b of funding), there is no detail of how CCS will be subsidised.
Accordingly I don’t think any value is currently assigned to CCS given uncertainty on commercial model and the time lines.
Londoner.
The 1.8% bonds will be generating approx $150m interest saving pa until refinancing. The $0.5b is a rough estimate of the difference between fair value of the debt and nominal value. This should be adjusted for in the debt add back to arrive at potential equity values but given the debt can range between $5b and $7.2b, depending on pre completion cash flows, this is a false level of precision.
My core concern is relative values to drive the equity split. We know WD EBITDA for 2023 was $4.6m and using EBITDA multiple of 1.5 (per Aker BP) would value the business at $6.9b. Harbour is currently valued at approx 0.8x 2023 EBITDA. The deal is valuing WD at over 1.8x 2023 EBITDA at current HBR share price.
I just do not see the rationale for the differing values. Prospects in Mexico are similar, Harbour has good prospect in far East. UK and Norway Tax regimes are similar pre Labour. Harbour has far higher decom liability - could this be part of reason. I also struggle with the WD 2P reserves and that approx 500m are undeveloped. I have never seen this disclosure before and wonder how much of Harbour’s 2P reserves are undeveloped.
Buzz
Not sure why Bondholder would not agree. They currently have security over WD assets and post deal they will also have security over Harbour assets as well.
I also recall somewhere that the bonds were with the BASF group. Could be wrong.
I think Harbour’s long term survival would only be a question if Labour implemented their full tax policy which I believe is unlikely due to job losses and union resistance. We could still have a good few years of $1b FCF with no UK CAPEX until production dropped to unsustainable levels, probably enough time to build overseas business and then walk away from UK decommissioning.