Member Info for Stevo12

Oilviking

Are you ready to settle up on our year end net debt bet?

Kraken - I think we will need to see the 2025 financial statements in March to be definitive on our bet on 2025 FCF, but it looks like slightly negative excluding dividend and Vietnam acquisition costs.

I have had a first cut at 2026 FCF break-even per barrel, which effectively is broadly consistent with 2025 as detailed below in mid $60s. The core drivers are reduced EPL payments, lower CAPEX and no Magnus contingent payments which is offset by lower production in UK (taxed at 38%) and higher production in SEA (taxed at 70%+). I attach my base case numbers below for others to review and challenge.

Enquest 2026 FCF cost per barrel

Production 41-45k BOPD assume 43k

Annual 15695000

Costs £'m

OPEX 450

ABEX 60

CAPEX 160

Per barrel 42.7

Interest 70

Lease 71.6 Per company forecast

EPL 50

Overseas tax 142 Key forecast of royalty, PSC and tax

G&A 10

Per barrel 21.9

Total per barrel 64.6

I have assumed Malaysia production (12k BOPD) has a royalty, PSC and corp tax of $24/barrel and Vietnam (6k BOPD) of $20 barrel at $65 oil and $40/ BOE gas.

Really interesting update. Hugely impressed by the Magnus deal - Enq still had over $800m contingent consideration to pay with a NPV of over $400m and acquiring BP’s remaining interest for $60m is an absolute steal. Enq would have paid something close to $60m in 2026 anyway for BP’s 37% share of 2026 FCF. This alone should create an increase in equity value of $200-300m.

What else did i like - Hedges better than i expected and progression in SEA is looo looking increasingly positive.

What did I not like

1. No deal

2. On 17 December 2025 (14 days before the year end) the trading update stated that CAPEX, OPEX and ABEX was in like with previous guidance and today’s RNS highlights that the above costs were actually $30m less. I really struggle to understand how you can not know what your 2025 CAPEX and ABEX bill is going to be on 17 December. These are long lead time items but on the positive side they were lower than forecast. However, I can not understand how a competent management team can get a 14 day forecast wrong by $30m.

3. As i expected the company generated negative FCF in 2025 with an increase in net debt of $50m, although the increase in net debt was partly driven by Vietnam acquisition costs of $22m and $20m of refinancing costs. Sorry Kraken but it looks like an other contribution to charity.

I do not yet have a view on 2026 FCF yet.

Mirasol

it will take a little over 12 months to repay Navitas the loan from Phase 1 FCF but, as noted by others, RKH will have the ability to seek other forms of finance once the cash is flowing. They will also have to fund their share of phase 2 development cap ex which will be substantial and can’t see a lot of exploration until phase 2 is flowing in 2030.

Marked

Total production from phase 1 of 43k per day (max 50k per day) of which RKH entitlement is 35% or 15k BOPD.

Buildersbum - apologies yes post royalty revenue $340m pa or close to $1m per day..

Tin can

I have assumed average production from phase 1 of 43k per day. Peak production is 50k+ but starts to tail off quite quickly and yes $100k per day revenue post royalty at $70 oil.

Paul - a 9% royalty is equivalent to a corp tax rate of 15-20% as OPEX, CAPEX and Interest is not deductible. In my calculation royalty cost is $6-7 barrel and corporation tax at 26% is $8-9/ barrel. Royalties are a sneaky way of generating tax income even if operator is losing money.

Also at $70 oil, RKH will be cash flowing $25-30 per barrel so a capital value of 2P reserves of $20/ barrel is pretty racy. Each $10 increase in oil price will add approx $6.5/ barrel of FCF.

There have been many discussions on future share price at various stages on the journey to and beyond first oil and for my own benefit I have tried to apply some logic as detailed below. This is very much a straw man to be challenged, improved or rejected but here goes.

1. 2P reserves of phase 1 are 60m barrels to RKH and share of CAPEX approx $700m ($12/barrel) pre tax benefit. Value of 2P reserves at first oil approx $20/barrel (at $70 oil) or $1.2b. I have based this value per barrel on NS barrels pre EPL with UK and FI taking a similar tax take. I have also triangulated it as follows; 15k barrels per day would yield post royalty revenues of $340m, OPEX of $153m (at $28/barrel), Corp tax of $47m, gives a pre interest FCF of $140m resulting in a valuation multiple of 8.6X FCF which is quite racy for O&G.

2. Per above, the conversion of $60m of Phase 1 reserves to 2P creates $500m of value ($1.2b-$700m capex) to which tax losses would increase value by approx $125m (discounted) - so an equity creation on phase1 of $625m on successful first oil. Applying a 20% risk factor and discounting back two year results in equity added value today of $405m. Accordingly taking into account the approx $150m of equity raise, this translates to a phase 1 valuation of $555m (£425m).

3. RKH current market Cap £622m which confers a value of approx £200m to phase 2-4, 200m barrels of 2C reserves of £1 ($1.3) per barrel. So future value creation is generated by successful completion of Phase 1 which will unlock further $220m of value or 20p per share. However the big uplift comes from moving Phase 2-4 2C reserves to 2P which unlocks $6.7 per barrel ($20-12-1.3) or $1.3b. This translates to 117p per share. The reality is that this value will likely be unlocked between 2-8 years.

So potential of approx 220p per share for Sealion in long term with oil at $70 plus inflation of 2-3% per year, with possible £1.25 on first oil combined with Phase 2 FID in early 2028 - £1 for Phase 1 and 25p for Phase 2 FID.

Thoughts? Challenge!

I am also with II and cash has been returned. Unfortunately I was only allocated 4% of the excess application.

Agree sitting duck. Oil will have its bull run which might not be in 2026, but it will comer. Gas I am not so sure about given the current difference between European and ROW prices. The ROW has a lot of catching up to do to reach European prices.

Thanks SEK. Worth a question at the next update.

This is more a matter for the Serica BB but the original purpose of the discussion was to understand the difference between HBR and Serica’s 2026 FCF (relative to size) and the key reason seem to be that Serica is not paying any EPL or Corporate tax in 2026, which if true, is a major advantage.

SEK

I absolutely agree that as company sponsored brokers the forecasts are built on info provided to them by management and will have been subject to management review and commentary.

However I can not see any possible scenario that the current and enlarged group is not subject to EPL which is pretty much unavoidable against which historic tax losses can not be used. I Accept that the brought forward tax losses will offset triton profits for CT and Supp charge, which is why tax rate will not be 78%, but more in the 45-50% (of which EPL is 38%). The timings of the tax cash payments will have some complications between original Serica business (Bruce) and Tailwind, Prax and Spirit acquisition but i can not see how they can arrive at a total tax payment of £8m for 2026.

Perhaps you could ask Stephane Fouchard? I would be really interested to know.

SEK

I have taken a detailed look at the Auctus forecast and for 2026 they assume a total tax bill for Serica of $8m and approx $330m of pre tax FCF. This makes no sense as Serica will be paying 38% EPL on all UK taxable profits and further 40% on Bruce profits. I anticipate the effective tax rate will be somewhere between 45-50% which would result in a more realistic $160-170m FCF for 2026. If Harbour was not paying any tax in 2026 then FCF would be $3-4b.

SEK

While the CAPEX for LLOG is averaging $300m per year, the guidance was higher in earlier years. I have taken management guidance re 2026.

The key reasons for the relatively low FCF compared to Serica (per barrel) are the tax rates in Norway and UK with Harbour not holding any tax losses and also interest on debt. Not sure what commodity prices Auctus assumed.

SEK

I would not expect LLOG to contribute to FCF in 2026 with CAPEX programme to double production in in full flow. Waldorf could kick in $100m FCF.in 2026.

Need to recognise that 2025 FCF includes $400m of working capital management which is non-recurring and improvement in 2026 FCF beyond $0.6b forecast is principally commodity price dependent. I do think the risk of dividend reduction in 2026 did have impact on SP yesterday and might do further damage if confirmed in March. The inconvenient truth is that O&G share prices follow the cyclical nature of O&G commodity prices and we are in the bottom of a trough. The sun will rise again.

Meoryou

We are in the oil price slump! $80-90 to $60 is a pretty big slump and while Brent could go into $50s this year, i think it is more likely to hover in low to mid $60 before returning to trend in 27/28 with oil north of $80. This excludes any black swan events. Interestingly the medium/long term trend for gas is downwards as LNG grows. So we could see a recovering oil price and declining gas price in 2027 - in fact gas might drop enough to trip ESM.

Happy

I disagree that Enq overpaid for LLOG. The acquired business is currently generating approx $400m of FCF which increases to $800m by 2027/28 with WTI at $60/barrel and will be over $1b with WTI back to $70. Even without volume improvements, an acquisition price of 8X FCF is not outrageous.

The real problem was the WD acquisition price which was more like 20X FCF and Enq over paid to reposition the business away from UK.

2026 is going to be a difficult year for the whole O&G sector if oil is in $50-60 range and will see a further shakeout. Hbr can withstand a low oil and gas price environment for 2026 and oil price will return to trend but not before 2027 at the earliest. Personally I am staying in but would not invest further until probably Q4 2026 or until oil price future start to improve.

My take on the trading update is that 2026 is going to be a year of positioning Harbour for next 5-10 years in what is going to be challenging commodity prices. The assumed lower oil and gas prices in 2026 (compared to 2025) reduces FCF by approx $0.8b which is partly offset by reduced CAPEX.

The positive message is that HBR can comfortably withstand a lower oil price environment but with consequentially lower dividends and FCF in 2026. Excluding a material increase in commodity prices or removal of EPL, I can not see a driver for progression in SP in 2026. I think patience is needed which will be rewarded by 2027/28.

While a really positive result it also highlights that RKH could have raised a significant portion of the capital needed for Sealion from Long Term Holders rather than Israeli funds. There was more than enough time! Anyway the past is the past and hopefully a steady climb from here.

SEK - you may be right. We will know more very shortly with upcoming announcement.