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Romaron. Just to clarify your statement "Like you I think 8.34% is fair". By fair do you mean the transaction in question provides decent prospects for equity holders and do you think the right issue will be closed with no problems as a result? Or do you mean fair for the creditors? I am not invested in PMO at any point in the capital structure but i think a harmonised interest rate north of 8% on their credit facilities in question (under my calcs) clearly significantly reduces their interest coverage even with the two new assets, to the extent there is little / zero margin of safety for cash flows to the equity even post-financing / rights. I note PMO's retail bonds are some 20% down but the equity has been crushed to support my point.
The PMO timing on the refi and the bid for BP assets has been unfortunate. I think we may be in agreement, it shows under highly leveraged conditions....creditors can do very well, if they intentionally or unintentionally well-time their pound of flesh just before a potential up cycle for oil. 8.3% when interest rates are zero with a huge margin of safety in terms of being at the top of the stack is a great deal.
I am not a credit guy but PMO equity holders have to be disappointed with +8% pricing? Particularly given 1) new equity money coming in via rights issue 2) decent BP assets being acquired and 3) global cost of capital being pinned closed to zero.
I would hope ENQ situation is viewed as a cleaner landscape in the eyes of creditors i.e. we will not be simultaneously bedding in new assets while refinancing and Kraken/Magnus are long life assets that have established a decent track record by way of production and netback. I worry about myself using these boards for reinforcement bias but its extremely easy to get bounced out of contrarian positions during times like this (my entire portfolio is full of small, hated and idiosyncratic names but ENQ is by far the most leveraged) . POO rising from here to the mid 60s back end of 2021 is the most important thing that needs to happen and nobody can predict whether this will happen with any degree of certainty. The probability is in ENQ favour so i have confidence to hold.
Don’t get too technical on us. You are buying NWG and LLOY for 30 to 40% of its tangible equity. You are the consensus. Your opinion is the consensus hence why it’s priced the way it is. If you’re waiting for a 90% discount to it’s tangible equity you may be waiting a long time.
“ Banks will be hit hard when the inevitable housing market weaken”
Where are you seeing a bubble outside London? You can’t see it as it doesn’t exist. House prices in Newcastle haven’t beat inflation since 2009. I think your mental process paralysed from 2008. This is not 2008....look at LTVs, interest rates, housing supply, affordability checks......go back to sleep
I am probably naive to the shenanigans that undoubtedly go on on boards and markets of small/mid caps. Did Franklin always say...Wealth should be won fairly and spent wisely :-).....Anyway, lets hope for some positive news in H2. Hopefully management can focus on their job at hand and the rest take cares of itself....optimising BKR and allocating the >£100m of capital in best possible way for shareholders.....acquiring better prospects and sensible prices, dividends or buybacks.
Quintus. I am not sure I understand your point. The apples vs apples comparsion should show. On one side of the equation is Serica's free cash flow or earning power attributable to us as shareholders. This equates to operating cash flow is ey i.e. £136m in 2019 less the cash flow share to BP £57m less other capex of £5m. So call it £74m of FCF to shareholders net of the BP payment. You can then use Serica's EV as your capital base which is much lower on the MCAP per Bloomberg and CapIQ because of the £100m in cash (last reported). If you wanted to add the cash flow sharing liability into EV then thats fine but you can then deduct the £57m from the earning power side. I think it should show as a highly free cash flow generating company at a low price on any screen.
Romaron. I accept most of your points. I think another year or two more catching a likely upswing in oil and gas prices would have added a healthy clip to the consideration. RRE operating capability is not even close to Enquest or a high quality NS gas player like Serica (who's management and Chairman i greatly admire). Gas or oil, adjust the breakeven and ultimately the game comes down to whether your finding cost per barrel is low enough (including price paid for assets and decomm liabilities). March 2020 was a freak event and panic in the oil and gas equities presented the largest margin of safety in the sector I am ever likely to see. I think your point on ownership is fair. The owner of RRE closed the tab and called last drinks at bar. We dont know the reason but 1) not enough proven operating credibility to back himself or in fact access the capital markets to continue buy and build 2) higher breakeven in low oil environment and significant decomm liabilities 3) potential to be backed in the private markets from a PE player.
I am staying with Enquest but perhaps not as calm as you are. I have great respect for AB and way more comfortable he has big money in the game. That said, there can be zero slip ups on the production side and Brent needs to be at our backs for sure.
"I don't think the near 15% owned in house by EnQuest is always appreciated.".....yes i agree its always comforting and i demand skin in the game now in everything i go into.
Hi londoner7. There is no one formula and a raw net asset figure can be a good sense check. It can be knocked off course depending on the accuracy of reserve valuations, impairments, goodwill and management's ability to account for liabilities correctly. The key is to arrive at a somewhat accurate measure of NAV/share and then observe whether management is able to grow that NAV over time. The exact way to value an E&P company would be to do a risk adjusted DCF of each oil well, but that is incredibly difficult as an outsider to do. The after tax PV10 of 2P is a calculation of the net present value of revenues that will be derived from Proved and Probable reserves minus all cash outflows (production costs, development capex, well abandonment and reclamation costs, and royalties) using a 10% discount rate, at a given moment in time. I then take the after tax PV10 of proved and probable reserves (2P) at the year end 2017 measuring date, minus debt outstanding and divide it by the fully diluted shares outstanding.
With RRE, i found it difficult to do because the Marathon UK Acquisition in 2019 increased their reserves and resources by 82% and that came with huge long dated decommissioning liabilities. In addition op costs per barrel are higher than ENQ Per their 2019 accounts "On a proforma basis unit opex costs were $39/bbl for oil and $14/boe for gas in 2019 operating costs per barrel in 2019". That said, the marathon deal was a well executed cheap deal, they had good hedging in place, a boat load of cash of which alot of it was going into surety bonds for decomm. It got down to £60-70m of MCAP at the end of March so there was a huge margin of safety....................I invested in ENQ years ago when i knew nothing hahaha. I have paid the price for learning about margin of safety later in my career
*I should also caveat, the below assumes the same netback for PV10. I do not think RRE are running at near the same operating costs p/b as ENQ. Our discounted cash flows per barrel for that 2P should therefore be higher. Still........its a horrible offer assuming RRE produce some cash for ever barrel out the ground....
Londoner7. I find PV10 based on the 2P reserves more accurate than net assets. ENQ assets and operating capability are superior to RRE. However, a rudimentary calculation based on 2P reserves as at 31 December 2019 independent of capital structure. RRE: 60.8 of 2p (MMBOE), offer today/consideration = £250m. Based on £/MMBOE and taking ENQ 2P @ 31/12/2019 of 213 (MMBOE) you get £876m in EV. Not sure how you are getting to 52p based on the Rockrose offer. Are you taking off Enquest debt?
Not saying the offer has knocked the cover off the back but totally agree, cant just look at cash on balance sheet. Very big difference between net cash and cash at hand. Its also not just deccom liabilities. Break-even p/barrel across the piece was ok but never going to win prizes in terms of operating costs (sorry). I knew that going in here. Maintenance capex also chunky. RRE and Serica, whilst a different mix, are in different leagues when it comes to operating ability. The latter is an operator and capital allocator. RRE is restricted to the latter i'm afraid.
Offer accepted is very low indeed. Its close to cash at hand per share. Notwithstanding potential operating cost issues on old Marathon Oil assets, hefty maintenance capex and decom liabilities i.e. inferior assets to Kraken and Magnus..I sincerely hope that is not a price mark in NS. Looks like owner-CEO has just sold out and stuck his fingers up at the public markets. They cite access to the capital markets as a problem. Is there any benefit to being public as a decent producer of hydrocarbons atm. Feels like a thankless task....getting beat up by ESG ideologues in institutions who current enjoy their 100 p/e multiple on Amazon (we will see how long that lasts) and an every-increasing regulatory costs. It just shows how levered ENQ is to Brent and steady production. There is little fat to cut and the capital markets are not there atm thats for sure.
Based on production holding steady, Brent in a range of $40 to $50 for the rest of the year, $25 p/b FCF break-even as stated, how much of the RCF do people believe ENQ knock down in 2020 and how early can management announce repayments?
Newk, entirely plausible. If you enjoy what you do in the energy sector and have created a great business, is there any upside of being public? Getting bashed of ESG ideologues, a smaller universe of public investors, ever-growing regulatory costs and disclosure requirements every time you sneeze.
The facts are, being private in the energy (fossil fuels) sector is become more advantageous. Its a shame because i have a feeling AA as stuck is fingers up at the public markets at the wrong time. The fickleness of the ESG ideologues sat in London's institutional invest seats is likely to be exposed in the coming years. FANG/software/services is by chance flavour of the month and coincidentally overvalued to the extent multiples are in bubble territory. When this bursts, free cash flows from solid energy producers and great operators will have massive relative value.
In summary, is it a headache being public now as a producer of hydrocarbons....yes. Will it always be like this....no, imo.
Has Buffett cut the ribbon on an H2 E&P deal bonanza......I think its a fair statement to say Serica's operating ability and capital allocation skills compared to Rockrose is apples and oranges. Fair based on a well thought through deal structure BKR deal, $12 break-even, proven track record of the Chairman / executive team with regards to asset life extension and capital allocation. Natural Gas is and will be the fastest growing hydrocarbon. Serica's board will be fully aware of this and hopefully that the market capitalisation of the company is below its intrinsic value. The enterprise value of the company is significantly below its intrinsic value if management can deploy the cash in the next 12 months.
It would be very disappointing if the board panic and jumped at the first low-ball offer from a buyer. Given the quality of management, I think this is highly unlikely. With cash on hand where it is, limited liabilities, increased share of BKR, drilling in Q4, I calculate a fair price at 250p a share. If we can make a string of shrewd acquisitions combined with a buy back if needed, I will also be very happy.
This is what happens when management do not own enough equity and eat their own cooking. Why do a placement and dilute existing shareholders at these levels when the company does not desperately need the cash. Are they kidding me.
I'm outta here. That capital allocation policy stinks and and makes zero sense. Sorry management, you blew it. This thing is going lower