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I was criticised on this board for questioning Magnus and ENQ ability to improve production. This was my area of concern. They are clearly struggling with it. I would go as far to say Magnus production in the context of guidance given 2018 …it’s a collapse. The banks saw this decline and simply told AB they will not be refinancing on his terms, if at all, without a new deal. AB has gambled and I won’t be joining him.
GLA
You are making big assumptions there. I can list you hundreds of companies with more leverage relative to cash flow than card. So you saying those companies can’t release accounts due to auditors being unable to sign off going concern because it’s conditional upon refinancing in the year ahead? I don’t think so.
Firstly the company is a going concern by virtue of the fact the bank has waived covenants. Secondly, they have never promised a refinancing. They took that out of the last rns and said banks are waiving the covenants. We don’t know but my gut...there is only upside to delaying. They can confirm a solid 8 weeks of trading and demonstrate cash flow
Good point CTA on the monthly waivers expiring end of June. That would be more than breathing room, should you expect the company to paydown a decent amount of debt before 31 December (includes Christmas season). They need to keep the momentum going with online so they are well placed come November. I will continue to observe
"These tests are applied monthly until June 2021, after which it is envisaged that the business will have a phased return back to its pre-Covid six-monthly covenant tests of EBITDA to net debt and interest cover."
It depends to what date they waive to though? If they move away from month-on-month and the banks say they will do a temperature check in late summer. Then i do think it could move materially higher. A couple of positive trading updates in between April 12 and August and there could still be a lot of upside here.
I am not smart enough to understand algos (heck i even muddled placing and open offers yesterday - sorry about that again). What i do know is that ENQ has to demonstrate solutions to two clear problems for the equity to move. The price of oil is not in management's hands so it is excluded:
1) Production in Jan and Feb was not good. Magnus is currently an impaired asset on the basis it is not producing as expected and thus its intrinsic value (the cash that it generates) its lower. It is up to the company to prove otherwise and get things back on track. Optically, the market could see GE as insurance to compensate for Magnus rather than 'true' incremental production. If you choose to convince yourself, with bias, that everything is fine at Magnus, that is your choice but lets call it how it is. AB has tried to waff away questions for a while now regarding Magnus - repairs, water pressure and now the 'natural declines' narrative is finally appearing etc etc. The guidance for Magnus provided in 2018/2019 is now out of whack and meaningless. It has been some time (1-2 years) during which Magnus has not lived up to that guidance. This needs to be addressed and the decline in production needs to be stemmed. 13,770 Boepd is alot different to the 17k, at a minimum, I was expecting
2) Balance sheet and GE. I have said before that GE is the solution to what is now a solvable credit problem. But, the market wants to see this delivered and completed before it gives ENQ a pass due to near-term maturities (RCF) being due, and the overall complexities of the transaction.
Net, i am optimistic. The FCF has came at an important time and GE is looking like a good chess move, particular with the economic transfer date happening on 1 Jan 2021, which nets off the price. I am more worried about 1) than 2). I think posters are ahead of their ski's with $500-600m in FCF at around today's Brent price. To cite management's 50% FCF/equity yield my gut is that they are shooting for $300-400m. Remember this does not include PIK and therefore does not reflect economic reality. If interest is not settled in cash you are removing it from management's reported FCF in the short-term but ENQ will eventually have to settle the PIK in cash via financing cash flows in 2023 when the bonds mature / are refinanced. I always deduct PIK in my FCF. I like to think of myself as a realist.
Apologies if that all sounds negative. Its not meant to be. I ascribe a decent probability to those 2 issues being addressed this year and I think the share price will meaningfully re-rate if they are hence why I am invested,
I am not invested here but following. The board will have to provide a liquidity update tomorrow if i am not mistaken? Waivers are up on Wednesday so its either defer/waive again or refinance. If they waive it again, i have a feeling this is going to move significantly higher as it would imply there is more cash coming in than expected from online sales to the extent that it has been enough to preventing the banks' bellies rumbling and they will leave the financing as-is.
Thanks for confirming Hitman. My mistake. I think i have confused open offer with a market placing where shares can be placed on the open market and simply purchased by major shareholders or larger institutions. Apologies for setting off alarms. That said, its a valid concern given the raise relative to the current market cap so I wanted to be sure.
I am becoming increasingly concerned about AB shafting shareholders. If you were AB now, what would your objective be? Why would you do anything that risks pushing the share price up, knowing that this results in $5m of your own principal capital buying fewer shares. I have listened to the call a couple of times. Both AB and JS sound very nervous and cagey. I am watching this situation very carefully how they orchestrate this equity raise. I quote the below from the results last week. This is not a rights issue where existing shareholders are offered to buy additional shares relative to their holding. This is being ran as an open offer. It reads like AB can be aggressive and hoover up shares via a placing and open offer. If he is dirty, there is a huge conflict here and I am questioning my holding. Why wouldnt he want to sandbag this share price currently to maximise the dilution and increase his stake? This is now making me question the ''production wobble'' in January and Feb and the very very very clumsy communication on the call and the overly gloomy going concern narrative in the report. AB can not be overly negative as he needs the banks to play and half-believe in the story but he does not want this share price going any higher as he wants wiggle room to aggressively hoover up shares in the open offer.
Has anyone emailed IR to understand how the placing and open offer is being constructed? Is it anti-dilutive to existing shareholders or not? Through our brokers will we be offered the right to buy additional shares or not? If people do not know, please do not guess. Looking for a response from someone who will know exactly how this will work
Further, the Group anticipates raising up to $50 million of equity through a placing and open offer, in which shareholders related to Amjad Bseisu are expected to participate in line with their equity holdings. Amjad Bseisu and/or persons related to him are expected to make financing commitments assuring there will be no funding shortfall in respect of this $50 million. These financing commitments constitute a related party transaction and will therefore require independent shareholder approval. J.P. Morgan Securities plc (which conducts its UK investment banking activities as J.P. Morgan Cazenove) is acting as global coordinator, bookrunner and sponsor to EnQuest in connection with the placing and open offer, as financial adviser and sponsor to EnQuest in connection with the Transaction and as sponsor to EnQuest in connection with the related party transaction.
Thanks L7. I forgot the capex deduction and noted if you think its too high. In fact of course its too high for Magnus as the $120 includes the decomm capex on Heather/Broom and Alma/Galia which JS on the call said budget for $40m cash out per year. The residual of $80m is maintenance and expansionary. The calc is a little bit academic given the changes in the cash flow as a result of the GE/refi. That said, the bond interest is the largest chunk of cash outflow other than the static items. The market may now expect this to be re-payable from 2022 onwards to avoid PIK advancing the bond balance and compressing the equity.
HMHn, wow i didnt realise there was such a spread for opex per barrel. Where is your source for Kraken @ $6. That seems very low. I suppose you may be excluding the FPSO lease payments which amount to $10?
That would be a very odd definition of free cash flow and not correct. Free cash flow (FCF) represents the cash available for the company to repay creditors or pay dividends and interest to investors. Universally it does not include paydown of principal on debt, dividends or share repurchases. I have emailed IR as this is a big claim with no footnotes to support. Classic ENQ. I am giving the FD the benefit of the doubt on the last call due to the fact they are in the middle of the prospectus coming out and had to be tight lipped but he was all over the place with the numbers. That performance in the future will not be accepted. The PIK question was just embarrassing. I think he genuinely didnt know the answer there and wasnt to do with disclosure. I found it worrying being honest
In the slide deck when they say "2021 free cash flow yield to equity >50%"................do they mean the market cap or the book value of the equity?
If they are referring to the market cap, this is very concerning as their FCF projection would be around $200-250m.
I have noticed a few posters, when trying to forecast the all important free cash flow estimate for 2021, miss the cash outflow (that happens below the gross profit number) from the cash-flow sharing agreement with BP on the 75% interest in Magnus. Can someone tell me if i am on the right lines here. Its a material number but its not so simple and transparent with the accounting. First of all, lets ignore the provision (balance sheet) and P&L (finance cost and fair value adjustments). We are bothered about the cash in our world, so....
We know Magnus is not performing, as much as AB like to mumble and go silent, sorry pal its not delivering so until it does we will use the numbers that reflect currently reality. Lets say it does 15,000bdp, we can use the global opex per barrel number of $14 in the recent presentation and lets allocate $40m of capex to Magnus as 1/3 of the $120m capex projection.
=15,000bdp*($60 average brent - $14 opex) - $40m in capex = $251m*75% *50% = $94m payment to BP in cash for the cash flow sharing element.
I have not bothered with the Magnus gas purchases and gas sales. Is that included in the opex per barrel number? In 2020 and 2019 it looks like they paid $53m and $97m for gas from third parties and then sold condensate and gas for $60m and $120m. Both years seems like a net cash inflow but not material.
The Magnus vendor loan is that $77m? If they paid that off completely in 2020 thats $180m potentially going out to BP. Do you think this will be knocked out and added to the new RCF?
As you can see this is not immaterial. My fcf estimate for 2021 and please throw stones off me if this is way out of whack. I am forgetting about GE so this is partly a pointless exercise
46,000bpd @ (60 brent less 14 opex) = $772m - ($94m for Magnus cashflow sharing) - ($121m lease) - ($120m capex) - ($90m interest on loans/inc vendor loan and bonds) = roughly $350m in FCF
This will materially change when the prospectus comes out but those quoting $600m free cash flow on existing assets........i am just not getting there i am afraid. tell me how you are getting to 600
L7 sorry that came across in the wrong way. Wasnt a criticism of your post itself....more just the fact I am simply in full agreement with your conclusion that this is a commodity business and ENQ got the Kraken acq wrong. Like car insurance or ryanair - GEICO and Mr O'Leary are extraordinary capital allocators and cost leadership cam be (and is) their only advantage. The Lundin family is similar. I think International Petroleum Corp is a great example of capital allocation skill and cost leadership via low finding cost per barrel (including the damn acquisition of the asset of course not just the opex and ongoing maintenance capex). ENQ did not get the timing right with Kraken and it bludgeoned the company's balance sheet for many years after.
The quicker they solve this credit problem i.e. consolidate odds and sods into the RCF and push out the maturity, ENQ will be able to breathe and produce its way out of debt. I have no doubt AB knows this but it couldnt happen any sooner. It looks promising but nothing is a given in this industry. Good POO support while discussions are taking place are enormously helpful. If you were on the credit side and in the IC committee at BNP at 10pm looking at Brent in the low 40s, then houston we have a problem. Thankfully that is not the case.
L7 i enjoy your posts but quite frankly I dont think your post needed to be that long on Kraken. It was evidence of poor capital allocation from ENQ. They paid to much, levered up way too much for a cyclical industry which requires margin of safety and their expectations for production also had no margin of safety / were too high. That combination has manifested itself in the equity sliding off a cliff and poor share price performance. Now the idea is to survive, refi and produce out of the mess of balance sheet we created.