EnQuest forced to cut debt by windfall tax

Compared with other North Sea energy companies, EnQuest (ENQ) had slightly more reason to be worried by the 75 per cent tax and windfall levy rate, as it dropped the cap on how much it could borrow under its reserve-based lending (RBL) facility, bringing on a sharper repayment plan this year.

The company has long had a significant debt pile. But net debt excluding leases has now come down to $717mn (£576mn) from $1.2bn at the end of 2021. Significantly, the company’s current borrowings (those due this year) dropped 38 per cent to $132mn after a refinancing, and the company has already repaid $118mn of its RBL this year. 

Investors need not worry too much about the new tax hitting free cash, however – “No significant corporation tax or supplementary charge is expected to be paid on UK operational activities for the foreseeable future,” the company said. 

Cash profits were up almost a third to $979mn in 2022 on the back of higher prices and higher production. The output increase of 6 per cent to an average of 47,259 barrels of oil equivalent per day (boepd) came from the Golden Eagle field in the North Sea – EnQuest completed the purchase of a 27 per cent stake in the field in late 2021. Guidance is for a similar level of production this year. 

Assuming 2022 is a peak for earnings – as is the consensus City view, as per FactSet – the company is now looking at life after a crippling debt load. After more debt is cleared, the company has said the path is open to dividends. 

This could be top-of-cycle thinking, but a healthier balance sheet means we are less bearish on the company, which is also on a forward price-to-earnings ratio of just 1.5 times. Move to hold. 

Last IC View: Sell, 30p, 6 Sep 2022