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Why are we discussing acquisitions for AA. If AA is reading this, you already have a great business to buy at a price significantly below its intrinsic value. Its called ROCKROSE I.E. your own. This following course of action is the best use of shareholders funds held as cash on the balance sheet. Its exactly the same for Serica. You have two great businesses priced at ridiculous levels. Share repurchases make total sense.
Rockrose has met the needs of the business and the stock is under-priced and therefore buybacks make nothing but sense here. For continuing shareholders, repurchases only make sense if the shares are bought at a price below intrinsic value. Today, it is highly probable that Rockrose is priced significantly below its intrinsic value. Oil and gas prices have stabilised and significant blocks of supply have been cut off as evidenced by falling rig counts and capex reductions around the world. We have significant 2P reserves priced very very cheaply. If this rule is followed, the remaining shares of Rockworse will experience an immediate gain in intrinsic value. Using a simple analogy, if there are three equal partners in a business worth £3,000 and one is bought out by the partnership for £900, each of the remaining partners realises an immediate gain of £50. If the exiting partner is paid £1,100, however, the continuing partners each suffer a loss of £50. The same math applies with corporations and their shareholders and in this analogy the exiting partner is losing his shirt in Rockrose's case. Ergo, the question of whether a repurchase action is value-enhancing or value-destroying for continuing shareholders is entirely purchase-price dependent.
On that basis, just like the Board would consider price when purchasing an outside business, many in the North Sea are not as good as Rockrose and are more expensive, I urge the Board to evaluate and consider the current price of its own company. Through a significant share repurchase at these levels, the Board can reward long-term shareholders by buying something for far less than what it is worth, which is the best capital allocation policy of all. I do not believe this is a complicated equation. The Board can buy a significantly undervalued business today, which is far superior to dividends, even without listing the tax benefits to shareholders of a share buyback over dividends.
These times dont come around very often where you can gobble up a great business for a stupid price. AA please take advantage of Mr Market and make good use of your capital allocation skills.
Management need to communicate what they planning to do with +£100m of shareholders funds. I will writing to investor relations to seek answers. Serica has met the needs of the business and the stock is under-priced and therefore buybacks make nothing but sense here. For continuing shareholders, repurchases only make sense if the shares are bought at a price below intrinsic value. Today, it is highly probable that Serica is priced significantly below its intrinsic value. Gas prices have stabilised and significant blocks of supply of associated gas has been cut off as evidenced by falling rig counts and capex reductions around the world. We have significant 2P reserves priced very very cheaply. If this rule is followed, the remaining shares of Serica will experience an immediate gain in intrinsic value. Using a simple analogy, if there are three equal partners in a business worth £3,000 and one is bought out by the partnership for £900, each of the remaining partners realises an immediate gain of £50. If the exiting partner is paid £1,100, however, the continuing partners each suffer a loss of £50. The same math applies with corporations and their shareholders and in this analogy the exiting partner is losing his shirt in Serica's case. Ergo, the question of whether a repurchase action is value-enhancing or value-destroying for continuing shareholders is entirely purchase-price dependent.
On that basis, just like the Board would consider price when purchasing an outside business, many in the North Sea are not as good as Serica and are more expensive, I urge the Board to evaluate and consider the current price of its own company. Through a significant share repurchase at these levels, the Board can reward long-term shareholders by buying something for far less than what it is worth, which is the best capital allocation policy of all. I do not believe this is a complicated equation. The Board can buy a significantly undervalued business today, which is far superior to dividends, even without listing the tax benefits to shareholders of a share buyback over dividends.
I need to look at the indentures. Would lenders by comfortable in loaning an extra £40m so AB could buy in 20% of the market cap? If he is bullish he could significantly increase his ownership, why not? It would kick the share price on significantly. If we all believe the market cap of enquest is below the intrinsic value of the equity why are management not pushing for this?
As much as I want to be irrational, it doesnt pay. Frustrating but market is pricing this correctly for the time being. Oil at $50 and its a different story. ENQ just one big leveraged bet on the oil price now given AB has done a great job on the cost side. Brent at $35 against FCF break even of $25. Thats only enough cash to service the interest. EV and debt stay the same. It could be a blessing that oil stays in the high 30s this year. That will ensure bankruptcies and shalers not being enticed to switch back on. Unfortunately we want permanent pain and extinction on the supply side for this to this move........Its been a drag on my portfolio and nobodies mistake but mine.
Londoner - completely agree with your summary of the Kraken. I always try and look at finding cost per barrel. AB done a great job recently with operating cost of lifting oil out the ground but unfortunately finding cost per barrel includes what is paid from geo to drill and its not pretty. Capital allocation needs drastic improvement
Fair enough but shame i think. I have learnt over the years to let winners run and run and run. Today's announcement just declared this a winner and MATERIALLY reduced the risk of ENQ's prospects as a business. If you were fortunate to get in at 10p (i wasnt). Thats where money is made in investing. I am not saying im Buffett but i have been lucky to have some 5-10 baggers that have covered up my sins elsewhere and there have been many. With EnQuest, AB has laid out simple maths by providing investors a cash break even of 25-30 bucks. If you believe; there will be mean reversion (whateverthatmeans) in the POO, decommissioning liabilities are not materially mistated, and Kraken and Magnus have legs...... you do the fag packet math in terms of a current MCAP of $244m and those barrels over the next 10 years at a cash profit over $20 . 10 bagger perfectly feasible
$25p/b cash breakeven for an off-shore oil project is not easy for any of those who truly understand of the economics of this industry. One of the reasons I have stayed with ENQ is AB's 10% holding and significant amount of net worth in the company. $25 cash breakeven is the result of a man working for the owners and eating his own cooking. Alignment of interests is so important. His net worth changes with ours :-)
If you believe the share price is determined by earnings over time, nil cost options should be tied to the management's ability to effectively allocate those earnings or do you simply think management should be automatically rewarded for an increasing share price notwithstanding the level of retained earnings, capital owned by shareholders, they reinvest back into the business on your behalf?
Or are you just going to call me a 'nutter' again. Damn, i lost that exchange....
Not happy. Don't like getting diluted when compensation incentives are not aligned Mr Flegg and Mr Walker are being compensated for share price increases irrespective what they do with retained earnings?? Take a savings account and call it a business. Assumed the savings account offers 4% per year and the business has 2 shares. You put £10,000 in on day 1. If you leave the £400 of earnings in the saving accounts the earnings (interest), the value of per share is £5200 after year one. In year two, earnings will increase to £416 valuing the business at £10,816 and each share at £5,408. Would you pay the clerk on the phone a nil cost options for increasing the share price for doing absolutely nothing.
Its the same with Serica. Happy to compensate Mr Flegg and Mr Walker with nil cost options if they commit to a 100% payout of retained earnings to shareholders. But if they plan on not paying out 100% why should they be rewarded for share price increases as a result of simply retaining earnings? Not happy and i know other shareholders aren't either. We will be taking this up with the company.
Luck why do we care what oil is going to be next quarter? And why would i care what analysts think? Do they bet their house on these convictions? If we believed oil would be in the $20s or $30s over the medium to long term we obviously would not be invested. You need to revisit your definition of high lifting costs per barrel. Sorry i am genuinely not being harsh but if you look across US shale, Gulf, Canda, your statement is just factually incorrect. Opex per barrel of $20 and cash breakeven of $30 is upper quartile
LuckCounts....Enterprise value per barrel is simply a market appraisal of the company divided by the number of barrels. You are basing you investment decision based on the market appraisal? It would be easier for you to invest in an index fund and be a passive recipient of market returns. The correct metric would be finding costs per barrel or lifting costs per barrel. Let the oil price be what it be. You cant predict it
I am a value investor and never make macro predictions on oil. I have spent a significant amount of time the past three weeks unpicking financials across my current energy holdings and new opportunities. A key metric i focus on is finding costs per barrel or lifting costs per barrel and management's shareholding %. EnQuest's operating performance is one of the best i have seen. The CEO has outperformed his peers in terms of tenaciously driving down costs. The reason is simple. He is eats his own cooking. London analysts and salary-men often do not understand this.
The advantages of CEOs eating what they cook and AB having a significant portion of his net worth tied up in ENQ came to light in the recent RNS. This company will survive. It has been unlucky and lucky at the same time, having the bulk of its maturities pushed out. Anyone who understands basic commodity cycles will know, POO in 2021 onwards will look rosey. I have been investing a long long time and admittedly got caught out with the virus. I still sleep easy at night, and ENQ SP is likely to be a great return for me over the next 2-5 years
It doesnt appear that way. Just as a refresher. If all companies were expected to repay their debt at maturity with cash and refinancing was not an option, which is what you are implying.....you are effectively saying corporate debt will cease to exist by 2023.
The maturity of the bonds being April 2023, is lucky timing and great news for the equity. There is a high probability net debt to EBIT and DSCR conditions in 2023, three years from now, are substantially better based price of oil improvement, disciplined run-rate maintenance capex and credit providers looking for yield given real interest rates are negative. Bonds have a great chance of being re-financed that far out.
The RCF can be refinanced in October 2021 and does not have to be repaid if you read the prospectus. Refinancing is basic to get your head around. Just like you don't have to pay a mortgage back after a 5 year term. There is a strong chance POO will look a lot different in H2 2021 improving the financing capability of the company. The bond maturities can be pushed back to April 2023 (3 years away from now). Assuming we free up cash via trimming capex, PIK interest on the bonds and pay at least 50% of the RCF, our DSCR at POO conditions in H2 to 2021 will be very attractive to lenders again when interest rates remain close to 0%.
Premier and Tullow in very different situations.