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L3 agree with your observations in terms of production. On net debt, the PIK on the bonds is simply like an aggressive tape worm for the equity holders in a low oil price environment. Its truly awful. In fact, it adds to the degree to which ENQ is a monstrous levered oil price play. The debt structure can flip violently the other way in a higher oil price environment. Knocking out the RCF and Och Ziff can come in quick succession and it would mean we could eventually cut into bone and begin to start sawing off the principal on those bonds come 2022. This is a sea change in terms of negotiating power with lenders. In the run up to 2023.
I do agree with you that the ''delever story' alone is not enough with existing assets. The cast of characters can not become too stale and i am watching carefully. On M&A and reserve replenishment, AB needs to think and think fast on how to structure partnership deals in the NS or Malaysia which offer ENQ optionality into the future and involve little in terms of initial capital outlay. Cash is still oxygen atm. Sharing of risk and the option to defer the bulk of the capex into a period of oil price support would be ideal. Warren Buffett's cigar-butt investing comes to mind. Where is the free puff. Serica Energy managed this with BKR gas field from BP. One of the best structured deals i have seen in the NS. We need smart capital allocation here - appreciate its not easy to do.
All in all, i think ENQ is certainly off the ventilator and starting to exhale. Oxygen is coming through but we need more of it. Relentless focus on FCF and replenishment of reserves through smart capital allocation will prevent another convulsion.
I am prepared to give Britbox time. Mccalls capital allocation is dreadful but why does she care if her own capital is not at stake here. Buybacks coming out of this crisis would have involved good judgement and shrewd capital allocation in the interests of the owners. I am not impressed so far. ITV has some great content and it needs someone to shift the gears. I do not think i am alone.....a lot of eyes now on her to evaluate performance.
On the buying during distress - fine. Buys and sells are not really my point. I am talking about Mccalls net worth itv is not adequate in my opinion. I want UK corporate managers to start owning the car and not just renting it.. Look at O'Leary - great example of someone that wears the shirt. A significant part of their net worth in the company means their fortunes move in lockstep with the fellow owners based on the developments in intrinsic value of the company. This is fair. If they make dumb decisions, are they happy to take the pain or will they simply let options roll and take a big salary. ITV is not a bigger position because of this reason.
5freights - thank you for your reply.
L3 and Londoner - what did you make of the update? L3, i know you cited significant concern over the repayment or refinancing of the RCF in October next year. Does the early repayment coupled with the vaccine news reassure you? I am hoping they make bigger dents during 2021 although I need to look into the ringfenced cash required a little further. Kraken holding firm. A little disappointed with Magnus. All in all, AB seems in fighting mode.
Romaron - the bonds are due October 2023? Thats three years away from now not two years as you refer to below? An extra year is big
Holder here. Why does McCall own so few shares? It is starting to concern me and almost annoy me. Management in the UK and Europe are just refusing to eat their own cooking and share options and freebies are becoming the norm. In the US, this just would not happen for this level of MCAP. Above all, it makes me question McCalls capital allocation skills. She didnt buy after the the share price dropping 60%? Does she believe the instrinsic value has gone down 60%. At AGM's i will not stand for this pathetic level of ownership from very wealthy people.
They need to put something out to the market on capital allocation ASAP other than "we are disciplined". I have wrote to management several times on some share buy backs in the meantime if they can not get a deal away. We all want management to be patient but there comes a time where this company is generating lower returns on capital than its cost of capital i.e. £1 of retained cash is not leading to more than £1 of market cap. Mitch if you are reading this we need clarity on what you intend to do with the money IF you cant get a deal away and give yourself a timeline / realistic expectations. As a LTH i need more. Sorry.
Beyond company notifications i do not regularly check day-to-day price action. I have checked in today for the first time since the interim announcement and there is tumbleweed with regards to what is happening with 50% of the enterprise value via the cash management are sitting on. Patience yes but to keep this share price close to where it is now, they will need to originate M&A or give us the cash back in the next 6-12 months. Where is the M&A?
Agree. Management are credible and need time to try and make an acquisition but come 2021 the market will not grant permission for management to sit on £100m in cash without any disclosure on capital allocation. This isn’t moving until there is a deal or disclosure of a special dividend
L7 thank you for your contributions. Given Magus is a significant part of the discounted cash flows in our 2P bucket, i agree its important to obsess what normalised productions maybe. The technical stuff is way over my head.
Nice bounce. This is purely my gut and i never trust my gut when it comes to investing but one feels like sentiment towards this virus is changing. People and employers are not stupid and can not be tricked by the media, who are trying to squeeze as much eyeball time as possible by crying CASES SURGE CASES SURGE. Death per infection rates are converging towards flu due to a change in the demographic mix of those affected and improved treatment. Has anyone thought that we may not need a vaccine but just de-escalate the death situation and that is looking very very promising even in places like Spain.
The reason i say things are moving is not purely gut. Industrial M&A is up. PMI's are up globally. I feel like those waiting for the oil price to fall through the elevator shaft again are just not looking at the data.
Londoner I agree with your points. Low finding costs per barrel of future 2P, a high oil price and a leveraged balance sheet can create 10 baggers. A low oil price can also blow you up. Let’s hope we have the former outcome.
L3. I think you may be overthinking JS and PR around the RCF repayment. I mentioned on a previous post that it depends on the magnitude of the RCF’s outstanding principal at maturity (Oct 21) relative to the value of the collateral it is secured against which is calculated by discounting the future cash earning power of Kraken and Magnus. Notwithstanding the other notes maturing in 2023, I can not see a residual on the RCF being an insurmountable problem to refinance unless you believe we are still in the 40s come discussion time. I hear you on not being naive to PR but I also wouldn’t overthink it.
They need to be on the hunt indeed. On a global level the M&A volume across industrials and energy is picking up. Lets hope management are sweating over origination as it takes blood, sweat and tears to get the right deals done. The good ones never just land on the desk. I wouldnt like to think Mitch is singing the same song on conference calls this time next year.....the opportunity cost of capital on £100m of cash is not peanuts
Yes. I was impressed with Mitch's deal criteria outlined in the Q&A: 1) the target must move the needle and be 50% of Serica's current MCAP at a minimum 2) low finding cost per barrel i.e. low operating costs / capex per barrel and then 3) everything has a price so likley gas but wont dismiss oil if the price is low enough and 1) and 2) are met. Its price price price....which is what i want to here from someone holding the elephant gun.....and by price i mean liability sharing and sharing of downside risk.
haha sorry ok technically. I was happy with the call. I really like the discipline. It resonates with me as I am a cheap skate too. I would much prefer a big bolt-on that moves the dial than a takeover bid. Its a tight management team who are extremely s/h orientated. But it is about the M&A from here to move this thing. I have no rush. Relax and just let others worry.
The company is valued at a fair price imo. Not oversold. If you believe this company can find a good prospect at a reasonable price and deploy a significant portion of its cash (even combined with an equity raise or a touch of debt if needed), then I think Serica is a reasonable purchase. If you do not believe the company can do an chunky acquisition then this is not a bargain stock. I am holding as i do highly rate management but i would not regard this stock as a bargain at these levels. Reserves are depreciating and the cash is building. Its a capital allocation story. Bruce and Colombus - hope they go well next year but they aint doubling this from here.
Appreciate not required but particularly helpful given extreme volatility in the operating and macro landscape. Hopefully ops update soon or strategic update would be even better. General point but in my experience M&A happens when the dust settles. In 2009 there was nothing happening. Bid-ask spreads need to become more rational between buyers and sellers.
A current update NewKOTB, like every other company. We are now in September under dramatically different conditions both in terms of operating performance (well i now do not know this) and gas prices. A more recent cash figure, current level of production given H1 was down significantly and was not reflective of the true operational or economic characteristics of the business.