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

Good morning, ladies and gentlemen, and welcome to our 2021 full year results presentation. Joining me today in this presentation are Jonathan Swinney, on my left; and Bob Davenport on my right. Jonathan will present the financial results as usual with Bob covering global operations. The situation in Ukraine is a true human tragedy on a large scale. Our thoughts and prayers are with all those who are currently suffering and we wish them a speedy resolution. As a responsible company, we've reviewed our commercial arrangements and do not consider we have any adverse exposure to the situation there. While the resulting higher oil price is helpful for our business, this crisis has also highlighted the importance of affordable and secure energy supplies, including the long-term transition to renewable energy. EnQuest is a transition company taking upstream assets to decommissioning and also having an exciting hub for new energy at Sullom Voe that I will talk a little bit more about in the presentation. Companies like EnQuest continue to have an important role in making the most of the resources we have in Britain to meet society's energy demand as we make the transition. Now going to the highlights of 2021. Clearly, safety is our #1 priority. And again, we achieved top quartile lost time injury performance. We also navigated the COVID-19 pandemic and made excellent strides against our internal and industry targets on a mission. I will outline this shortly. As you recall, we reacted quickly and decisively in 2020 when oil prices declined. And we tailored our business through Transition 2020, we've seen some production of our high-cost assets and transformed the organization. We are now seeing the benefits of this transformation. With the support of oil prices, we generated $400 million in free cash flow last year, the highest since our inception. We strengthened our portfolio by the Golden Eagle acquisition, which looks even more attractive in today's price wars. And we've also made 2 important acquisitions for growth, Bressay and Bentley. Those give us significant low-cost 2C resources next to our infrastructure. We've reduced our net debt for the fifth straight year even after the Golden Eagle acquisition. And we've also simplified the balance sheet, as Jonathan will show you shortly. We did, however, see a lower production performance than we expected, primarily due to the operational issues at Magnus, as we've outlined before. But what you see -- what you would have seen from our announcement this morning is that we have started the year strongly, delivering 50,400 barrels a day to date at the end of February. All assets are performing well, and we reduced our net debt by $132 million in the first 2 months of the year. While oil prices are supportive, we remain disciplined in our investment decisions and our focus continues to be further debt reduction while selectively investing in low, quick-payback, organic opportunities. As I mentioned and as you can see from Slide 4, we've made excellent progress in reducing our emissions during the year by reducing our CO2 equipment emissions by 15% year-on-year. This continued our strong performance where we have reduced our emissions by 44% from the 2018 benchmark, which is set by the U.K. government in the North Sea transition deal. We're very close to the 2030 target of 50%, and we are ahead -- way ahead of the 10% target of 2025. Actions speak louder than words. We have made the investments. We continue to work on this as a priority. And all of our workforce is focused on reducing emissions. We need to continue to innovate to find new ways to reduce our emissions, particularly given our increased activity sets in 2022. It's important also to highlight that not all barrels are equal in the emissions debate. We have optimized our Kraken cargoes to make use of the very low sulfur fuel oil market and blend Kraken into VLSFO, enabling us to reduce the footprint of Kraken significantly below, even the best local barrels in -- like Brent or Johan Sverdrup. Our emissions there is around 25 kilograms per barrel, which compares very favorably with the best-in-class field. We're also creating value in the energy transition space. And as I've outlined before, we -- our proven capability starts upstream, where our core business lies. We leverage our experience in enhancing the field lives of existing assets. We've done that through many fields, 9 fields since our start, improving uptime, lowering costs, enhancing recovery, while at the same time reducing emissions. We have a proven capability in the upstream assets, and we have shown ourselves to be able to adjust to reflect the macro environment and generate significant cash flow, as we've done in the challenging year of 2020, where even at a $40 oil price, we generated $200 million of free cash flow. We've also demonstrated a top quartile drilling and subsea tieback capability. and we will leverage that capability to deliver opportunities for value enhancements in our operated assets. But the world is changing for energy companies like ourselves. The transition will take time. Oil and gas will remain part of the mix for many years. And the recent events in Ukraine have shown us the importance of affordable, available and secure energy. And EnQuest is part of that mix. We remain focused on delivering on our core business. While we safely and responsibly make the best use of existing resources and infrastructure and defer end-of-asset life through drilling, it is natural that fields will eventually stop producing and enter the decommissioning phase of their life cycle. We have a strong, experienced team in place managing our decommissioning program, which we manage for ourselves and many of the majors. We've already removed 2 floating facilities, both at or below budget and are using our proven capability in drilling to deliver on extensive well abandonment programs in both Thistle and Heather. We're well advanced in that program and hope to report on that soon. So with upstream and decommissioning as part of our business strategy, we also have an important upcoming business strategy. We're creating an energy transition hub in Sullom Voe. We've began examining the potential for this new energy and using our existing competitive advantage and existing infrastructure to drive future value creation for the shareholders. We operate a very unique site with unique advantages. It's the deepwater port and jetties. It's 1,000 acres with access to oil and gas pipelines, East and Western Shetland, which we operate. It's a skilled workforce that's able to operate in harsh environments. It's the highest capability factor for offshore wind resource anywhere in the U.K. at 53%. That's why we established our infrastructure in the energy business. The business was established to focus on strengthening and extending the life of Sullom Voe by maintaining safe and cost-efficient operations and securing new business, delivering the group's emission reduction objectives and targets and exploring the potential to unlock renewable energy and decarbonization at Sullom Voe. This is a long-term project, and we're just at the beginning of our journey. We will be providing small amounts of initial seed capital to further define the opportunity set, and we'll exercise discipline to minimize our outlet. We believe we can leverage our proven capability in effective operations and project delivery and apply those core competencies in the arena of new energy. But we recognize that we cannot do this alone. So we are exploring options around strategic and financial partnerships that could deliver long-term value in our energy hub in Shetland. As you can see from the slide that the Sullom Voe Terminal in particular, has a number of core attributes that I mentioned that lend themselves to doing just that. As we've done in the past with many of our deals, we are creating low-cost optionality in our portfolio around an exciting new business in the future. With that, I will now hand over to Jonathan to take you through the financials.

Thank you, Amjad, and good morning, ladies and gentlemen. Turning first to the summary slide on Page 8. We made good progress on our strategic aims during 2021, supported by higher oil prices, capital discipline, EnQuest generated strong free cash flow of $397 million, up 89% compared to 2020, which along with signing the new secured credit facility enabled the group to simplify its capital structure, acquire the Golden Eagle assets and reduce overall net debt. Revenue for 2021 was $1.32 billion, 54% higher than in 2020, reflecting the materially higher realized oil prices achieved key during the year, partially offset by lower volumes. Across the year, we achieved an average realized oil price, excluding the impact of hedging of $73 a barrel, which reflects the materially higher oil price during 2021. Including our hedging, the average realized oil price of $68.60 a barrel due to realized losses on our hedging program of $68 million. Our salable barrels were greater than our production barrels for 2021. This is due to the timing of our liftings. During the year, we moved from a net under-lift position in 2020 to a net overlift position in 2021. Our salable barrels are also affected by our entitlement barrels in Malaysia being around 70% of the working interest production and shrinkage overall of around 1%. Revenue also included gas and condensate sales of $244 million which included around $192 million associated with the resale of purchased gas no longer required for reinjection in the Magnus field. Operating costs decreased by $8 million primarily reflecting reduced tariff and transportation costs due to lower production in 2021. This was largely offset by higher production costs, driven by materially higher emission allowance costs, lower lease charter credits reflecting the higher uptime at Kraken with continued strong performance of the FPSO and remediation costs at Magnus. The increase in operating cost per barrel from $15.20 per barrel to $20.50 per barrel reflects these costs as well as lower production. The higher revenue resulted in increased EBITDA and cash generated from operations, increasing to $743 million and $757 million, respectively. In aggregate, cash capital and abandonment expenditure reduced in the year, down $55 million to $118 million. Free cash flow was significantly up on the prior year with strong cash generated from operations and lower CapEx resulting in lower net debt of $1.22 billion. Turning to Page 9 and our cash expenditure program. Our cash capital expenditure for the period was $51.8 million, which mainly relates to Magnus well intervention campaign of $23 million, and PM8/Seligi riser repairs, where we spent around $13 million. Abandonment was $65.8 million for the year, following the cessation of production at the Dons and the work that is ongoing at Heather and Thistle, which Bob will outline in a little more detail shortly. Slide 10 shows the bridge to how our net debt position has improved from around $1.28 billion at the end of 2020 to $1.22 billion at 31 December 2021. As I mentioned earlier, we generated cash from operations of $757 million, which after deducting abandonment expenditure and tax results in $674 million net cash flow from operations. We incurred $52 million of cash CapEx and also paid BP $16 million in relation to the normal vendor loan and profit share of Magnus. Interest and other cash flows are primarily made up of cash interest paid on our debt facilities and also the BP vendor loan. Lease payments mainly relates to the Kraken FPSO. All of this added up to strong free cash flow generation in 2021 of $397 million, which in tandem with the group's debt refinancing facilitated the acquisition of Golden Eagle and also enable the acceleration of repayments of the Sculptor Capital facility and also the BP vendor loan in total. As you can see on Slide 11, prudent decision-making during the periods of low commodity prices, coupled with strong free cash flow generation has underpinned our ability to continue to reduce net debt in line with our strategic objective to delever. Similar to our production performance, we started this year strongly with a further significant reduction in debt to $1.09 billion at the end of February and continued early repayment of our reserve-based lending facility. Our focus remains on further reducing our debt and the current macro environment supports our target to achieve a net debt-to-EBITDA ratio of around 0.5x. In order to protect our cash flows, we've entered into a number of hedges with 8.6 million barrels hedged for 2022 and 3.5 million barrels hedged for 2023. And at the same time, this gives us exposure to higher oil prices with the unhedged barrels. Turning now to Slide 12 and our expectations for 2022. There is no change to any of our 2022 guidance that we previously communicated. We continue to expect net production to be between 44,000 and 51,000 barrels a day with year-to-date February performance averaging 50,400 barrels per day towards the top end of this range. On the slide, we've provided a bridge to separate out the increase in operating expenditures over the year, which includes a full year of Golden Eagle expenditure, increased emissions and diesel costs due to higher market prices and the work programs at Magnus and also at PM8/Seligi. Total operating expenses are expected to be approximately $430 million. Cash capital expenditure is expected to be around $165 million, primarily relating to the drilling campaigns at Magnus, Golden Eagle, and in Malaysia. Bob will cover this in more detail later in the presentation. Abandonment expenditure is expected to total approximately $75 million, primarily reflecting well abandonment program at Heather/Broom and also at Thistle/Deveron Field. And with that, I will now hand over to Bob to take you through the 2021 operations.

Thank you, Jonathan, and good morning, everyone. I'll begin by sharing an overview of the group's operational delivery in 2021, followed by some details. So first, our overall 2021 production performance. In total, the group delivered below our guidance with production at 44,415 barrels equivalent per day and that's down about 14,700 barrels equivalent per day compared to 2020. This reduction included natural declines, some assets moved to decommissioning and a big driver was the operational challenges on Magnus, which I'll cover in more detail shortly. In 2021, PM8/Seligi and Kraken both delivered on target, while the Greater Kittiwake Area was lower and some new volumes were added at Golden Eagle. And again, I wish to recognize our EnQuest teams, both offshore and onshore for their resilience and hard work responding to the many challenges presented by COVID-19 throughout the year. I'll now provide a bit more detail on the assets, starting with Kraken. At Kraken, production was in line with guidance with daily average at just over 31,150 barrels equivalent per day gross. Production and water injection efficiency were very strong at 88% and 89%, respectively, while the FPSO performed very well throughout the year. Early on, some opportunistic maintenance was completed, enabling deferral of the planned shutdown to 2022. However, production was impacted by brief shutdowns to repair subsea risers and an oil heater and also from natural decline. Subsurface and well performance remained very strong at Kraken with stable water cut evolution, and we continue to optimize production and injection daily along with regular well testing. We've now produced over 50 million barrels from Kraken since first oil in June 2017 and delivered our 100th cargo offload last year, and cargo pricing remains strong. Turning next to Magnus. Production of 11,870 barrels equivalent per day was 32% lower than in 2020 and below our plan for the year. Performance was negatively impacted by well integrity issues, from topsides and compression failures, third-party infrastructure outages, natural declines and some COVID-related downtime. Our production enhancement program was undertaken in the second quarter, including a coiled tubing intervention campaign, returning 4 wells to service and repairs to a compressor gearbox failure which resulted in single train operations during much of the fourth quarter was completed, bringing both processing trains back into operation. Most importantly, the Magnus reservoir is performing very well with plenty of remaining potential. And as we return to drilling after a 2-year hiatus, we remain confident in the significant remaining potential at Magnus, and we look forward to increasing the production there. Next, some detail on the other North Sea assets beginning with Golden Eagle. So as mentioned earlier, the acquisition of a 26.7% share in Golden Eagle has provided a highly cash-generative addition to the group's portfolio. The acquisition completed in October, so the full impact of additional production won't be realized until this year, but we are very excited at the latest example of our ability to create new value through the right acquisition or the right assets at the right time. At our other upstream assets, which include Greater Kittiwake Area, Scolty/Crathes and Alba, average production was 43% lower. There, the power umbilical supporting the Mallard and Gadwall wells was successfully replaced in September as planned, restoring both wells to production. However, a 4-week shutdown, gas compression outages on restart and some natural declines did impact year-on-year production levels. Moving next to Malaysia. Average production in Malaysia during 2021 of 5,028 barrels equivalent per day was on target. This was an excellent performance given the restrictions imposed by the COVID-19 pandemic there where our teams adapted really well to optimize existing wells and repair damaged equipment and restore some wells to production ahead of schedule. And throughout 2021, the team continued to optimize production with well work whilst awaiting the final riser reinstatement. The replacement riser was positioned on the seabed in December and the new riser system and pipeline were commissioned in late January of 2022, which was ahead of our revised schedule. With this important milestone now behind us, we look forward to new drilling, aiming to fully optimize recovery of the significant remaining oil and gas resources in place in PM8/Seligi. Next, to the decommissioning assets. As Amjad outlined, we made good progress on our decommissioning campaigns during the year. In April of 2021, at the Dons, the northern producer was disconnected and departed the field ahead of plan and below budget and then handed it back to its owners. At Heather, the well abandonment program continued on schedule, whilst the topsides' decommissioning program was approved by the Secretary of State. At Thistle, we focused on getting the platform ready for future well abandonment activities. Their Phase 1 platform [ rehabitation ] was completed on schedule in June, while hydrocarbon inventory was removed as scheduled in October. So well abandonment activities are set to begin next month. As you can see, we continue to leverage our core competencies in drilling, project delivery, and efficient operations to deliver an asset decommissioning. Now finishing up with 2022 wells and drilling activities. As you know, we have significant recoverable oil and gas remaining in our core assets, which can be accessed with low-cost drilling, especially at Magnus and PM8/Seligi. 2022 sees EnQuest embarking on the largest well activity set since 2014, in line with our established asset plans and budgets as we look to mitigate the natural declines in the last 2 years. At Magnus, we plan to drill 3 wells with production starting in summer following 2 well workovers to restore production from well integrity failures last year. At PM8/Seligi, we're planning to drill 4 new wells and workover 4 wells with the main production impact seen in the second half of the year. And at Golden Eagle, 2 wells are planned during the year, commencing in the fourth quarter. It's an exciting year for us, full of barrel-adding activities, but I do want to emphasize, while today's oil price is very supportive, our program is in line with our established asset strategies and robust at last year's prices as we continue to balance investment in our assets with financial discipline and reducing debt. With that, I'll hand back to Amjad, who will summarize the future outlook for the group.

Thank you very much, Bob. So I'm going to just go through a few slides to outline what I think is a very bright future for EnQuest. We are heavily leveraged to oil price. And with the current price environment, we have significant cash flows. These will allow us to delever very quickly. Starting off with the opportunity upstream, Magnus, one of our key assets. It's got 2 billion barrels of oil in place and 50% recovery to date. This is well below the 60% that we were able to achieve at Thistle before we decommissioned it. We have a plan to deliver a multiyear drilling and well workover program to mitigate natural declines, drive growth and maximize the recovery from this asset. This activity in conjunction with the ongoing integrity and rejuvenation program provides Magnus to the great future. We have made more focus on Magnus by driving more of a facility to try and rejuvenate the program quickly. Second is Kraken. Work continues there to plan future drilling activities, and we are analyzing the 3D seismic data shot last year to ensure that potential infill targets and prospects in the Western area are optimized. We have the opportunity to drill a sidetrack and well in the Western Flank in the next 2 years. We're also excited by the prospect of having the 2 large fields that are in the neighboring acreage, Bressay and Bentley, most of which are almost double the size of Kraken in terms of [ step ] oil in place, about 1 billion barrels of oil in place each. We are evaluating these assets in 2022. And we hope to make good progress on options to field development at Bressay with a longer-term potential for an oil and gas hub to be centered around our existing infrastructure or using existing assets. This could contribute significantly to the security of the energy supply because these fields are very significant. The projects are not without their challenges, but we are working diligently and utilizing our experience in the area and in successfully developing Kraken as we have done. However, repeating again, we will balance any investment in these assets with our ongoing focus on debt reduction. So we expect a low phase development for these assets. Continuing on Golden Eagle, we remain supportive of the operators' plans on this mid-life asset, which is quite exciting, to execute a multilayer -- multiyear drilling campaign beginning at the end of 2022, where we're drilling 2 wells. The plans involve drilling 3 more wells, including the 22 wells in '22 and '23, with the potential to transition to platform drilling from 2025 onwards. In Malaysia, we talked about the most extensive program that we have in drilling and workover, where drilling 4 wells this year and having 3 workovers. There will be a lot of work to be executed between now and 2026, again, leveraging our ability to drill low-cost, quick payback growth. Importantly, we also continue to discuss options with Petronas around the potential development of the material gas resource at Seligi, which is over 2 tcf. We also have a commitment to drill in 2023, wells in our near-field asset, PM409 which we picked up in 2019. As you've heard, we have a sustainable organic production base that will continue to balance our investment in our assets with our strategic priority to reduce debt. With the prevailing supportive oil prices, we expect to continue to rapidly delever, making good progress to our net debt-to-EBITDA target of 0.5x, which is a new target set now. We've made great strides in our emission reduction efforts. As you've heard, reducing emissions by 44% from our baseline, but we still have more to do and remain committed to contribute to the national targets in this regard. We have also demonstrated our capability in decommissioning and have a number of core skills that are well suited for the development of the new energy opportunities we discussed, which are very synergistic with our capabilities. We have a strong track record of creating value through timely acquisitions. This record has been shown time and time again, involving low upfront cash consideration at a low point in the price cycle, even in the high oil price days of the early decade -- last decade, we bought PM8/Seligi, we bought Kittiwake, we bought -- we started Thistle and Heather. And laterally, we bought Magnus, Golden Eagle, Bressay and Bentley. Our business is strongly positioned to play an important role in the transition by responsibly optimizing and delivering our production, leveraging our existing infrastructure and delivering a strong decommissioning performance. We are excited also about the new energy opportunities for further decarbonization. As you've heard, there's an exciting story here at EnQuest and we are at the beginning of a very different chapter where we're going to reduce our debt and focus on returning value to shareholders. Thank you very much. With that, I will start with questions here, and then we'll go to questions outside of the room. Thank you. [ Mark ]?

And I'll start by saying that it's -- we've got quite a diverse set of assets with mature fields and offshore heavy oil. So Bob, just very good to see the operation is looking stable in the investment in the coming year. So I think we move straight on to the finance point. And Jonathan, the refinancing of the bonds is obviously a question that keeps coming up. Indeed, the question of buyback of bonds keeps coming up. So I just wonder where we stand with that? And could you also give us a status update where the vendor loan, and I think results were helped by Magnus contingent accounting. So just give us an update on that. And then the last point is, could you tell us what you carried for the Sullom Voe asset on the balance sheet? That would be interesting.

I think these are questions mostly for Jonathan. So I will pass it to Jonathan.

Thanks so much, [ Mark ]. In terms of bond refinancing, I certainly said it previously that we obviously have windows, which is our full year results and half year results each year. So clearly, with the bond due in 2023, the windows are full year results at the moment, and then half year results later in the year and then full year results next year. So from my perspective, we need to be ready to be able to go in all of those windows. And that's what we're ensuring that we will do. Clearly, it will depend on market positions at the time, but we will be ready. The other thing I think I've mentioned before as well is there's a natural dynamic between the earlier you go, the less cash flow you've produced, and therefore the size of the bond is bigger, if you go later, you've got the cash flow, the size of the bond gets less and probably from an execution perspective, becomes more simple. So I think there's that dynamic as well. And that gives us choice as well, which I think is a very good thing. So there's nothing has changed on that, and so we will be ready to make sure that we can avail the markets as appropriate going through this year and into next. I think on the vendor loan, we have now totally repaid BP that vendor loan, so there is nothing there now. It wasn't technically part of our debt because the size of the -- the vendor loan that we paid was positive free cash flow. So it was not in our debt facility, which is why you see it's part of that reconciliation to the reduction in net debt. But it's now all gone. So there's nothing there in terms of Magnus vendor loan. And then thirdly, with your question around the credit that goes through the P&L with regard to contingent consideration. So fundamentally, the overall contingent consideration has been reduced with regards to Magnus. As a result of that, it's set up as a provision in the balance sheet. And if you reduce that provision, then the credit goes through the P&L. As you see, we put that through the exceptional item columns, so it's not part of business performance, but clearly does give us a credit through P&L and reduces the provision on the balance sheet as well. Does that answer all your questions, [ Mark ]?

I mean, Jonathan, I don't think he has been asking about the value on the balance sheet for Sullom Voe. I don't think we have...

No, no. I mean there's no specific values in PP&E, for instance, on SVT and we do have a small. So yes, it's not material when you compare to the balance -- the asset.

Any questions from the audience? Okay. Sorry, with that we will move to the remote questions, please?

[Operator Instructions] The first question from the line comes from the line of James Hosie from Barclays.

Yes, I was just wondering if you could give us a bit more color on your production outlook for this year. Obviously, you started the year over 50,000 barrels a day, that's out there in the guidance, and you've outlined how you're adding new wells on production in the second half of the year. So just what sort of underlying decline rates are you assuming in that guidance of 44,000 to 51,000 for the full year? And is the multiyear drilling plans you are outlining for your key assets, is that enough for EnQuest to keep production stable in future years if that got 45,000 to 50,000 barrels a day?

Okay. The question is on the range and color on the production for the year given the investment. So the range we've talked about is 44,000 to 51,000. We are at the upper end of the range at present. We've had a great performance through the first couple of months. We have also talked about the shutdowns, which are regular on assets, which will occur later in the year. Our drilling program is the biggest drilling program we've had since 2014. We're drilling 9 wells this year. And so we are expecting that drilling program to mitigate any declines this year. And indeed, next year, we will continue to look at investments that will mitigate declines. So I think that's -- James, does that answer your question?

Yes. Yes. That's fair enough. When you're talking about the multiyear campaigns, that is designed to keep production at broadly current label. Is that right?

Yes. I mean, again, we have very exciting field in Magnus and Kraken. Next year, we'll be able to assess the seismic and whether we're going to drill sidetracks or even the Western Flank. And in Magnus, we clearly have -- it's an opportunity-rich field, and we continue to look at liberating slots there to drill more. It's a very busy year, and I'm hoping that the program that was really determined late last year for this investment this year will continue through the future with the positive background in oil prices and the macro needs for energy security. So yes, we're hopeful that we will continue drilling in the future. We're spending $165 million in CapEx this year, which is above last year's numbers, which was around $50 million, but we will also continue to focus on reducing debt and make sure we achieve our target as quickly as possible.

The next question comes from the line of James Thompson from JPMorgan.

Great. Obviously, a good start for the year in terms of free cash flow and you're making, obviously, very good progress through net debt, which is good to see. I was just wondering maybe, Amjad, if you could talk a little bit more about how you're thinking about growth or how you're thinking about the longer term beyond the main assets? Obviously, Bressay and Bentley came into the portfolio at very, very attractive considerations based on today's oil price. U.K. has clearly had some headwinds in terms of getting projects moving, things like that. So maybe you could just talk about confidence in maybe being able to get to development on some of the more heavy oil resource. And then beyond that, are you looking maybe to sort of expand more in Malaysia or anywhere else?

Okay. Thank you for the question. So we clearly have a lot in our portfolio of organic opportunities, both 2C resources that we've had within our fields like Magnus, Kraken and particularly in Malaysia, where we have a very large resource there of gas. So we will initially continue focusing on organic opportunities, which will understandably be the highest accretion opportunities given the infrastructure is there. We are excited also about the gas opportunity in Malaysia, where there is now clearly a focus on gas, and we have a very large gas resource. We are looking at Bressay initially and then Bentley as possibilities for using existing infrastructure because those also fit very much into a program where development can take place. However, I don't think we're going to be looking at a large expenditures on CapEx, and we will be incurring incremental expenditures, which fits very much into our subsea tieback capability as well as our drilling capability. So I think those are the first ports of call. Your question about growth in M&A, we continue to look at opportunities. But obviously, with these higher prices, we will be focused much more on the kind of deals we did when we started the business in 2010 to 2014 where the prices were higher, where we bring our capability to acquiring assets, which are late life, high cost assets with the lower efficiencies where we can turn around those assets by increasing the efficiency, investing in those assets and reducing the cost per barrel to allow them to be very effective high cash flow asset. I would expect limited to no consideration upfront for those assets, just like we did with Greater Kittiwake, PM8/Seligi indeed, Thistle and Heather. So those are the kind of opportunities that would be palpable to our capability and trying to grow the business.

Okay. And just secondly, just in terms of decommissioning, obviously, you made the decision to shut-in the asset. So there's quite a bit of work there. I was just wondering if you could give us a bit more of an update about progress there? How are you finding well abandonments? Do you think you can save a bit of money in the process relatively speaking? Just be good to understand how that program of work is evolving at this point in time?

Yes. No, we have -- so we have decommissioned 2 floating assets already. All the -- other than the subsea kit, everything else is now removed on both assets. Those were -- one of them was on target. The first one was on target and on budget. The second one came in better than target, both on cost and schedule. So I think a very good start for the team. We have a very -- I think we have a strong, experienced team, which is segues very much into our capability, it's project management, it's drilling. We are using our existing drilling team also to look at the P&A. And I think we have upper quartile performance on drilling, and we're trying to segue that into the same performance on plugging and abandoning the wells. We have a program on Thistle and Heather. We've started the Heather program in earnest and we will see starting the Thistle program soon. And things are going well so far. And we've kind of had 4 wells on Heather. And I think initially, things look very promising in terms of our capability to manage these decommissioning assets well. So -- but it's very comforting that we've done 2 floaters and we are going to be doing 2 major assets with infrastructure, I think -- and again, I think that will continue to strengthen our capability to buy these [ large ] assets because decommissioning is very much a part of these late-life assets.

Yes, I just say building on that capability could potentially be a bit of an advantage. Just a final one for me. In terms of SVT and thinking about net zero and its transition, I mean, should we expect kind of new -- sort of major milestones being hit on that program in 2022? Or is this discussion really for 2023 in terms of potential financial partners or otherwise?

I mean we really -- we set up the infrastructure, new energy with Salman running that. He will be continuing to have that responsibility in his new role. And we've made really very strong progress. We are committed to the Shetland, and we are committed to Sullom Voe and we are committed to ensuring that skilled workforce and the assets there, which is probably in today's market worth several billion pounds are transitioned utilizing new energy. So I'm hopeful that we can make progress there. And I'm hopeful that we can report on the strategic initiatives going forward. We're very excited about them. It makes a big part of our future. It is a big part of our future. So we are very committed to moving that forward at pace. Again, I'll repeat, we are not investing large capital in that business, but it is seed capital. So we feel that business could be, in the future, a very big part of our business.

The next question comes from the line of [ Olli Gearhart from Insight Investments ].

Two things I'm wondering about. A, are you contemplating doing some more hedging, maybe buying more [ puts ] given strength of the oil price? Or are you happy at 54%, given your lower -- given your guidance, lower end of the guidance, that is fully sufficient? And secondly, you also mentioned you had about $240 million in revenues from gas and condensate. Could we expect -- what kind of volume was that? Could we expect that kind of volume to be sold in similar volume this year into the market? I would assume prices are significantly stronger in that area.

I think, Jonathan, both questions are for you.

Yes. Okay. I mean, we continuously look on the hedging front. So at the moment, we're in a good balance of protecting our current cash flows at the same time having upside to the current oil price environment. So I think that is -- I think we're very comfortable where we are at the moment and with compliance in our lending facility as well. So I think we feel comfortable as to where we are. You mentioned $240 million from gas and condensate. But do remember that the vast majority of that is crossover gas that we buy from Western Shetland and then sell. So it's a pass-through rather than necessarily kind of our own production. So in terms of size, you can work back, it's probably about 2 million barrels of oil equivalent type size. But it is, I'd say, a pure pass-through. And therefore, volumes for this year. I'm not sure the volume necessarily makes any difference on the basis of pure pass-through because fundamentally, it doesn't make a difference to the cash flow to us. But I would expect volumes to be at or around current levels. It could increase this year. We don't control those volumes because they're coming from Western Shetland. So not a material cash flow generator for us.

There are no further questions over the phone, and I would like to hand over the call back to Ian for written questions.

Got a number of questions come through the webcast. First one from [ David Larson ] regarding Bressay, can you give us a view of the technical solution? Will it be a tieback to Kraken or stand-alone production platform or FPSO?

Okay. Thank you. I think it's -- we are looking at options, but the options will probably be -- I mean, a new FPSO is probably not within our capital aspirations. And so I think we would be looking to use existing infrastructure, whether it's an existing platform or an existing, I guess, or the Kraken field itself, but we would not be looking to invest in a good amount of capital. And it's a bit early, and we -- obviously, we've just taken the assets last year and looking at the data. So we are hopeful that we'll get some visibility by the end of the year. But at present, the only thing I know is that we will not want to spend significant amount of capital for a new FPSO there.

Next couple of questions from [ Hasnain Ali Ansari ]. What is the forecast for net debt, EBITDA at the end of this year? And are there any updates on the status of the EnQuest Producer and Project Orion?

Okay. On net debt to EBITDA, we don't comment on that. Obviously, everything is available, the OpEx, CapEx and ABEX and really, it depends on your oil price assumption. So I think that is -- that's the only variable there. And we also talked about what we've hedged. So it's a relatively simple calculation. So I will leave you to make that. There are clearly analyst reports on estimates there. In terms of EnQuest Producer, we continue to warm-stack it, looking for opportunities for it, and we'll we're quite -- it's obviously much more marketable today. We have received offers and continue to receive offer. So I think the decision to keep it has been the right decision because I think it's accretive in value over the time that we have kept it. In terms of Project Orion, I think we're clearly working with the Shetland Island consortium there and continue to be excited about it.

Next question from [ Clive Finn ]. What is the current position on the farm-out of Eagle?

Okay. I think the -- in terms of Eagle, we continue to look at opportunities around subsea tiebacks. There's no decision at all in terms of what we're going to do there.

Operational question from an anonymous investor. Given Magnus' performance was below expectations last year, could you say anything more about current production? And what do you expect 2022 will be? When will the new wells come online? And will they add to the current production capacity or will just replace others?

Okay. Bob take that?

Yes. Happy to answer the question. So of course, Magnus production levels were below our targets last year and that was due to a number of operational factors. We've completed a number of restoration activities, including bringing 4 wells back online towards the end of last year. And we remain very excited about the opportunities at Magnus, where as I said, we are drilling 3 wells, are working over 2 wells, and that will add to the existing production base through the year. And of course, as usual, there are plans for a brief shut down for maintenance, which will happen in the third or fourth quarter, which will also impact production slightly.

Next question from [ Aaron Hager ]. Can you please clarify your capital allocation policy specifically? Is it correct to assume you are aiming for a 0.5x leverage ratio before considering potential returns to shareholders?

I think we've reset our targets from a 1 to 1.5 to 2.5 because we want to accelerate our debt reduction and increase the strength of our balance sheet. Returns to shareholders will feature in our future capital allocation and continue to be under review.

And just next question from [ Janica Alyasenna ], do you have any particular credit rating ambitions where you would like to get to?

I think this question is for Jonathan.

We haven't set out specific credit rating aspirations. I think our job is from an operational perspective to show the free cash flow generation and reduction in net debt, which will clearly help strengthen the balance sheet and therefore, help improve any rating. So that's what we will continue to do. I mean we do speak to them very regularly. So from that perspective, make sure that they're up-to-date with our guidance, et cetera. So no specific aspirations, but certainly, as the balance sheet strengthens, I would hope that there would be an improvement with regard to the overall ratings that we receive.

Thank you, Jonathan. Three questions now from [ Philip Crate ]. Access to the RBL facility declined to $300 million in June, if your bonds are not refinanced by then. Is this a permanent reduction or reversed once the bonds are refinanced? Second question, do you have any margin arrangements on your hedges? And the third question is around your departure, Jonathan, and will this affect the timing of any refinancing?

I think the questions are for you.

So with regard to the RBL decrease, that is correct. There is an ability to extend the RBL if we go through the high-yield bond financing, but otherwise, it is a decrease under the current agreement, which obviously is a good thing because deleveraging the balance sheet and the current cash flows have enabled us, as we've announced early to make early repayments and therefore, that has continued to reduce faster than the amortization program. With regard to margin, no, there aren't any margin arrangements with regard to our hedging. And I think we've said that I'm certainly going to be around for quite some time to make sure it's a handover to Salman. And I think both of us are excited about the opportunity around that. So I think we will be ready to make sure that we can avail the markets when they are ready as well, and we'll make sure that EnQuest is in good shape to do that.

Moving to the next question on Golden Eagle from [ Rupert Dyson ]. At $100 oil price, how fast is the payback on Golden Eagle, including your tax shield usage?

So I think we don't specifically look at the presence in terms of asset by asset, but what we have published is that we generated $75 million last year before the acquisition. So the acquisition price instead of $325 million, we -- during that 9 months, there was $75 million of cash flow. And so at that juncture, that's a good measure of cash flow and cash flow going forward. So it's a very quick payback period, if you take that into account.

Thank you very much. There are no further questions on the webcast at this stage. Any more one in the room?

One more question in the room.

Yes, I'd like to ask about what you feel the chance -- or use the word risk -- the chance of a windfall tax is in the U.K. and whether there's been any engagements regarding that with the government. That's the first point. Second point, kind of related. Kraken heavy oil, we've talked about that in terms of pricing. Has there been any change in pricing given euro's oil coming off the market or any premium that you've seen in the market from that regionally?

Okay. On the -- and the change in the windfall tax. Obviously, our position on that is decreasing the tax clearly doesn't promote additional investment, which is very much needed in the sector where under-investment has taken place over the last 4 or 5 years. So our position there is clear. We are blessed with the allowances that we got on Kraken, which have accrued over time. It was GBP 800 million per field, the Kraken and Kraken North, and we had the ring fence expenditure supplement, which increased that over time. So at the beginning of the year, we have around $3 billion in tax loss carryforwards, principally from the Kraken investment. And those are the kind of things that were needed to develop fields like Kraken which has been a huge success in the industry, the largest fully subsea heavy oil development -- really in the world, fully subsea. And so I think that the incentives, rather than dis-incentives are important, especially in these days where energy security is important. In terms of your second question, Kraken has been strong and continues to be strong. And as we've said, we use it as blend stock for VLSFO, and that continues to be a very strong market.

And has continued to be a premium to Brent.

Okay. Thank you for joining us today and looking forward to seeing you in the half year update. Thank you very much.