EnQuest PLC (3EQ.F) Earnings Call Transcript & Summary

Good day, and welcome to the EnQuest full year results call. [Operator Instructions] And I would now like to hand the conference over to your first speaker today. I'm Amjad Bseisu, Chief Executive. Please go ahead, sir.

Thank you very much. Good morning, ladies and gentlemen, and welcome to EnQuest's 2020 Full Year Results presentation. First, I hope you and your families are safe and well. 2020 has been a difficult year for all of us, both personally and professionally. However, you will see that we have transformed your company, EnQuest, during this difficult time to be a much more robust and a much more sustainable enterprise. Joining me today on this call are Jonathan Swinney, our Chief Financial Officer; and Bob Davenport, our Managing Director for North Sea operations. I will start, then Bob will cover the operations in detail, and then Jonathan will be presenting the financial results as usual. I will then return to summarize before we move on to the Q&A session. Turning to Slide 3. As you have read, we've had a strong year given the circumstances. We came within guidance at 59,000 barrels a day, that includes the cessation of production of 7,000 barrels a day from 2019 assets, which produced 7,000 barrels a day. We've reorganized our U.K. business into upstream, midstream and decom, and we have reduced our costs considerably by almost $300 million over the year. We reduced our free cash flow breakeven from $50 a barrel to $32 a barrel, which is 35% lower, even though we instituted the transition 2020 during the year. But more importantly, 2020 has been about people and transformation. We did take quick and decisive actions to reset the company. We look to protect our people in line with our priority of delivering safe results. By working with a variety of stakeholders, including industry and medical organizations, we ensured that operational response was in line with a prevailing advice and level of risk. Our operations were unaffected practically. We adapted our existing processes and procedures, removed nonessential personnel and allowed our onshore workforce to immediately commence working from home, all to ensure we could keep our people safe and maintain operations. Secondly, again, this is the issue about people, we made the difficult but necessary decision to not restart our highest and to embark on our material transformation 2020 in the U.K. to ensure the support functions match our changing operational footprint. This required the difficult decision of reducing our staff. We also removed discretionary spending while completing our high-value drilling activities in Kraken and Magnus. Given such circumstances, I'm extremely pleased and proud of our performance in 2020. We delivered in line with our guidance. As I mentioned, we materially lowered our cost base and we have reshaped the company to be much more robust in the future. This performance allows us to generate $200 million of free cash flow at $40 realization and reduced our net debt to the lowest level since 2014. At the same time, we continue to look for value accretive opportunities. We've acquired the Bressay assets, which gives us a material 2C resource of 115 million barrels. And early in 2020, we announced the agreement to acquire material nonoperating, high-quality, Golden Eagle asset. Let me be clear about the Golden Eagle opportunities. I think this is a great opportunity for the company. It's a high quality asset. It's a great addition to our portfolio, and it fits very well with our business. It does compensate for our cessation of production assets by adding nearly 10,000 barrels a day and 23 million barrels to our resource base. The joint venture, Golden Eagle, is in the middle of drilling also a 4-well drilling program, of which 3 have been completed, and those have all been ahead of expectations. The remaining 1 is expected to be onstream prior to the transaction completion at the end of the year. So we're very excited about this opportunity. It's got $8 a barrel operating cost lower than our $15 barrel target. The life of field cost is roughly $15 a barrel, and this adds up to a very strong accretive acquisition of more than $100 million of NPV and $50 a barrel. With the oil prices materially above this at present and with cash flows generated by the assets being able to utilize against our U.K. tax assets, it's clear that we see a very positive and material impact of the acquisition, as demonstrated by the next slide. So going on to Slide 5, we find the impact of this acquisition on our transformed company. As I mentioned, our decisive actions in 2020 means we already have a high-quality, low-cost core of producing assets, I think one of the best in the North Sea. With the acquisition, we will offset the impacts of our cessation of production and our national decline, returning our production closer to 60,000 barrels a day, which is what we achieved in 2020. We will marginally lower our unit operating costs and will add about 10% of our year-end 2020 2P reserves, all of which are expected to be produced from the existing development plans of the asset. At the same time, we'll also add 5 million barrels to our substantial contingent resources, which themselves have been enhanced, as I mentioned, by the material discovery, the just covered Bressay field acquisition. So in summary, we have transformed our business to a lower cost business. The Golden Eagle acquisition will enhance our highly cash-generative asset portfolio, and we've substantially added to our 2C resources to get to 279 million barrels with the Bressay acquisition of 115, alongside our 2 large contingent resource assets in Malaysia and in Magnus. As you would expect, we would develop these opportunities in a responsible manner for the benefit of all of our stakeholders. Turning to EnQuest as a business model, I think EnQuest is very well suited for the energy transition. We have a focused strategy, which started when the company started in 2020 to identify ESG and to identify the environment as a key part of our tenants going forward. Thus, we're focused on recognizing that hydrocarbons remain a key element of the global mix for many years, but we need to pursue a business which fulfills the transition 2050 targets of 0 emissions. We have to fulfill our part of this transition to a sustainable low carbon world while reducing emissions from our own business. Our business model is distinct from companies that have material exploration component, as such we're less exposed to the longer duration exploration discovery, development and production cycle. We primarily acquire mature underdeveloped assets from other industry participants and drive performance improvements including emission reductions, short cycle, quick payback investments. Our recently established U.K. decommissioning director is also responsible for the safe and efficient execution of a decommissioning work program, which includes minimizing emissions alongside maximizing the recycle and reuse of recovered materials. This is an exciting opportunity for EnQuest, where we can take assets before their decommissioning and optimize those assets and get them decommissioned properly. As majors and other operators continue to shift their focus from these mature bases, such as the North Sea and Malaysia, there will be further opportunities for EnQuest to access additional resources. Turning to the next slide. We have continued to lower our emissions in the energy transition and that has been a focus for the company. Within the energy landscape, the emission performance is a great area of importance for EnQuest as a responsible operator. Indeed, we've reduced our emissions from the 2018 baseline set up by the government by 26% to 2020, significantly above the 10% target to 2025. We've also committed to decrease the emissions from 2018 by an additional 10% to 36% by 2023, again, significantly above the target of 25% and 50% by 2030. As the charts show, this continues to be a focus for us, and we will continue to play our part in achieving the U.K.'s net 0 target. I also think it's important to highlight that not all barrels are equal in the emission debate. We've continued to optimize the sale of Kraken cargoes and indeed have come up with innovative ways to use Kraken as a blend stock for very low sulfur fuel oil, avoiding emissions relating to refining and helping to reduce also the sulfur emissions in accordance with IMO 2020 regulations. Indeed, Kraken, even though it's a heavy oil field, will be one of the lowest emitting fields in the North Sea, as you can see from the data in the slide. Turning to the next slide. Lowering emissions and reporting on potential impacts of climate change are clearly important to us, but we also recognize the force of a wider ESG factor. In fact, during 2020, our Board Committee responsibilities were expanded to ensure our ESG performance was in line with our culture and values. Since our inception, as I mentioned, we have prioritized safe results and had that plastered all of our offices and all over our assets with no harm to people and respect for the environment. This has been a tenet from our start. We have a strong safety culture, highlighted by both independent reviews specifically carried out last year from a third party, but also our performance of lost time incident frequency of 0.22, which is absolutely top quartile performance and has continued to be quartile performance for a long time. We've also been able to successfully navigate through the COVID 2019 pandemic, evidenced by our resilient operational response and achieving targets even through this difficult time. We did experience a significant event in a detached driver in Malaysia. And as a result, we've initiated a company-wide review of asset integrity to develop a fit-for-purpose safety system for late life assets. Diversity and inclusion is also a key focus area for us. At present, 19% of EnQuest's leadership teams are female and 43% are from diverse ethnic background. While at a Board level, we have 22% representation on both camps, female and ethnic diverse backgrounds. We remain committed to improving workforce diversity and inclusion, and there was a renewed examination of the company's approach during this year. We are aiming to build awareness of the harness of the power of diverse thinking across our organization. This is very much in line with our revised purpose. Thinking of many views, considering many views, looking at diversity as a strength is important for us and is part of our culture and our values and will help us create these solutions through the energy transition -- creative solutions through the energy transitions. At the same time, we will not compromise our standards or ethics or merit, where we will continue to operate in accordance with our code of conduct and established risk management framework. With that, I would like to hand over to Bob to cover our operational performance in more detail.

Thank you, Amjad, and good morning, everyone. In a moment, I'll share an overview of the group's excellent operational delivery in 2020, followed by some detail. But first, I'm especially proud of the way our EnQuest teams, both offshore and onshore, responded and overcame the many challenges presented by the pandemic and our own transformation program. Their dedication and hard work created the positive results in the future, which Amjad just described. So now on to our overall 2020 production performance on Slide #10. As Amjad said, given the unique challenges of last year, I'm very pleased with our overall performance. Importantly, we successfully mitigated the impacts of COVID-19 through the evolution of our protocols and the diligence, professionalism and adaptability of our workforce and our supply chain partners and complying with our requirements. In total, the group delivered just below the midpoint of guidance with production at 59,116 barrels equivalent per day, and that's down about 9,500 barrels per day compared to 2019. The single biggest driver for these reduced volumes was cessation of production decisions at a number of assets with production from our decom direct is down about 8,500 barrels per day. Again, while these decisions have reduced our production, they have significantly lowered our cost base and allowed us to restructure our business into 3 directorates in the U.K. for improved focus and delivery. In the year, we delivered really outstanding performance of Kraken, above the top end of guidance, slightly lower at Magnus, higher at Scolty/Crathes. And in Malaysia, production was down by about 2,000 barrels a day equivalent compared to the previous year, reflecting the impact of the riser detachment at the end of September. I'll now provide more detail, beginning with Kraken on Slide 11. At Kraken, production was ahead of guidance with daily average at just over 37,500 barrels per day, that's gross. Production and water injection efficiency were strong at 87% and 91%, respectively, while the FPSO performed very well throughout the year. During the third quarter, we completed a planned shutdown for essential maintenance work, although unplanned repairs were completed on the DC-1 riser in Q4, which resulted in 2 producer wells shut in for about 2 weeks. Overall, subsurface and well performance was very good with water cut evolution remaining stable. We continue to focus on optimizing production and producer injector well management, incorporating the results of regular well testing. In addition, drilling at Worcester was completed in the first half of the year with the new producer-injector pair coming on stream late in the second quarter. We have now produced well over 40 million barrels from Kraken since first oil in June 2017. Cargo pricing remained strong as we sold directly to the shipping fuel market as a component of IMO 2020 compliant fuel oil. Production in the first 2 months of this year is within our guidance range, again, at 30,000 to 35,000 barrels per day growth despite brief shutdowns to inspect and then repair a riser hold down ]. It's worth noting that during that repair operation, we did reduce future plan 2021 shutdown days by completing early some critical maintenance scopes. Though we're not planning on drilling at Kraken until 2023, we do expect to complete a 3D seismic campaign in the second half of this year to support ongoing evaluation of discoveries and prospects in the western area, in which we continue to see potential for further development. Turning now to Magnus. Production of just over 17,400 barrels equivalent per day was about 4.7% lower than in 2019. The performance was impacted by a gas compressor and seawater lift pump availability and natural declines. Now offsetting this was positive contribution from 2 new wells, which came on stream in the first quarter, combined with good production and water injection efficiency, both of which averaged around 80%. During the year, we continue to focus on production enhancement activities, including well interventions and reservoir management. Production in the first 2 months of this year were impacted by unplanned third-party outages and power failures at Magnus, all of which have now been resolved. Moving forward, we have activities ongoing and plan to add new production, including well interventions, increased water injection and facility optimization. And the team are finalizing well targeting evaluations ahead of the planned development drilling program in 2022, while we continue to assess the existing 2C resources for future opportunities. Turning now to Slide 12. At our other upstream assets, which includes Greater Kittiwake Area, Scolty/Crathes and Alba, average reduction was about 15% higher reflecting strong performance of Scolty/Crathes. Both the Scolty and Crathes wells continue to perform nicely with ongoing optimization to help mitigate natural declines. This strong performance was partially offset by lower production elsewhere in the Kittiwake area, mainly due to failure of the subsea umbilical providing power to Mallard and Gadwall requiring their shutdown, along with underlying natural declines. With the umbilical awaiting replacement, production in the first 2 months of 2021 remained lower. However, gas lift was introduced at Scolty/Crathes late in the first quarter to improve rates, while normal production levels will be returned to Kittiwake during the second half of the year, following the planned replacement of that failed power umbilical. As I mentioned earlier, production from our decommissioning assets was much lower than 2019, primarily due to cessation of production decisions taken at Heather, Thistle and Alma/Galia. At The Dons, production was impacted by a lack of gas lift, which was no longer available from Thistle, combined with underlying natural declines, and we took the decision during the year to cease production in early 2021. The partner and regulatory approvals were received in February and the field stopped producing in early March as planned. The development producer floating production facility is currently being used for initial decommissioning activities. Once these activities are complete, expect that early in the second quarter, the vessel will depart the field and be handed back to the owner. At Heather and Thistle, reparatory work continues ahead of the planned well abandonment programs later in this year. Turning now to Malaysia on Slide 13. Production at PM8/Seligi was reduced from September by the detected riser. This pipeline provides gas lift and injection to the Seligi, Bravo, Echo and Hotel platforms. Now we've had good success with showing production thus far. We've installed a riser plant at the Seligi Hotel platform, along with repairing and replacing cable and pipe work and steel work on Seligi Alpha platform which enables the PM8 fields to come back online 2 months ahead of schedule. We still need to replace the entire Alpha to Bravo gas lift pipeline and both risers to afford normal production levels are expected to return. This is planned for the second half of the year. And again, that's really good progress with the required approvals, materials and equipment sourcing and preparations for installation ongoing. At the same time, we continue to assess the large 2C resources at PM8/Seligi for future drilling opportunities, which we expect to recommence in 2022. Regarding PM409, we continue to evaluate the large 2C resources present in this block as we work a drilling proposal in support of our license commitments there. In summary then, our 2020 operational performance was outstanding and set against the challenging backdrop of the COVID-19 pandemic and our own North Sea transformation program. Production in the first 2 months of this year was slightly behind schedule, but we remain confident in delivering production from our existing portfolio of between 46,000 and 52,000 barrels per day for full year of 2021. That's because repairs are already completed on the Magnus power system, third-party equipment and Kraken tether which accounted for most of the unplanned downtime in January and February. We opportunistically brought forward some critical maintenance from planned shutdowns later in the year. And importantly, we have multiple projects across our assets to add additional production, including ongoing well interventions; increased water injection and facility optimization at Magnus; well optimization at Kraken; increasing gas lift and reinstatement of the power umbilical at Kittiwake, Scolty/Crathes, Mallard and Gadwall; and reinstatement of the Alpha Bravo gas lift pipeline at PM8/Seligi to restore full volumes there. Longer term, we see plenty of drilling opportunities at our 3 core assets, that's Magnus, Kraken and PM8/Seligi, and I look forward to our completion of the Golden Eagle acquisition which will add another high-quality asset to our portfolio. With that, I'll now hand over to Jonathan to take you through the financial results.

Thank you very much, Bob, and good morning, ladies and gentlemen. Turning first to the summary slide on Page 15. Notwithstanding the very challenging environment outlined by Amjad and Bob, the group delivered on its 2020 production and cost guidance. The early and decisive action to reduce costs resulted in operating and capital expenditures being $295.6 million less than 2019, materially lowering the group's free cash flow breakeven. Our realized oil price of $41.3 per barrel in 2020 was materially lower than the $65.3 per barrel we realized in 2019, primarily reflecting lower market prices as well as the impact of our hedging program. In 2020, we recognized $6.1 million of hedge losses compared to $24.8 million of gains realized in 2019. The realized price, excluding hedges for the year, was $41.6 per barrel compared to $64.2 per barrel in 2019. Salable barrels of oil were less than production, mainly as a result of the entitlement barrels in Malaysia being around 67% of the working interest as well as shrinkage of around 1%. Entitlement barrels for 2021 at PM8/Seligi are expected to continue to be around 70% of the working interest barrels. Revenue also included gas and condensate sales of $60.5 million, mainly derived from Magnus gas sales, which included around $40 million associated with the resale of purchased gas no longer required for reinjection in the Magnus field. The decrease in operating cost per barrel were $20.6 per barrel to $15.2 per barrel, reflected the group's focus on cost control, the 2020 transformation program and cessation of production at Heather, Thistle and Alma/Galia. In aggregate, cash, capital and abandonment expenditures also reduced in the year down $75.6 million to $173 million. Low production and realized oil prices resulted in EBITDA and cash generated from operations decreasing to $551 million and $568 million, respectively. As outlined at the half year, we also recognized a noncash post-tax impairment of oil and gas assets of $259.2 million and derecognized $371 million of our deferred tax asset, both reflecting lower long-term oil price assumptions. Given low oil prices during 2020, both the retail and high-yield bond interest payments were paid in kind during the year. This continued into 2021 with February's interest payment on the retail bond paid in kind and the April high-yield bond payment is also expected to be settled this way. These PIK payments are added to the group's issued debt. At the end of 2020, our net debt had improved to $1.28 billion and in January 2021, a further voluntary early repayment of $25 million was made on the term loan and revolving credit facility. Turning now to Slide 16 on our capital and abandonment expenditure. As Amjad has already outlined, we acted quickly to the macroeconomic situation in March, deciding not to restart production at the high cost Heather and Thistle assets, minimizing discretionary expenditure and prioritizing value-accretive drilling at Kraken and Magnus. Our cash capital expenditure for the period was $131 million with Kraken continuing to be where the vast majority of expenditure was focused through the delivery of the Worcester wells in the first half of the year. The remaining CapEx related to the Magnus infill campaign, which concluded in Q1, bringing 2 new wells on stream. Approximately $40 million related to work in prior periods were settled during 2020. Reflecting our decision to cease production at a number of our assets, our cash abandonment expenditure increased in the year to $42 million, abandonment spend was focused on Heather and also on Alma/Galia. Decommissioning activities on Thistle began in 2020. However, the decommissioning liability is retained by BP and Thistle. EnQuest will begin making payments by reference to it 6.1% share of decommissioning costs during 2021. For 2021, combined cash capital and abandonment expenditure is expected to be around $120 million, with capital expenditure primarily relating to license to operate activities and excludes costs associated with the PM8/Seligi riser incident repair, which is expected to be largely covered by insurance. Abandonment expenditure primarily reflects decommissioning programs at Heather/Broom, which includes an acceleration of some work scopes as well as abandonment work at Thistle/Deveron and The Dons. Slide 17 outlines our net debt performance. As you can see, our net debt position has improved materially from around $1.41 billion at the beginning of the year to $1.28 billion at the end of 2020. Net cash flow from operations totaled $522.1 million in 2020, down from $962.3 million in 2019, primarily as a result of lower oil prices. As I outlined just now, cash CapEx was $131 million. During the year, we paid $21 million to BP in relation to the vendor loan associated with the acquisition of the additional equity interest in Magnus, along with an additional $41 million of profit share as well as $10 million of interest, which is captured in net financing and other costs. The majority of the net financing costs primarily relate to interest on our Thistle facility and the FPSO lease. As I mentioned earlier, in 2020, we settled our bond interest payments in kind, which increased our net debt. We continue to focus on managing our liquidity and net debt position and in line with our -- with prior years have laid in hedges. For 2021, we currently have hedged around 5 million barrels of oil with an average floor price of $55 a barrel and an average ceiling price of $64 a barrel. Turning to the next slide. We are now making good progress with our financing arrangements associated with our planned acquisition of the Golden Eagle asset. As we outlined in February, we intend to enter into a new reserve-based lending facility that will refinance our existing senior secured facility part fund the acquisition and help to simplify our capital structure by repaying early the Scolty/Crathes facility and Magnus vendor loan. So far, our lead banks, DNB and BNPP have been to their respective credit committees and committed substantial funds to the new debt facility, and we're now into the marketing phase of the process. At the same time, we're also working hard on developing the perspective to accompany the equity raise for the transaction. I'm certainly pleased with our progress so far and remain confident in our ability to refinance our existing senior credit facility and raise the necessary debt and equity funds in order to complete the Golden Eagle acquisition. I will now hand over back to Amjad for closing remarks.

Thank you very much, Jonathan. As you've heard, we've had a transformational year in 2020. We are well placed to deliver value as a company. We have a proven track record with a very strong track record in increasing production efficiency and cost control and reserve growth since inception. We're an industry leader in drilling and subsea. We've executed innovative and value-accretive acquisitions, and we have a clear ESG focus. We've strengthened our strategic position through transition 2020. We materially lowered our cost base, reduced our net debt to its lowest level since 2014. We've acquired substantial 2C resources at Bressay, and we've had a chance to acquire a very high quality, low-cost assets in Golden Eagle. Over many years, we've proven ourselves to be a strong operator, driving operational and financial efficiency. We are clear about our core capabilities, and we believe our focus on extending the useful life of existing assets through operational improvements and reducing emissions is well suited to operating through the energy transition. I believe EnQuest is well placed to succeed in a changing world. I look forward to 2021 and to finalizing our Golden Eagle opportunity to which replaces our decom asset production and having significantly higher cash flow and stronger cash flow and lower breakevens and with higher oil prices. Thank you very much for listening. I will now hand back to the operator for the Q&A session.

[Operator Instructions] The first question coming from

One for Jonathan. Am I right in my understanding that the bonds will become cash pay in the event of the successful term loan refinancing?

Sorry, I just got just disconnected from my side. The -- I think the initial refinancing which was put in place when we did the original refinancing back in 2016, I think, was with respect to refinancing the current facility and that current facility was due to the, I think, refinanced, I think, by the time we said that in October this year. So fundamentally, that was why the -- all the payments were due are now being pushed out to October 2023 automatically. I think from recollection, I think, the PIK payment would still be in place. But I'd have to go and check that, to be honest, we'll -- I'll make sure I do that, then we'll come back to you.

And the next question comes from the line of James Hosie.

A couple of questions. Just firstly, thinking about your comments on decommissioning. Do you see EnQuest becoming a decom specialist now and should we think about an asset acquisition that brings the abandonment liability as a value creation opportunity for EnQuest? And then just on Kraken, your partner recently announced its sale of interest and describing the decision as exiting an asset that will follow a natural decline mean and do you share that view for Kraken or is there scope for gross production to remain relatively stable over the next few years there?

Okay. Thank you, James. I will take both those questions. So on decom, we are building capability, and we have clearly a segue into that capability through 2 of our strengths: number one, drilling. Almost half of the cost of the abandonment or decommissioning is relating to drilling. And clearly, we have a proven capability drilling with the third-party showing that we are upper quartile performer. We have drilled 50 or 46 of 200 wells in the last 4 years. And so I think we bring that capability. We also bring projects execution capability. Again, we are upper quartile in the subsea tieback, where many of our fields require subsea So I do believe we can segue into decommissioning. We've set a direction, and we look at this as an exciting area for the future and looking to maximize the value to both shareholders as well as our partners in the space. On Kraken, we think Kraken is a long-term asset and it's a very young asset. We have just started production in only a few years ago. We have just reached our 40 million-barrel production level late last year. So we are just in the beginning of a long journey. And so we do believe there's upside in Kraken. Clearly, there is the Western Flank, which we've drilled wells last year and have been producing. We have oil in place in the field of over 400 million barrels and 100 possibly in the Western Flank. We have a deeper horizon, the Heimdal , which we would look at producing. And we Bressay, a very large field that we are now operator on with a possibility of a tieback to the Kraken infrastructure. So we do feel this is an asset which is a young asset. I think both ourselves and our partners believe the life of the asset is 20 years plus. And so we will continue to optimize that asset going forward.

And the next question comes from the line of James Thompson.

I just wanted to think about kind of CapEx plans over sort of the medium-term on the major assets. When I go back to the 2019 CMD, I mean oil prices now are thankfully back to the same sort of level as the CMD back then. And obviously, at that time, there was some ambitions to develop the sort of 2C on Magnus and PM8/Seligi, particularly, now clearly, you've had to sort of push some of those activities out through 2020. But I just wondered maybe you could kind of help key us into kind of capital plans going beyond 2021. I appreciate this year is sort of, if you like, license to operate, you need to go after those assets. And obviously, oil prices are sort of more favorable here. So maybe you could just sort of help us try to understand your kind of ambitions to capture the 2C on the core assets over the next few years, kind of how much it costs and when you think you might sort of get back to those higher -- or those 2C production numbers that you sort of outlined 1.5 years ago?

Yes. Thank you very much, James, and I hope you are well. You're absolutely right. The CapEx planned over the medium-term are under review and continue to be under review. We've obviously looked at this year with 2 lenses. One, which is a low price lens because when we made the assumption in -- for the year, we're using kind of a mid-40s price on our budgets for this year. And so we do have significant intervention activities, IWR, intervention work programs and rejuvenation of wells, both in Magnus as well as in PM8/Seligi. We are, though, looking next year at restarting the drilling program, both in PM8/Seligi as well as Magnus and PM8409, which is the asset we acquired in Malaysia that tied back into PM8/Seligi. You're absolutely right. We will be looking at bringing more 2C resources and starting a program, given prices have firmed up. These are very low-cost barrels in terms of CapEx. And we had mentioned the $5 to $8 a barrel in terms of cost. So they remain competitive, and they remain very accretive at even low prices. But our focus will continue to be reducing our debt load and ensuring that we get into a position where our balance sheet continues to be more and more robust over time. We are at the lowest level of debt since 2014. We are -- our target is to get to below 1% on net debt to EBITDA. Clearly, we got very close to that in 2019. But through last year with the oil prices being around the 40 or average for the year, we have that target now to meet again. So we will look at that in the future for sure, and we will come back to you hopefully in the latter part of the year with maybe a more firm plan on the future.

Okay. All right. It would be very helpful to sort of see how those plans are evolving through this year -- later in the year. As you say, good debt levels to see revenues down 50% and still delever the balance sheet, cut debt by 10%, I think, is a pretty good effort. Thinking about the hedge strategy for this year, I don't -- forgive me if I'm wrong, but it feels like a very narrow band in terms of your floor-ceiling that you've agreed to in your hedges. Can you just talk about that? Certainly, looking back, there seems to be a wider spread on the floor and ceiling? Is that a specific strategy for this year? I mean, because, obviously, if we do see higher prices in the latter part of the year, you may sort of leave some of that on the table. So just a little update in terms of the sort of hedge strategy would be helpful.

I will start, but probably ask Jonathan to also add his comments, James. So I mean, this year is a year where we obviously have a repayment of our debt, our secured debt at the end of the year, October this year. So we are very focused on ensuring that we pay that down as much as possible. You have seen in our financials, I think we will, at these prices, we'll make a very big dent, if not, a full dent into that. We clearly are also looking to refinance the hedge program -- the baseline for the hedge program is to repay as much of our debt as possible in this year. The refinancing is really focused on cleaning out our debt structure and ensuring that we also finalize the acquisition of Golden Eagle, which we're very confident that we will be able to do and get the refinancing in place. So I mean the answer to your question, the reason it's a tight range is because it's a year where we are very focused on reducing our secured debt and making a very large dent into that. And again, we do have the ability to continue hedging into the future of the year as we're hedging with about 5 million barrels to date. Jonathan, do you want to add anything to that?

No. I think you've covered most of it, Amjad. I mean I think as soon as oil prices were above $50, we were layering in hedges on a regular basis all the way through this year, as you've seen, when we had our operational update as well. And we will obviously continue to do that. So as Amjad said, making sure that we secure the balance sheet is key. That's what we've been doing.

Great. Final one for me. Just can you give us an update on the EnQuest Producer? What your thoughts around either monetizing that asset or putting it to you somewhere else?

Yes. Thank you, James. So the EnQuest Producer is -- again, we decommissioned the Alma field on schedule and budget. We have the producer at the And we have reduced the costs very, very significantly on the producer, just to -- for a tepid kind of one stack there to look at opportunities. We are looking at opportunities of sale or redeployment through other partners. So we continue to look at that. I think the cost of holding it now given the higher prices, I think we are seeing a lot more opportunities, and there's clearly a handful of parties that have approached us, more than one handful that we are actively in discussions with on either a sale or redeployment.

The next question comes from the line of Alberto Gallo.

So coming back to the refinancing, what are the plans to potentially simplify the capital structure in the future? And when will bondholders -- what an ideal capital structure would look like and when will bondholders learn about it?

This is for you, Jonathan.

Thank you. So in terms of simplification, I think the refinancing for us was -- we intend to repay the Magnus vendor loan and also take out the 15% facility that's currently on Kraken so to make that cleaner. I think what I've always said with regard to overall financing on the bonds is once we get to the October 2023, when it's obviously -- when the bonds are due, that fundamentally, we'd be able to repay say, I mean, ballpark of it's about $1 billion worth of bonds repay half of that. So you've got a -- certainly an RBL in place as well. Obviously, it depends on the cash flows between now and then or prices stay pretty constructive then we can repay that in cash but then have a kind of 50-50 of $1 billion worth of debt, 50-50 through bank lending, reserve-based lending and 50% through bonds, that would be the kind of the ballpark of the capital structure in 2 to 3 years' time?

And the next question comes from the line of Alex Walsh. Seems like there's no response from the caller. We'll move to the next question, it comes from the line of Mark Wilson.

I got a couple of questions to Jonathan. First on tax and the second on decom. And cash tax, you see a very low, just $10 million and said against the $3.2 billion of overall tax losses. Would we imagine that, that cash tax level will remain at that low level, maybe just with Malaysia payments over the next few years? And secondly, can you expect or do you expect to be able to utilize all those tax losses out of the current portfolio, I include Golden Eagle in that?

Yes. It would be the low levels of cash tax, which, as you say quite rightly, is with respect to Malaysia, $10 million to $15 million has been historically where we've been, and I anticipate that going forward, obviously, with higher oil prices, that tends to increase. And then in terms of utilization of the current tax losses, obviously, we derecognized some of the tax losses with regard to the deferred tax asset. We do recognize around about $370 million of that. So that shows you that, certainly, some of that $3.2 billion of tax losses that we have got -- wouldn't be used. Now that's using a long-term oil price of $16 a barrel. And obviously, we weren't allowed to take into account the Golden Eagle asset acquisition because that hasn't completed yet. So certainly, that will improve the position. So if oil prices certainly stay or progressed above $60 a barrel then we will certainly start to be using those tax losses that we derecognized. And clearly, the acquisition would also allow us to use more of those losses. So I think if it's above $60 -- certainly if it gets to maturity above $60, then the answer is yes, we would be able to use those tax losses in due course.

Great. And the second point is on decommissioning. Now just 6% at Thistle, we've got the largest share at Heather, I think, 37% on the Could you give us an overall -- do you think the overall decommissioning exposure is on the current portfolio as it stands over the next few years?

I think in terms of cash, we had said over the next 3 years kind of averaging kind of $60, $70 or so a year. So that gives you around about $200 million over the next 3 years in terms of cash out for

Okay. Then going back to Slide 7, the emissions, is it -- you show the Kraken emissions, is it possible to give or convert the group emissions into kilograms per CO2 for the group production last year?

Yes, we actually do -- we have put that in our annual report in the past, and we're happy to share that with you, Mark.

And no further questions over the phone lines at this time. Please continue, sir.

Thank you, Operator. So we have some questions from the webcast, Amjad, Jonathan and Bob. The first one coming from from Innovation and it's also linked to another one from a private investor Carlson. Any time plan for refinancing the existing credit facilities? And after this, any plans for dividends or buyback programs.

I'll start with the second one on the dividend buyback. And maybe, Jonathan, you can answer the refinancing of existing and bond facilities again. I think you've answered it slightly in the past. So I mean, as the cash flows continue to be strong, as you know, our free cash flow yield on equity is very high. And as we are able to make a big dent in our -- in achieving our targets of net debt-to-EBITDA below 1, I think we will start considering dividends in the future. And I think that in terms of share buyback, I think we will look at that also, but I think initially, the plan was to look at dividends rather than share buybacks. But that will be a part of our landscape for the future once we get into our target range of net debt-to-EBITDA below 1. Jonathan, you want to talk about the plans for existing and RBL as well as bonds? I think you mentioned some of the plans for the future anyway.

Yes. In terms of the current facility, I mean, obviously, the plan is to refinance that with regard to the current facility that we're working on at the moment with our lead banks, DNB and BNP So we're putting in place a larger reserve-based lending facility to refinance the current facility as well as part of the acquisition of Golden Eagle. So working very hard on that. I think that that's obviously consistent with what we said at the time of the announcement of the acquisition in the first place back in February. I think longer term, certainly, as I said, looking to refinance the bonds they are due in October 2023. So more -- we've got around about $1 billion worth of bonds at the moment. So I'm certainly looking to have a more balance of that debt rather than having $1 billion worth of bonds having more of the balance of, say, $500 million of bank debt and something similar in terms of the size of the bonds.

Thank you, Jonathan. Just linked to that question from Michael Burn as well on the new RBL, will you be increasing your hedge book going forward, given the higher RBL balancing? Can you outline what you will be targeting?

The answer is that, that is certainly likely to be the case. So I think traditionally, we've always looked at hedging around about 50% of our production. I think we would be looking to maybe hedge a little bit more than that in 1 year out and a bit less than that 2 years out. So clearly hedging with the new facility that's in the interest certainly of the company and also of the banks involved in the lending facility so that we can make sure that we can secure the cash flows for the next couple of years. So certainly, what we want to do as well. So certainly, we'll be looking at putting in place a longer-term hedge program as a result of the refinancing.

Thank you. Three questions from , Wells Fargo Asset Management. At $60 oil, where would you see net debt at the end of the year? And then on an operational basis, how much of 2021's lower production guidance is attributable to maintenance? And what are the decline rates on your current producing portfolio?

Jonathan, I think there's probably all 3 for you.

I'm just sorry, I was just trying to write down a couple of them. I mean, at $60 oil, we've given a lot of guidance with regard to production, OpEx, CapEx and as well as the expenditure. So I certainly wouldn't want to risk giving a profit forecast with regard to kind of given that we've got prospectus coming out in the reasonably near future. So I wouldn't want to give a specific number on that. I think you should be able to work through with our guidance and you'd get a reasonable ballpark number on that. In terms of -- sorry, Ian, on the second question?

So the second question was how much of our 2021 production guidance decline is attributable to maintenance and then what are the normal decline rates in our existing portfolio?

Well, I guess, in terms of our overall OpEx in terms of maintenance. Maintenance is just a normal part of what we do. If the question is with regard to kind of maintenance keeping production flat as in maintenance CapEx, then obviously, we're not spending any material money this year in terms of drilling, not in our guidance. I think in terms of maintenance, OpEx itself in -- particularly in the U.K., but what I can remember is there's not a specific percentage because a lot of it is just normal operational OpEx as well as transport and transportation and tariff costs as well. But I don't think in our 2021 guidance, there's nothing out of the ordinary in terms of the size of maintenance on a go-forward basis. And then, sorry, Ian, on the last question in terms of...

Just on normal, what's an average decline rate in our portfolio?

I think in terms of decline rates, there's a mixture across our assets. But overall, it tends to be kind of in the lowest double digits, so 10%, 11%, 12%, 13% is kind of overall where it tends to be. Obviously, we do work around our assets in terms of, as Amjad mentioned a bit earlier, with regard to drilling in due course, both on Magnus, PM8/Seligi and then we've got Pembroke and Maureen slightly longer-term with Kraken as well with opportunity. So obviously, there's plenty of work going on to stem that decline.

Thank you. Linked to that from a production standpoint, 2 questions from Miguel Costa-Gomez a private investor. On Magnus, are we ever going to see average yearly production as per the 2019 Capital Markets Day projection or is it the case that we're now assuming production will decline faster than in 2019? I'll ask that one first, if that's okay.

Yes. So I think -- I mean we have planned well in Magnus in the 2019 CMD, which will -- which were delayed, obviously, because of 2020. So we didn't drill anywhere this year. We will restart the drilling program in Magnus in next year. So we are seeing production near 17,000, 18,000 now, and we're expecting to stem the decline and indeed, increase it over time depending on the well stock that we drill. So that will be a feature in the future as we restart our drilling program in Magnus.

And then another one for Jonathan. Are you able to provide the net debt figure at the end of February? Again, that was from Miguel Costa-Gomez .

Thanks for that. I mean, it was -- as we were expected, I mean, I think I'm quite keen, given that, obviously, going back 3 or 4 years ago, our net debt was very highly focused on going through the restructuring. So from -- rather than specific month-by-month basis, it's certainly on track with where we thought it was going to be and wouldn't be anything materially different from any kind of expectation. So obviously, we are 12 80at the year-end. And the end of February number was certainly within our expectations.

A couple of more questions have come. The first one from Donald Philipps with Line Trust . How receptive have shareholders been about the $50 million capital raise in finance package? And are you actively picking on other deals or just work in getting Golden Eagle done?

I'll answer the second one. And Jonathan, maybe you can answer the equity raise question. So on the second one, Golden Eagle is our focus and will continue to be our focus until we finalize our prospectus and equity raise. We do continue to look at other deals, and we continue to be in the market. We were in the market last year. Clearly, Golden Eagle was an opportunity that we were competitively able to bid for and are very happy that it's very accretive to our shareholders. And I think it was the right opportunity for EnQuest to capitalize on in terms of the future. So -- but our focus is on Golden Eagle and finalizing Golden eagle. Jonathan, I think the question on equity raise, how that's going and the feedback from shareholders?

Yes. I mean the feedback has certainly been positive from our shareholders with regard to Golden Eagle. Obviously, we had said that it would provide NPV of greater than $100 million to shareholders. So that has certainly been supportive and supported by shareholders. So I think that has all been positive. Obviously, the person's report will be included within the prospectus when we publish that, and that will show an NPV value in there. So we'll obviously update the marketplace at that time. But from our perspective, we said it was going to be at least $100 million, and that is still very much the case. So a positive response from our shareholders.

Next question from Thomas Sreet of Street Research. The U.K. government will make it far more difficult for oil companies to obtain drilling licenses. What is EnQuest's strategy to deal with the new government announcement?

Okay. I'll take that on. I mean, I think the government's announcement is about transition -- is transitioning from oil and gas over the period up to 2050 and even beyond. I think the government -- the North Sea transition deal also refers to oil and gas as having a place very long term. Now in terms of the main deal issues, it relates to reduction of emissions and 10% by 2025, 25% by 2027, 50% by 2030 against the 2018 baseline. As you would have seen in our presentation, we are way ahead of that target. We have reduced our emissions 26% from 2018 to 2020. So we've achieved the 2027 targets by 2020. And we have set the line to get to 36% by 2023, and we will be achieving the 2050 -- sorry, 2030 target of 50% ahead of the target. So I think we are well placed to achieve the targets set out by the North Sea government initiative. Now I think we are also not affected by the exploration narrative. We are not an exploration company. We take existing assets and extend their life and look at undeveloped discoveries and extended their life. So in some ways, we're ideally suited for it as a transition company because we could take these assets and our business model is about extending the life of those assets.

And then the last question from the webcast from Sergey Kipingland What do you estimate the free cash flow breakeven for us for 2021 will be?

So we've given guidance on 2020, which is -- which was $32. 2020 was an important year. We did achieve the target of $32 per barrel. I think that was looking at an oil price for the year of $40. There is sensitivity to our cash flow breakeven because I think about 10% to 20% of our costs are oil price related. So we will not specific guidance because we don't know where the oil price average will be this year. But I think assuming the sensitivity to oil price, that is generally the sensitivity to -- it would be around 10% or 20% sensitivity to where the oil price is versus last year.

Thank you very much, gentlemen. There are no further questions from the webcast. So I'll hand back to you Amjad for closing remarks.

Okay. Well, I want to just to thank you for your support and being loyal stakeholders and shareholders. I do see 2020 as a seminal year for EnQuest and transformation 2020 as central transformation for EnQuest. We are a lower cost company. We are one of the lowest cash flow breakeven companies in the North Sea in 2020. We have reduced our size for a fit-for-purpose future, and this exactly shows what we've been able to do, number one, by adding contingent resources with PM409 and Bressay, those resources tie into our infrastructure. So the low CapEx, low -- the highly accretive resources and by doing acquisitions like the Golden Eagle acquisition. The Golden Eagle acquisition also shows that we have the support of the bank and of the industry in terms of being able to acquire the right assets at the right time. It's a very highly accretive acquisition. I'm very excited about it. It fits very well with our program of cash flowing, maximizing our cash flow and reducing even further our breakeven. So I'm very excited about the year ahead. I think we'll make a very large dent in our debt going forward, and we will be able to get into our range of a very robust balance sheet in the not-too-distant future, giving us a pass for growth, both through acquisitions as well as through organic opportunities. With that, thank you very much, everyone. I wish you a very good day and looking forward to hearing from you and seeing you, hopefully, in August with our half year results.