focusIR May 2024 Investor Webinar: Blue Whale, Kavango, Taseko Mines & CQS Natural Resources. Catch up with the webinar here.
Combed through bond prospectus again in detail this morning. Retail and HY bonds are the bulk of our net debt and maturity/re-fi can be pushed out until April 2023, three years away. Cash interest does not need to be paid on bonds in the meantime and can be PIK'd (they have being paying cash in 2019). The free cash be re-directed into RCF paydown. The scheduled capex of $230m in 2020 and 2021 can also be trimmed. Along with our cash balance as at 31st of December 2019 (ex-restricted). RCF outstanding balance of $450m (inc. PIK) as at 31st of December 2019 can be repaid comfortably by 1st of October 2021 with oil taking a beating. The RCF cam can also be refinanced per the terms in the restructuring (so no Neil, it doesnt need to come from shareholders or asset sales). There are no other maturities or required until April 2023 save for small SVT loan of $17m in November 2020. Neil, your crude on free cash flow per your earlier posts makes no sense. Sorry.
I expect the company to have purchased a big block of shares back of Sun Capital in the placing that occurred overnight. If not, as a shareholder I want to know why and there better be a good reason. The company is way overcapitalised and should return the cash pile back to shareholders immediately.
from WSJ an hour ago.
VIENNA—Russia has rejected a Saudi-led effort to deepen OPEC’s oil production cuts in response to the deadly coronavirus in China, cartel delegates said Thursday.
The group’s failure to reach a consensus is a setback for OPEC’s de facto leader, Saudi Arabia, and its burgeoning alliance with Moscow.
Delegates from the Organization of the Petroleum Exporting Countries and allies including Russia met for three days this week to debate how to respond to data that showed China’s demand for crude falling as it deals with the coronavirus crisis.
The virus, which originated in China, has already contributed to a sharp decrease in demand for crude, driving oil prices to bear-market territory on Monday.
Saudi Arabia had initially backed output cuts of 800,000 to 1 million barrels a day to balance oil markets.
The gathering collapsed without an agreement, after the Saudis proposed a compromise cut of 600,000 barrels a day. The Saudi proposal had broad support, but the Russian delegation rejected it on the grounds that it was too early to assess the impact of the virus on global oil demand."
If the market capitalisation stays the same today, the financial community is effectively attributing zero value to the transfer of $360m from debt holders to equity holders that occurred in 2019. To be more pointed the market is effectively saying 'even though you have paid off $360m, i am shrinking your enterprise value by $360m. This irrational thinking can only happen for so long.
Pleased! Net debt down by $361m is a great achievement. No criticism on the hedging front. The oil price is all over the place for obvious reasons and nobody can reasonably forecast even a range. Oz barrels account for 16 production - big deal. The leverage is moving back towards the equity, which is great to see. We have to watch depletion and require new acquisitions. in FY21, which i have no doubt will happen. Refinancing will happen soon.
I havent looked at the cash flow sharing deed which will have specifics on cost. It was just an estimate - fair enough with leasing. Across the group enquest do not have costs per barrel of $20p/bbl though - irritates me when managements refer to EBITDA or pre-capex costs in a capital intensive biz. The higher the profit the bigger the payout to BP, as our cash already included in top-line. Will see if i can take a look. Couldnt find in prospectus last time i checked.
Re the Magnus profit calc ENQ don't absorb capex or lease costs in their $20 p/bbl number so I have added back a few dollars based on the global capex and leasing costs. I assume the BP cash sharing deed will not exclude capex for Magnus. My estimate is conservative though...granted. I think we are very well positioned and wish everyone good luck. Magnus and Kraken are great assets when you compare to asset extensions specialists like Serica, who are exposed to gas oversupply and have way less 2P.....that stock is still cheap though - i am taking a closer look
Kraken increase offset by depletion in other fields. Magnus continuing on current trend. I will be happy with sustained production in 2020, de-levering $300-400m and re-starting hunt for new Malaysian or North Sea marginals with max capital discipline.
I am not getting near $50m a month of FCF as has been suggested on this board unless Kraken premium surprises me. My fag packet prediction for FCF available to pay down debt principal in 2020 is $360m. The Tanjong Baram Project Finance Facility is L+8.5% and the BP seller note is L+7.5% so I would hope they can aim to wipe these whilst still paying the PIK and principal scheduled payments for RCF next April. $360m FCF calculation below:
EBITDA = (66,500*$62*365)*60% EBITDA margin: c.$900m. Cash deductions as follows
-$200m (Capex)
-$50m (repayment of 75% seller note to BP)
-$60m (Magnus cash flow share paid to BP, 6,500bodp*$25profit/bbl)
-$120m (lease obligation)
-$100m (interest charges, these could be lower but assume RCF paydown offset by PIK on bonds will mean same as 2019)
-$12m (Malaysia corporate tax)
Thanks Krakenoil. I think management are correct to let the numbers do the talking on the premium when accounts released. Providing a specific premium number changes forecasts and expectations which means potential disappointment if ENQ unsure whether they can consistently achieve it. As a positive undercurrent - good for me.
*missing anything?
** i meant assumed Magnus profit per barrel of $29 sorry.
** just to clarify they have only paid $12.5m in H1 regarding the 75%. I have should have made that clear.
Pelle and L3, you seem to have a good grasp of the accounting if you can opine. I think its very important to decipher gross and net for Magnus as the cash flow profit share as an outflow could be chunky. The provision is just finger in the air re discount rate of 10% etc so I don't pay too much attention to accounting estimates. Its the utilisation via the cash flow statement $36.7m in the H1 cash flow line to watch.
I am looking forward to February. I am very hopeful of significant debt pay down.
I am trying to work out the cash flow impact of Magnus. Please feel free to chime in and lambaste any stupid assumptions. Firstly i have assumed the 63-70k boepd production guidance is gross for Magnus and includes BP barrels i.e. the 50% of the 75% of Magnus. I would surprised if otherwise as that is why there is a contingent consideration provision of $678m as the discount of future cash flow sharing and the seller notes. Regarding the BP seller notes i note in H1 2019 EnQuest repaid $24.3m and stated it would clear the remaining $10m balance in H2. This will obviously not reoccur in FY20 as thats the 25% wiped. They only paid $12.5m of the contingent consideration in H1. The H1 accounts do not disclose whether this is in relation to the deferred consideration/seller note which was $116.5m on 1 December 2018 or the cash flow profit share. As the seller note is expensive due to it being PIK'd at 7.5% i am going to assume that EnQuest could wipe the remaining $100m or so off in H2 2019. Ok now for the cash flow sharing.....people on this board probably have a better idea of what Magnus is producing but take the recent OGA data range of 15-20k boepd. Assuming mid-range of 17.5k boepd BP’s interest would equate to 6.5k boepd (17.5k boepd*75%*50%). Assuming a brent price of $64p/bbl, $20p/bbl opex per H1 and an additional $15p/bbl for absorbed lease payments/maintenance capex, I have assumed $25p/bbl of profit on Magnus oil. On 6.5k boep, EnQuest would therefore pay BP $70m per year to BP? In total for 2019 then thats potentially c. $150m cash out to pay off the defferred consideration seller note and then $70m for the cash flow sharing on the 75%? The $70m would then reoccur as a cash outflow for future years until we hit the $1billion cap which is way off at current production levels. Am i missing everything?
Pelle. This is an important point. I think by having >10% AB has power of minority to block a compulsory takeover per section 979 of the companies act 2006. http://www.legislation.gov.uk/ukpga/2006/46/section/979. I need to brush up on the Takeover Code but would that just mean AB has the right not to sell a buyer his shares if the majority of shareholders accept an offer or that he can outright block any offer. I suppose it depends on the articles of the shareholders agreement. It would be good to find this out.
I think one can overestimate the 'scrutiny' from market participants in larger institutions on the exact timing and terms of Enquests hedges. In my opinion, the company is put in the "too hard" and " too hated" buckets for reasons I have already mentioned. The DSCR is now approaching levels where the facts are different to the market appraisal even when sensitising POO levels to an extent. If we have another 2015 then of course, its good night Vienna but I think the probability of that happening is the same as interest rates going up to 6% by 2021 which would half the S&P 500 as a whole. We can only look at margin of safety.
I note a quote from Phil Fisher. I would recommend his books to anyone who is interested in investment philosophies:
“The price of any particular stock at any particular moment is determined by the current financial-community appraisal of the particular company, of the industry it is in, and to some degree of the general level of stock prices. Determining whether at that moment the price of a stock is attractive, unattractive or somewhere in between stock depends for the most part on the degree these appraisals vary from reality. However, to the extent that the general level of stock prices affects the total picture, it also depends somewhat on correctly estimating coming changes in certain purely financial factors, of which interest rates are by far the most important.”
If we assume Fisher is correct and 'appraisal' (not reality) is an extremely important determinant of a share price and apply this to Enquest taking each component in turn
1) the market's appraisal of Enquest in my opinion, is far worse from the facts. Enquest is a hated stock notwithstanding the facts presenting an improved company. To go even further, it is very easy to for an institutional investor who manages large pools of capital and is regularly susceptible to group think to hate Enquest for reasons unrelated to the facts (see below). However staying with this first component, what are the facts .....Well, even with a significant margin of safety on POO and interest rate rise, anyone rational who computes a basic fag-packet calculation can see Enquest has sufficient earning power to start paying down large chunks of debt in 2020 at a quantum equivalent to its current market capitalisation
2) The appraisal of the oil market from market participants, particularly institutional managers, globally has been negative to say notwithstanding the facts. Capital expenditure for new drilling since 2014/15 has been heavily constrained and oil (not gas) in the US is showing signs of distress and much slower growth. Both factors make oversupply due to sudden increases in production unlikely. Demand for oil is not reducing and we can all speculate on trade but a significant fall off of oil demand due to a trade war is speculation not a fact
3) The markets appraisal of UK small caps is negative largely due to assumptions and forecasts based on Brexit scenarios. These are forecasts not facts. The UK small cap index since May 2018 has declined 7% compared to the S&P 500, which has increased 15%. A 22% differential.
To summarise i quote you more Fisher: "It should never be forgotten that an appraisal is a subjective matter. It has nothing necessarily to do with what is going on in the real world about us. Rather, it results from what the person doing the appraising believes is going on, no matter how far from the actual facts such a judgment may be.”
I am recently long Enquest because the facts differ from the market participants appraisal of the company, sector and mar
londoner7 thanks for pointing out the split in vendor loan repayments between the 25% segment and the 75%. I think correct - we can assume the 25% vendor loan will be wiped clean as of 2020. I note in the interims " A total of $12.5 million was repaid during the first half of 2019" with regards to the 75% vendor loan segment, which is less than half of the $34m you quote but your explanation is logical so i will use that. I am knocking a quick cash flow forecast together for next year. Thanks Pelle for your estimate. I will compare that against mine. I would think refinancing is on everyone's mind here as the execution risk is reduced and DSCR increased. I will try to take a look at the indentures for early repayment charges. interest rates staying where they are is just as important as high oil for this business. Lets hope for some movement in 2020
I could be mistaken but the magnus vendor loan is not even included the break down of net debt $1,637.9m in the H1 2019 review. How is that not classed as debt if you have borrowed $200m from the seller to fund the acquisition? I would like to know what net debt balance actually is before claiming ''we can just absorb it".
Am I correct in assuming that as at 31 December 2019, $78m will be (roughly) the outstanding deferred consideration on the initial $200m BP Vendor Loan used for the acquisition of Magnus. Looking at the cash flow statements in 2018 and H1 2019, $48.6m has been paid in 2018 and $36.8m in H1 2019, i have assumed the same $36.8m will be paid in H2). The vendor loan deferred consideration balance is buried inside the discounted value of the overall $625.3 contingent consideration included in the $1.3bn of provisions per the balance as at 30 June 2019. This should be broken out more clearly and I am not particularly interested in the discounted figure (i care about cash). The bulk of the $625m is simply the profit share agreement with BP i.e. 50% of the cash flows from Magnus capped at $1billion over the next 10 years. The vendor loan proportion carries interest of 7.5%, this its a more costly liability and as a shareholder I would like to have clearer visibility as to what cash is still left outstanding on the $200m. I am happy with Enquests performance and feel confident going into 2020 but i want to understand the cash flow and to whom cash flow is being repaid in detail. EBITDuuuuh is irrelevant to me when their is a mountain of complexity in the way of debt servicing between EBITDA and the cash shareholders will be entitled to. The presentation outlines Net debt/EBITDA ratio. The metric is an insult to anyone with a brain when we all known in a levered oil and gas company there are significant cash costs below EBITDA i.e. in this cash capex of c.$150m, repayment of lease obligations $120m, repayment of the vendor loan $78m, finance costs of c.$100m and corp tax of $32m. Is the figure of $210m in free cash flow on page 33 of the deck after lease payments and finance charges i.e. levered cash flow? Anyone any predictions on 2020 ACTUAL free cash flow attributable to shareholders or to pay off a big chunk in debt