EnQuest pays down debt and announces $15mn buyback

Excluding lease liabilities, EnQuest (ENQ) managed to reduce its net debt by $236mn (£186mn) during 2023, bringing the overall figure to $481mn, or 0.6 times adjusted cash profits. The leverage is understandable given that its corporate model centres on the exploitation of maturing and underdeveloped assets. But the introduction of the North Sea windfall tax has driven the imperative to pay down debt, along with its chilling effect on drilling incentives. EnQuest paid a total of $263mn in tax, including $77.2mn relating to the windfall levy, amounting to an effective tax rate of 113 per cent. The good news is that it expects to pay no corporation tax or supplementary charge on UK operational activities “for the foreseeable future”.

The sharp reduction in debt – a fall of $1.5bn since its peak – puts EnQuest in a better position to generate material free cash flows, but the company still fell to a net earnings loss after it recognised a non-cash net impairment charge of $117mn. Management said matters haven’t been helped by “a challenging fiscal environment in the UK”, but the revenue decline from the prior year primarily reflected the impact of natural field declines combined with falling energy prices. Post-hedging realised oil prices averaged $81.40 a barrel (bbl) against $88.90/bbl last time around. The fall-away in natural gas prices was even more pronounced, although it constitutes a much smaller proportion of sales.

Overall, it's a respectable showing given the direction of energy prices. Production has picked up in the early part of this year, and chief executive Amjad Bseisu anticipates a “pivot to growth during 2024”. Whether this prompted the company’s decision to employ $15mn towards a share buyback programme is difficult to say, but potential investors would be well advised to review the “risks and uncertainties” outlined in these results even given EnQuest’s discount to net assets. Hold.

Last IC view: Hold, 19p, 5 Apr 2023