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Romeron
I think we will start to see bids for offshore wind that reflects the reality of a rising (rather than falling) cost of construction and operation. Unfortunately the bids and the wind farms do not have to bear the cost of intermittency and while wind represents a minority of energy supplied to the grid and there are gas fired power stations to step in when the wind does not blow (up to 10 days Una row), there are no material cost implications.
However once we have achieved the Labour dream of a decarbonised grid by 2030 with wind representing 80% of energy input to the grid, the system will require storage and that is the hugely expensive and uncosted element in the system. Battery storage for other than a couple of hours is massively expensive and green hydrogen is both expensive, inefficient and unproven.
I find it interesting that Germany is now building new gas fired power stations as their green dream meets reality. When will the UK wake up.
Thanks RedB.
Still scratching my head a little as 2022 financial statements showed annual lease payments decreasing by $25m in 24 and in 2025 a further $40m. There are other leases in addition to Kraken FPSO but timing does not quite tie up with the end of the original lease in April 25.
The 2023 financial statements should clarify but the key message is that lease costs will drop very significantly as you note.
A really good question Wiggly. While we know the decom liability is large at $700m, the timing of cash costs is not clear.
Enquest is in the process of completing decom on a number of retired fields and this should be largely completed in 2004/25. The decom or Kraken, Magnus and Golden Eagle etc are many years into the future and we could see a reduction in Decom cash costs in 2025-2030.
Enquest will be getting a tax refund for approx 40% of the decom costs incurred in 2024, but not sure if the $70m forecast is gross or net of the tax refund.
The labour tax policy could accelerate the timing of decom if investment is frozen.
sek
i am willing to give up a few pence for a bit more certainty. a couple of weeks ago i was close to folding but i am now thinking that i will move more back into equity if the financial statements and the next 2024 update are still looking as positive as recent update. i am in particular looking at the 2023 financial statements for further insight into the following:
1. lease payment schedule for 2024,2025, 2026 and beyond. the 2022 accounts highlighted a reduction in 2025 but not the 70% referenced
2. 2023 epl charge to be paid in october 24
3. 2p reserve replacement in 2023. it has been poor over last couple of years and i would like to see what we have got from the $160m spent in 2023
4. thre is something not quite right with the cash number presented. we know that the jv cash is restricted for jv purposes (capex) and includes cash belonging to our jv partners (which is treated in net debt calculation as belonging to enquest), but i don’t understand if we have so much cash why the 9% rbl is not materially paid down. we can redraw the facility if we have an acquisition to finance. while management has been transparent in highlighting the 2023 cash position benefited from a reversing working capital timing benefit of $40m, i am assuming there is a degree of window dressing with the month end and certainly reporting period cash higher than the average monthly balance.
this will be visible in the interest income reported in the financial statements. given cash will have been earning 4% plus on any corporate account, we should see as high level of interest income. the interest income in the first half year was quite low indicating the average cash balance was far lower than the reported cash balance.
this is important to me as i want to understand the underlying net debt and i am expecting the jv cash balances to decline significantly by end of 2024 as enquest pulls forward as much capex as possible into 2024.
5. i am interested in further updates on the huge gas opportunity referenced by ab at davos. i am hoping it is not malaysia as gas belongs 100% to petronas and enquest receives a handling fee (not sure how much). i am a little frustrated that enquest counts malaysian gas (although less than 1k bpd) in its production numbers when we have zero equity interest and i am going to be mighty ****ed off if the forecast 2025 growth in bpd is due to malaysian gas for which we are purely paid a handling fee.
6. a bit more info on bressay, although assuming it is a dead duck until we have clarity from labour and also plans for svt.
6. outside of enquest’s control, i am hoping we will get a step back from labour on their ill thought out policy (although not holding my breath). i am also concerned on oil supply demand balance in 2024 which relies on opec (or saudi ) discipline in holding back capacity. fundamentals look much stronger for 2025 plus as lack of investment will eventually bite
Anas Sarwar reference to energy giants making 10Xs more profit was a reference to British Gas who don’t pay any EPL and increased their profits from £70 to £700m. Nothing to do with NS O&G. Stunningly stupid
sek
agree that 2025 should generated a very strong fcf year with significant debt reduction/ shareholder return. my back of the ***packet cals shows 2025 being over $200m higher fcf than 2024, with $100m coming from reduced capex, $30m reduced epl, $40m lower lease costs, $40m from 2k bpd of increased production. there will be increases in opex.
i am anticipating there will be no debt reduction in 2024 as the company uses $70-100m of fcf to acquire producing assets. enquest should be able to purchase 10m of 2p for approx $75m which should yield 1.5m barrels of annual production (4k bpd) resulting in cash generation in 2025 of $80m. while worth $80m to enquest, the seller would only lose $20m of fcf if full tax paying.
accordingly i can see 2025 being a bumper cash year with a sensible acquisition contributing to fcf of approx $350m which would result in significant market rerating and shareholder returns.
i promised myself that i would make a decision to hold, twist or quit following the announcement. i am not not yet ready to twist and will wait to see the update with year end results and whether labour reverse their “proper windfall tax”. so its a hold for me but will twist if my expectation of 2025 is confirmed by company during 2024.
SeK
Extract from financial review for 1/2 year 2023
“The tax charge for the six months ended 30 June 2023 of $131.8 million (2022: $142.4 million tax charge), reflects a $45.5 million non-cash deferred tax impact on the Group’s profit before tax, $10.3 million overseas current tax charge and a $76.0 million current tax charge associated with the EPL (noting EPL was substantively enacted in July 2022).”
I agree that Enquest could get pretty close to the 0.5 threshold by 30 June 2023 as I anticipate increased CAPEX will be back end loaded and EPL payable in second half of year. I think that management will look to where they will be at 31 Dec 24 in commencing shareholder returns.
L7
While it is useful and interesting to us number geeks to calculate the EPL costs, the company told us that for first 1/2 of 2023 the EPL charge was $76m and probably the best estimate is to simply assume a similar charge in second half giving an approx $150 EPL cash cost in Oct 24. This is pretty similar to the bottom up recalculation.
I am assuming the company’s understanding and calculation of EPL will have been refined following the completion of the 2022 tax return. The EPL cost in 2025 will likely go down due to the additional CAPEX in 2024.
I still think our biggest ally in the fight for a fair tax is the unions and it is great to see them starting to flex their muscles and comparing O&G to the demise of the coal industry.
L7
I understood from conversations that Enquest has an agreement with HMRC that finance leases are treated as effectively operating leases and expensed against tax as spent, as opposed to receiving capital allowances. However this agreement would have been for CT and SC purposes and I can see HMRC arguing that interest element of Lease payments should not be deductible against EPL profit.
Have you seen specific guidance on this or are you using logic?
In reviewing my 2023 FCF reconciliation, I have made a mistake in that I have applied a 2023 EPL cash payment of $60m. It should be $25m as Enquest received a $35m EPL refund in Q1. This results in underlying 2023 FCF of $252.5m compared to debt reduction of $236m. The principal difference being the the $50m Golden Eagle payment less the $40m Working capital benefit.
So $250m underlying FCF for 2023 looks like a good baseline number for projecting forward into 2024 before the reductions in 2024 FCF as guided by management, which are approx $180m if EPL is $140m for 2024. We will know when the 2023 accounts are released and 2023 EPL liability reported.
Part 2. Not enough space
I have estimated 2024 EPL payment in oct 24 as follows:
EBITDA $800m, less lease costs $152m, less Magnus BP payment $76m, Less investment allowance ($160m - $25m for malaysia x129%) $174m = taxable profits of $398m at 35% = $139.3m.
There are a few questions on high level of FCF in November and December and there appears to be 3 components (1) $40m benefit from working capital changes due to timing of loadings - this will likely reverse in early 2024 (2) lower than projected OPEX (3) cash in JV bank accounts increased by approx $40m between end October and December. This will include cash put in by Enquest and cash contributed by our JV partners to fund 2024 CAPEX. There are no details on the how much of the cash balance belongs to our JV partners and could be in 30-40% range.
My reflections on the announcement of 2023 results and 2024 guidance. I have detailed my assumptions based on the info provided by the company so that each elements can be considered and challenged by yourselves. All thoughts and comments greatly appreciated as we collectively refine our understanding.
2023
EBITDA for the six months ended 30 June 2023 was $399m and while production in the 2nd half year was 3,300 barrels per day lower than first half, realised prices should be approx $5 per barrel higher, which broadly cancel each other out. So my assumption is that similar revenue and EBITDA in second half of year, resulting in $800m EBITDA for 2023.
Cash costs excluded from EBITDA for 2023 were EPL $60m, Lease costs $152m, Magnus BP payment $76m, Interest cost $83m, Interest income $7.5m, CAPEX and ABEX $220m. Accordingly, FCF is estimated at $217.5m as compared to the reported debt reduction of $236m.
We know that the $236m reported debt reduction is after a $50m payment to golden eagle and also benefitted from a $40m working capital reduction due to timings of loading (which will likely reverse in early 2024). Cash sitting in restricted JV accounts is broadly similar at both 2022 and 2023 year ends so should not impact FCF.
Accordingly, there is a $18.5m (8%) difference between calculated and reported debt deduction, which could be due to a range of factors and, accordingly, using the reported $236m debt reduction as a proxy for 2023 FCF is not unreasonable.
2024
While Enquest does not spoon feed us with the projected 2024 FCF, there is enough info provided to estimate the key changes from 2023 as follows.
Revenue – Revenue should be broadly similar if oil averages $80, with 1k per day reduction in production offset by $2 per barrel additional revenue.
OPEX – increases by $45m as reported
CAPEX and ABEX – increases by $50m as reported
Lease costs – reduces by $25m per 2022 financial statements disclosure
Interest costs – Bond interest increases by $10m to $72m and RBL interest decreases from $21m to $10m.
Interest income – difficult to estimate and assume $2.5m higher than 2023 at $10m
BP Magnus payment – same as 2023
EPL – October 24 payment estimated at $140m (see workings below) compared to $60m in 2023. Enquest estimated EPL for first half year at $78m so could be closer to $150-155m
Using the above assumptions / guidance, FCF for 2024 is projected at $146.6m lower than 2023 at approx $89.4m. In addition, there will be the cash generated from sale of EP/Bressay less any cash cost for acquisition of 2P reserves in 2024.
I am looking at 2024 as a year of investment to max out EPL allowance before potential labour changes in 2025 to sustain/grow 2025 production. EBITDA for 2024 is estimated at $755m ($800m-$45m) and using 0.5 ratio requires debt to fall to $377.5m to commence shareholder return. This appears broadly achievable by end of 2024 or early 2025 with EP/Bressay cash receipt and a
For once we agree Kraken. The EPL has reduced market value by approx £0.8-1b or $10 per barrel of 2P.
Looking it another way we will be paying approx $150m per year of additional tax for 6 years.
I would not feel so bad if there was an actual windfall. Oil is pretty much at historic levels now and that is not accounting for inflation in O&G costs. Show me one product in a supermarket that is at or below its average price over the last 20 years
I do agree with Romeron that this could be, or close to, the darkest days for NS O&G companies and all WFT taxes in the past have been removed after a couple of years. However this is unlikely before 2025, so just need to get through 2024 and repay as much debt as possible.
Tomorrow is going to be interesting.
Just speculation, but there must be discussions going on at Shell and BP HQ about relocating head office and principal listing to US.
Shell actively considered US a few years ago when it relocated from the Netherlands to the UK because of anti oil and gas sentiment in Netherlands. The market valuations of the US super majors are at least 50% higher than BP and Shell on all metrics and the US is the most significant producing location for both Shell and BP.
We know the UK is now less than 5% of their production and why would you remain in a country (particularly under Labour) which despises O&G. Perversely both Shell and BP are committing proportionally more to UK’s Green transition than warrants based on size of UK business and a relocation of HQ and listing to US would allow them to avoid ‘POLITICAL” value destroying investments in the UK.
I am calling it early that definitely Shell and potentially BP will move HQ and listing to US in 2025.
CAPEX spend in 2024 makes good business sense as HMRC effectively funds 91.4% of spend through reduced tax payments (at least for the legacy Serica business). If Labour wins election and implements their stated policy then all CAPEX becomes value destructive.from 2025.
Labour is effectively proposing to take 100%+ of all FCF over field life.
L7
Just one additional point to your decom costs. The UK and most other countries (including Norway) permit tax deductibility for decom costs on a cash paid, rather than accruals basis. If there are insufficient taxable profits form oil sales to offset the Decom costs, HMRC pays a cash tax refund. Accordingly when a company decoms its final field, HMRC repays the company in cash approx 40% (and up to 50%) of decom costs. Each field has a specific agreement with HMRC which is approved in parliament such that future governments cannot change the agreement without compensation.
This is why pre 2022 Shell was receiving a net tax refund from HMRC due to their decom spend.
I have a question. I have never understood the background to the Magnus gas resale. It appears we are buying and selling approx $250m of gas each year. There is reference to it being excess gas not required for injection.
Does anyone have any better insights into the nature of the Magnus Gas arrangement?
Londoner
I am a recently retired chartered accountant who initially specialised in tax advisory, until i moved to M&A (principally due diligence investigations on behalf of buyer) over 20 years ago. i have always retained an interest in corporate tax but i have never professionally work on O&G companies.
In terms of your question there is a significant difference between taxable profits and financial reported (accounting) profits. Depreciation or depletion is not an allowable cost in calculating taxable profits, but is replaced by capital allowances which normally accelerate the tax benefit.
In O&G the best estimate of taxable profit is EBITDA less capital allowance on in year CAPEX. Current tax law allows 100% of CAPEX (plus the special allowances in SC and EPL) to be offset against EBITDA in calculating taxable profit, whereas for accounting purposes the CAPEX is depreciated over the life of the field. Interest expenses is allowable as an offset against core CT but not EPL.
The reason we have tax losses is that over several years Enquest’s capital allowances have accumulatively exceeded EBITDA resulting in tax loses which are carried forward indefinitely to use in periods where EBITDA exceeds in year Capital allowances ie 2023. This is not unusual when there are long life, high cost capital projects.