If you would like to ask our webinar guest speakers from Blue Whale Growth Fund, Taseko Mines, Kavango Resources and CQS Natural Resources fund a question please submit them here.
Many thanks londoner, as usual. Couldn´t agree more, so I just comment to provide some additional colour on Deleks potential reasoning for the ITH IPO itself back then.
As a longterm Delek shareholder, I was in the middle of the Covid crash, leaving Delek in a badly over-leveraged situation with credit-rating downgrades below investment grade and a going concern warning for almost two years in their reporting and results.
Delek managed to negotiate a "memorandum" with the consortium of lendings banks. Just to recall from my memory, Delek must not pay dividens until credit rating has improved materially and New Med Energy (they tried to IPO through revise merger with Capricorn for instance) or Ithaca IPOd to increase the potential short term liquidity (by being able to sell own shares against the market in "financial pressure situations" creating additional freefloat).
Thus, the 90/10 Ithaca IPO was the basis for the current Delek Group dividend payments according to my memory.
The fact that Delek believes Ithaca is undervalued with its current market cap. is also strongly reflected the option londoner already mentioned, so they can get back that 1% from Eni, they had to painfully sell at these cheap levels right now.
As I already mentioned several times here, I am slightly disappointed by the fact that the 500m dividend announcement was/is not enough to sufficiently support the stock price. I still plan to add on these levels, breaking with all balancing rules of my portfolio. Hopefully HBR will present positive news on its AGM next Thursday, resulting in a SP above 310 Pence again, so I can continue rotating from HBR into ITH to collect even more of this very juicy 20% dividend offered to people who are willing to collect Deleks forced ITH stock sells.
Can´t wrap my head around todays SP (non) action. Thought the recent drop was caused by weak Q1 production, which is negligible now given the accreditive production for old non-diluted shareholders. Fears about a dividend cut aren´t valid any longer too. So the recent SP drop has been solely caused by political statements / expectations around laber in my opinion, otherwise we should have seen some reversion today.
Q&A session was rather lame today, not many additional useful information in my opinion.
Anyways, I still like the ENI move. My model shows tax loss consumption by the end of 2028 now. Until then the ENI assets contribute to CFFO after tax (also on a 61,5% basis for non-diluted shareholders). Dividends for old shareholders approx. 1,4 bUSD at current commodity prices by end of 2028 at current commodity prices (without any windfall tax 75 to 78% worseing effect of course), which is close to current market cap... Still feels crazy undervalued to me, but maybe I am totally wrong and things around O & G in the UK will indeed turn absolutely terrible under labour and Cambo finally gets cancelled etc.
In any case ITH is a highly political stock and big bet on the industries future. However, the ENI deal de-risked the political exposure for old-shareholders in my opinion given additional optionality, so really don´t understand why there wasn´t any move today. The delek sale of 3% can´t be that disturbing or am I wrong?
Well...to be honest, it is actually MUCH MORE than I have been waiting for (expected).
Especially the special dividend announcement in massive news in my opinion.
As I have presented on this board, I was expecting a 2024 dividend of around 180 mUSD given the very weak reported January/February production (and of course all other known headwinds on ITHS dividend capacity).
At a first sight the ENI UK transaction looked fair to be, but not as good as the HBR/Wintershall for example. Now it looks like they are either completely "overpaying" shareholders from debt. capacity (but I doubt ENI is in for the short term slaughter of debt. capacity), or the short term 2024/2025 synergies of the proposed transaction are significant.
I am very pleased to see the new production guidance, taking ENI UK contributions starting from H1 into account. The standalone Ithaca part seems unchanged, thus I see it as reconfirmation that Jan/Feb actual prodution already was included in the initial guidance mentioned presented for the standalone basis.
(up to) 500m dividend for 2024/2025 ("real dividend" payed in two regular tranches, not as the initial 400m "cheat" stretched over 3 tranches) means up to 307,5 mUSD for old shareholders like us on a non-diluted basis. Thats obviously much more than I expected (20,6% forward dividend yield based on yesterdays closing market cap).
Corporate governance is about to improve significantly with Eni directors to be nominated to join. Shareholder structure to be more balanced. The only short term drag on the SP could be Delek forced to sell 3% to the public, but this should be more than overcompensated by the special dividend outlook.
Interesting to see them having mentioning Norway several times during the last Q&A sessions. Now they show Norwegian Var Energi (ENI subsidiary) as a full powerpoint slide success story of Eni. I might be caught on the too optimistic side again, but this reads between the lines as UK politicians are not complete idiots and that there is something useful in the making for UK O&G in general.
No investment advice (I am much more invested in ITH as I should be and thus heavilie biased), but I see the SP flying today.
Hi Asartara,
Sorry, have just been very busy recently. The reason for not having posted for a while is clearly not related to the recent SP drop on top of the dividend deduction and potential frustration.
Well, February production of course didn´t come up to markets expectations. I think the recent drop was caused by a mix of Stifel downgrade, weak 02/24 production and technical sells given this small stock with only 10% freefloat.
As posted on the M&A announcement day, for me the ENI UK transaction seems fairly priced to slightly expensive, but managements explanations for that were reasonable (having a strategic option to make use of the tax losses if investment climate further worsens after the upcoming election). So clearly not that bad/dilutive for current shareholder to solely justify stock price movement.
Commodity prices rallied, other players like HBR benefitted, but in 2024 ITH with lower production profile, higher proportion of undeveloped assets and some lower oil hedges already in place, doesn´t benefit to the same extent (but I am sure they will put some great additional hedges in place as they´ve shown in the past).
I personally sold some harbour to overweight ITH given share prices below 1,20 GBP, but thats no recommendation.
ITH heavilie relies on the UK O&G climate to stay investable, HBR only has one big risk that the Wintershall transaction will not go through (i.e. vetos from certain governments like Germany - which I hope as a German HBR investor will not happen!). So comparing HBRs 2,94 GBP today against ITH 1,20 GBP I decided to overweight ITH given 40-50% potential I see against 20-30% for HBR over 12-18 months. Haven´t looked into Serica yet, so no comment on that one.
For ITHs FC 2024 I agree to what Londoner or Tornado already commented on 02/24 production, it was known to ITHs management when they presented FY2024 production guidance.
However, in my model, I lowered my rather optimistic production estimate of 63 kboe/d (was betting on Captain EOR 2 to contribute to output earlier than guided) to midpoint guidance again (58,5 kboe/d). That causes CFFO to drop to 600 mUSD, equaling 180 mUSD dividend at 30%.
As Londoner already mentioned, 2023 CFFO was negatively impacted by negative working capital movement. Maybe these were even "engineered" by management to have this effect to reverse and support 2024 (their reported 2023 CFFO was exactly sufficient to cover the 400m USD dividend by applying the 30% rule).
So as you can see it´s too early for our models to be accurate enough to aim for precise numbers. Thats why I decided to leave out own interpretation for now and just work with management guidance, trusting in their capabilities and achievement rate in the past.
I would be surprised to be see a 2024 dividend below 180 mUSD, which equals 11,5% yield. Any positive development around discussions with the UK goverment, Cambo, earlier Captain EOR-2 ramp-up etc. should all offer tremend
On top of that, Stifel doesn´t like the proposed M&A transaction too much: https://www.proactiveinvestors.co.uk/companies/news/1044363/ithaca-s-proposed-eni-deal-is-the-right-strategy-at-the-wrong-price-says-us-investment-bank-1044363.html
"However, Stifel views the price paid for these assets as not particularly value-adding, equating the equity issued for the acquisition to the assets' value, thus creating no additional value from the transaction."
80p translates into 1 bUSD market cap., thats an interesting valuation.
Tax loss position sits at 4,5 bUSD, thus shields against corporate tax until 2029/30 in my opinion. Based on that, even without Cambo, ITH should be paying 200-400 mUSD annual dividend so 1,4-2,1 bUSD by 2030. Even if you consider ITH worthless by the time it consumed its tax asset because of no new Northsea investments and if you discount the expected dividend cashflows, you should arrive at more than 1 bUSD in any case (the 20% Rosebank share not considered).
But I am highly invested and might be biased.
For detailed dividend 2024/25 assumptions please see my conversation with "londoner" on this forum.
At 1,27 GBP ITH market cap is at about 1,6 bUSD. I expect 2024 dividend to be in a 160-200 mUSD range. So for me it seems like they are yielding at least 10% at the moment, with huge additional potential for 2025, because 2024 should mark the bottom for a lot of North Sea O&G companies (HRB, ENQ, etc.).
Londoner,
Appreciate your swift and very comprehensive reply. Very very useful to me!
I will reply to your 2nd part of that post regarding potential strategic considerations behind the ENI UK Deal as per separate post here. I listened to the Q&A section of last weeks conference call several times and some analysts had some question in exactly that direction on got answers with some "management hints"
Many thanks again regarding clarifying on EPL. Just to ensure I got it right, because it differs from German taxation in that regard:
For EPL, it is not allowed to deduct "Standard DD&A" (excluding decom. etc.) from EBITDAX, but 100% of period capex expenes instead? This is why you have used 129% of period capex? I.e. 100% to "replace/substitute" normal DD&A and 29% "allowence" which effectively reduces profit before tax for EPL then.
This means, in a low Capex year, EPL will become an even heavier burden, because EBITDAX is neither lowered by DD&A nor by period Capex spend?
In Germany, for investment allowances, Standard annual DD&A keeps running and allowences add up on top (i.e. the 29% here).
However, your 2023 backwards calculation seems to fit the actual reported figures very well, so seems correct and logical to me.
For 2025 I have adapted your +236m to CFFO. I see additional CFFO resulting from increased production of about 10 kboe/d, so about 220 mUSD for 2025.
Starting from my 2024 EBITDAX assumption, I get to about 630 mUSD for 2024 (excl. working capital movements) at 61 kboe/d (management commented on Captain EOR II ramp-up during a.m. call and I understood between the lines that it could happen faster than as per official guidance). So potential for 190 mUSD dividend. Management really seemed like they care about their dividend capacity (and owner Delek certainly enjoys the ITH payments), so including some lucky working capital reversal from 2023 I wouldn´t be surprised if they aim for 200 mUSD "round dividend" for 2024.
For 2025 CFFO could be 1,0-1,1 bUSD, so 300+ mUSD dividend potential in my opinion. ENI UK effects not included. But having synergies, utilization of ITH tax losses for ENI.UK and the "low ENI.UK CAPEX profile compared to ITH" in mind, the aquisition should be accreditive on a CFFO per share basis for old ITH shareholder.
I am looking forward to getting more data for ENI UK (i.e. production costs per barrel profile) deal soon along the official deal announcement, management seemed very confident to bring the deal over the finishing line inside the 4 weeks period.
Hi guys,
as a non UK resident and on top of that not an expert in the field of taxation at all, I am still struggleing to fully model the EPL cash tax burden on ITH from 2024 going forward.
Phasing is more or less clear now since management provided clear guidance on 2024 cash tax charge solely based on 2023 EPL tax burden.
However, can someone explain the investment allowence to me please?
From gov.uk I got "These changes included a rate increase from 25% to 35%, extending the time that the tax applies to 31 March 2028 and reducing the rate of the investment allowance to 29% for all investment expenditure other than in decarbonisation. The reduction in the rate of the investment allowance maintains the overall cumulative cash value of the relief following the rate increase to 35%, reflecting that it will have more value against a higher levy rate. These changes were legislated for in the Finance Act 2023 and took effect from 1 January 2023."
For 2024 my model guides to about 1,16 bUSD EBITDAX and 180 mUSD and 700 mUSD DD&A. Thus, the "taxable profit" for the EPL shall be 1.160 - 700 mUSD = 460 mUSD (financing costs cannot be deducted for EPL). Thereof 35% are roughly 160 mUSD 2024 EPL tax (before investment allowence).
Management guides for 365 mUSD producing asset capex and 210 mUSD Rosebank Capex, all excluding exploration, decommissioning etc. which could not be offset against EPL. So total 2024 producing asset capex suitable for the EPL investment allowence to be approx. 575 mUSD (midpoint guidance). Thereof 29% investment allowence are roughly 166 mUSD (to be deducted from the 160 mUSD 2024 EPL tax charge I estimated above).
Thus, 2024 net EPL payable in 2025 should be (close to) zero, or am I missing / misinterpreting something?
Londoner, (perhaps Stevo if you are reading here as well) please help.
If so, in 2025 we should be experiencing a huge boost in CFFO (after tax) bringing us back close to 400 mUSD dividend (at 30% CFFO)...
Thanks! Interesting.
EV/EBITDA of 1,6 is what we´ve found on in the HBR area of this board as well. However, comparing ITH to HBR, ITH should be valued on a higher EV/EBITDA because of the massive carried forward tax losses shielding against EPL an thus higher capacity for shareholder returns.
So in my opinion EV/FCF 2024-2028+ is the only way to properly value ITH by taking the positive effect of the tax asset into account.
Asartara,
Many thanks for your follow-up. I have spent some time on my model during the long weekend and will issue an more extensive post later on.
Just to answer to your question below:
170 mUSD is my 2024 dividend forecast given the low production guidance (probably lower than people expected here, correct me if I´m wrong Tornado/londoner)
from 2025 production will increase again as per official management guidance (2025/26 positively impacted by Captain EOR II, 2026/ latest 2027 from Rosebank start of production)
Especially 2025 could benefit from a) increased production & b) lower 2024 EPL payable in 2025 (because of two reasons, lower production higher opex thus lower tax and Rosebank investment spent to additionaly shield against EPL) so 1 bUSD CFFO (after tax) and 300 mUSD 2025 dividend accordingly is not an unrealistic target in my opinion.
For more details I am glad to provide some insights on the work I´ve done as per separate post later today/tomorrow.
All these assumptions are related to standalone Ithaca prior deal, potential effects from ENI uk not considered yet.
Bought this morning for 132,80 GBP (no investment advice!)
Will spend some work on my model over the prolonged weekend. Hopyfully others will join me supporting with some insights around UK taxation.
For me it currently seems like ITH carried forward tax losses could be sufficient to shield against corporation tax until March 2029 when the EPL hopefully ends. This combined with ramp-up of Rosebank investment (somewhat shielding against EPL) should lead to low nine digit cash tax charges and thus about 1 bUSD CFFO (after tax) / 300 mUSD annual dividend (given current production schedule and commodity prices, no hedging). All figures very very roughly from a very high level to make quick use of new information from yesterday. ENI not considered, all oldco standalone ITH as reported on yesterday.
So this year could mark the CFFO-bottom for ITH, similar situation to HBR -> burden from EPL 2023 tax charge combined with reduced own production given cancelled UK investments, but improvements from 2025 onwards (probable labour regime change obv. also not considered).
If 9% 2024 dividend yield marks the bottom for ITH this cycle, it seems very attractive to me.
Londoner7, thanks, I was rushing into my next morning appointment and only took a quick shot here.
I not only mixed up CAPEX with OPEX guidance, but also forgot to include the hedging effect and my sales assumptions was based on Brent price only, rather than applying a proper 2/3 1/3 oil vs. gas split.
Thus, this is me revised calculation:
Production (midpoint): 58 kboe/d
Sales (midpoint prod. at 85 USD/boe): 1.545 mUSD before hedging
Hedging (acc. to schedule against 85 USD/boe Brent and 0,70 GBP/therm) +115 mUSD
Total Sales (after hedging): 1.660 mUSD
OPEX (midpoint): 565 mUSD
Cash Tax (midpoint): 350 mUSD
Lease&Finance: 180 mUSD (my estimate)
CFFO 2024 (midpoint): 565mUSD
thereof 30%: 170 mUSD (which would result in a rather significant cut compared to 400 mUSD for 2023)
170 mUSD equals an about 9% forward dividend yield
However, I really linked the presentation which provided a lot of detail on various topics and some comments made during the conference call. Will comment on those as per separate post here.
PS: The 30% of CFFO (after tax) have been confirmed on slide 32, but we already expected them to apply the higher end of that range to satisfy investors given all the headwinds...
Hi Stumpy,
I don´t agree unfortunately, they didn´t say anything precise about 2024 dividend, but reaffirmed their 15-30% CFFO (after tax) guidance.
Given their new guidance:
Production (midpoint): 58 kboe/d
Sales (midpoint prod. at 85 USD/boe): 1,775 bUSD (compared to 2,3 bUSD in 2023)
OPEX (midpoint): 360 mUSD
Cash Tax (midpoint): 350 mUSD
Lease&Finance: 180 mUSD (my estimate)
CFFO 2024 (midpoint): 885 mUSD
thereof 30%: 265,5 mUSD (slightly better than my previous estimate despite the cut in production 2024)
Can´t tell how the market will react this morning. From an operational standpoint I am disappointed of the very weak 2024 production guidance in combination with Captain EOR II delays (Tornado, Londoner, etc. were hoping for contribution to H2-2024 production if I recall correctly).
On the other hand, the cambo development extension is some kind of stress relief, anything else would have been a desaster.
M&A to me looks "fairly balanced", not as good as the one HBR announced in December at a first sight. I have mixed feelings, maybe the stock market will like the reduction of Deleks ownership of the enlarged company and having Eni onboard as "counterpart". On the other hand, shareholders will not vote, Delek can decide on their own given their 90% ownership as far as I understood the press release (normally quite obvious, of course they can decide on their own as a 90% shareholder...). But maybe certain shareholders who don´t like the proposed transaction can´t do anything but sell this morning.
Looking forward to your thoughts Londoner/Tornado, will be listening to the call this morning.
Hi guys,
Happy to see some activity here going on!
@asartara as stuGGTTH already pointed at, their initial plans (made prior to the EPL desaster) even stipulate a 5% dividend increase to 420 mUSD for 2024. This would result in more than 20% dividend yield. So I assume the market believes the dividend will be cut - I unfortunately Mr. market might be right this time ;) Please find one of my posts below, where I tried to come up with an early guess for 2024 CFFO (and thus the dividend).
As it can be seen in the prospectus and as it was repeated several times by management during past conference calls, ITH plans to distribute 15-30% of CFFO (cash flow from operations after tax) to shareholders, mostly dividend but theoretically also as buybacks. Unless something unexpected will be announced (i.e. M&A activity), I expect them to use the top end of the distribution range given the current low level of leverage well within their 1,5x EBITDAX threshold.
Actual January 2024 production seemed a little bit weak to me, on the other hand brent sits quite strong at 85 USD/boe or even higher with Russias decision today, so I just slightly reduce my CFFO estimate towards 850 mUSD resulting in a potential dividend of 200-240 mUSD (up to a 50% cut). Given the current yield of 22% I expect markets to expect a about 50% cut as well aiming for 9-11% target dividend yield.
In my opinion any positive news regarding the sale of Cambo project shares, CEO presentation, (positive M&A), or production above my 65 kboe/d guestimate resulting in higher CFFO und thus dividend could boost the shareprice on Wednesday. I´m not too experienced to have any concrete idea in mind why they decided to postpone the data release on short notice. However brent moved very nicely recently, hopefully they put some nice hedges in place as they have proven in the past.
Talk to you on Wednesday folks, I am sure we will at least get a 2024 production FC and hedging schedule so we can update our models, any dividend guidance would be a bonus in my opinion (potentially seeing them just reconfirming the 15-30% CFFO policy and calling for being patient to see how 2024 develops from an operational standpoint).
Thanks for your swift reply (and the congratulations on my timing...lets this how this develops this week since the EPL extension has just been announced, ITH suffered a little bit today, hopefully thats it!).
I noted Pierce but dismissed it due to the small extent of ITHs share, shell´s like 93%.
I was aware of Captain Phase 2, but not of the exact timing, didn´t remember it´s so close from startup - thanks! Any indication on expected production boost? Just spent 15-20 mins on Google but didn´t find any indication on its desired effect.
However, looking very much forward to Q4 results and guidance end of this month, so we call can finetune and adjust our models.
Hi Tornado,
Many thanks - very useful!
I am rather disappointed how this compares against my "simple 2024 guidance" of 65 kboe/d, taken from comments made during the last conference call.
How do you interpret this January production? Given Q1 used to be a very strong quarter for ITH and scheduled maintenance still to come in Q3, this draws a cloudy picture of 2024 in my humber opinion. Of course January only represents one third of Q1, but anayways... Are there any problems known on re-ramp-ups for February/March planned, so that we can expect Q1 to finish better than the January run-rate?
Net debt at the end of 2024 should now look like
4,9 bUSD WD.bonds + 0,5 bUSD HBR.bonds + 2,15 bUSD cash.consideration – 0,4 bUSD harbour cash (= HBR net debt of 0,1 bUSD instead of 0 as guided) – 0,3 WD.FCF (H2-2023) – 1,0 bUSD WD.FCF.2024 – 0,5 bUSD (correction for market value of the WD bonds) = 5,3 bUSD
EV 13,3 bUSD – 5,3 bUSD net debt leads to rock solid 8,0 bUSD equity value of 3,75 GBP per share
I do mostly agree to all of your comments regarding the rather high purchasing price of WD and also agree to your comments regarding Londoners “before and after analysis”, however as you see, by trying to model the combined entity on 31st Dec. 2024, I get to comfortable results for old HRB shareholders after being much more careful about EUR/USD currency effects and taking 2024 hedging into account. Even if we adjust 2024 EBITDAX for valuation purposes due to it´s one-off nature it´s tough to get to an unsatisfying result from old hbr shareholders perspective (you mentioned +0,7 bUSD revenue, so even after deducting 1,2 bUSD EV I am again at 3,15 GBP, which is pretty close to what I presented on yesterday). Don´t want to downplay things or draw an overtly optimistic picture here, because I do agree to a lot of statements you´ve made, but still the math seems to support what HBRs management is about to do.
Hi Stevo,
Sorry for not being more precise with the currencies. But to defend myself, management did rarely say Euro or Dollar, mostly "billion" but since the report is in EUR, I expect them to have meant EUR. Allow me to correct myself at follows:
WD 2024 cash tax burden:
H1: 1b EUR (high level of confidence, because it´s based on 2023 actuals)
H2: 0,9b EUR (didn´t consider the hedging yet, adapted your EBITDAX, referring to CFOs comments in the WD Q4 call. He explained H2 would be less than 1b EUR given current commodity prices - this should also include the hedging schedule he´s obviously aware of).
However, I struggle to agree to your WD.2024 FCF calculation:
For my conservative EBITDAX of 4,0 bEUR you deducted 1,7 bEUR tax, 1,4 bEUR capex+explo and 0,2 bEUR int = 0,5 bEUR, but the mathematically correct result is 0,7 bEUR isn´t it (typo, or did rounding play heavily against WD)?
Applying the same math for your 4,7 bEUR EBITDAX estimate I get to 2024 FCF of 1,2 bEUR using 0,9 bEUR for H2 tax instead of 0,7 as before - emphasizing again on the CFO saying it H2 cash tax should be below 1 bEUR given the current commodity prices (and hedges I assume he should have taken into account). So this math kinda confirms my rather positive view on WD.2024.FCF (midpoint guidance for CAPEX+EXPO 2024 is 1,3 bEUR rather than your 1,4 bEUR). So using midpoint Capex guidance would bring us to 1,3 bEUR following your other assumptions, which is an incredible 1,4 bUSD (don´t believe in this myself in comparison to 2023, but as described I used your formula with some slightly tweaked variables – please challenge!). Since you mentioned 1,0 bUSD 2024 FCF for WD by yourself as top point guidance I will use this number, which I believe is reasonably conservative.
Further incorporating your 2024 WD EBITDAX of 5,1 bUSD and Londoners 2024 HBR EBITDAX estimate of 2,7 bUSD we are looking at a combined business of 7,8 bUSD EBITDAX in 2024. WD management declined to guide for 2025 leaving this for HBR as the new owner, so we have to use 2024 for multiple comparison until 2025 guidance becomes available. I feel still confident in assigning a 1,7x on EBITDAX, bringing us to about 13,3 bUSD EV at year end for the combined entity.