ENQUEST BOND ENQ1

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  • Given the bond price of ENQ1, we all know ENQ1 has buckets ( or barrels ) of risk. Moody's have updated their rating, given $40/bbl Brent, apart from that that they have some positive comments on the management. Key risks : Oil Price late 2016 when the hedge runs out, project delays and over-runs

    Rating Action:
    Moody's downgrades EnQuest to B3, outlook negative.
    Global Credit Research - 15 Dec 2015
    London, 15 December 2015 -- Moody's Investors Service has today downgraded the corporate family rating of EnQuest plc to B3 from B1 and probability of default ratings to B3-PD from B1-PD. The rating on the company's 2022 senior unsecured notes was also downgraded to Caa2/LGD 5 from B3/LGD 5. The outlook on all ratings remains negative.
    RATINGS RATIONALE
    The two notch downgrade of the rating reflects the continuous decline in the oil prices in 2015 and our expectation of no significant improvement in the market conditions in 2016. The B3 CFR rating reflects EnQuest's weak credit profile, with gross leverage exceeding $54,000/boe of average daily production at the end of 1H 2015, as well as the expectation that the company will continue to add to its leverage in 2016 and also likely in 2017, as it continues to invest in its key development project amid declining Brent oil prices and will generate negative FCF next year.
    EnQuest's capital structure is reflective of a higher oil price environment, and with $1.6 billion in gross debt outstanding at the end of 1H 2015 against current market cap of approximately $250 million, the company is increasingly dependent on the timely delivery on production growth in 2016-2017 to stabilise the balance sheet. At the end of 1H 2015 it held $294 milion in unrestricted balances.
    In 2016/2017, EnQuest faces a high level of investment and material execution risk as it targets continued growth in production levels through bringing on-stream its key project Kraken (2017). These risks are mitigated in part by solid economics of the project, which we believe remains economic at around $40 Brent oil price, and by Enquest's successful production growth with the completion on Alma/Galia project in 2015 and strong growth delivered on its Malaysian assets, as well as several of its UK assets, leading to updated production guidance for 2016 of 44,000 -- 48,000 boed. We continue to see EnQuest as an efficient and strong operator, as demonstrated by its ability to quickly bring operating costs down. Nevertheless, with its sizeable capital commitments, EnQuest will generate a larger than expected negative FCF position in 2016-2017 under our lower oil price assumptions and will need to rely more heavily on its committed bank facilities to fund the completion of its key Kraken project.
    Finally, EnQuest has been managing commodity price risk proactively and benefits from the existing hedging arrangements (that cover around 60-75% of next year production guidance, with 8 million boe of production hedged at $68 and 2 million boe of production at $65/boe). As the existing hedging will gradually expire in 2016, the company will become increasingly sensitive to the oil price weakness.
    Liquidity Position
    EnQuest's liquidity is underpinned by a USD1.2 billion 2019 revolving credit facility (RCF), of which around USD490 million was available as of the end of June 2015. The facility has several financial covenants. EnQuest has reset its net leverage covenant at the beginning of 2015, but as Brent prices continue to press below $40/boe, the headroom under the financial covenants will be eroding, at the time when the company will continue to invest and consume cash in 2016-2017.
    The company maintains a sizable $294 million cash balance (net of restricted cash balances), that was recently boosted by the divestment of real estate asset.
    Drivers of Rating Change
    While we do not see near-term prospects for an upgrade, measures to rebalance the debt/equity balance, including divestments, could lead to an upgrade on the B3 rating.
    The B3 corporate family rating could however come under pressure should there be (i) a material delay and/or cost overruns in the development key oil fields, such as Kraken; or (ii) any significant deterioration in liquidity position of the company, as a result of lower price realisations or operating issues.
    The principal methodology used in these ratings was Global Independent Exploration and Production Industry published in December 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.
    REGULATORY DISCLOSURES
    For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
    For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
    Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
    Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
    Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
    Elena Nadtotchi
    VP - Senior Credit Officer
    Corporate Finance Group
    Moody's Investors Service Ltd.
    One Canada Square
    Canary Wharf
    London E14 5FA
    United Kingdom
    JOURNALISTS: 44 20 7772 5456
    SUBSCRIBERS: 44 20 7772 5454

    David G. Staples
    MD - Corporate Finance
    Corporate Finance Group
    Telephone: 00971 4237 9536

    Releasing Office:
    Moody's Investors Service Ltd.
    One Canada Square
    Canary Wharf
    London E14 5FA
    United Kingdom
    JOURNALISTS: 44 20 7772 5456
    SUBSCRIBERS: 44 20 7772 5454
  • Joined the party @ 44p for a small gamble. :)
  • Thanks for posting this research, Paddy. Most interesting to read and much appreciated.
  • This thread started off by someone asking if it was good value at 98.30
    Today they are 29.70
    Seems like events have answered the question!
  • I shall buy these (and Premier Oil) bonds when it hits my single digit price target - option value :smile:
  • The ENQ1 bond won't be single digit anytime soon...the shares would have to be zero first,...even if the company does into administration, I would expect ENQ1 to have a recovery value >9p.
  • May well pick some of these up for my SIPP soon. A real punt, but I think worth it at these levels.
  • Yes SJD, I agree and have added a few more today for what I make a YTM of close to 30%

    WARNING - don't take this as a recommendation to buy.
  • Sold for a small profit. I did not expect that opportunity any time soon!
  • Personally I'm hoping for a bit (lot) more yet.

    See WARNING above.
  • Saw this news article and thought I'd share.


    Interest rate on EnQuest STG 155m 5.50% 2022 note to increase to 7.00%

    EnQuest said the interest rate on its STG 155m 5.50% 2022 note is to increase to 7.00% as the leverage ratio as at 31 December 2015 was more than 3x.
    The new rate of interest applies for the period commencing on (and including) 15 August 2016 ending on (but excluding) 15 February 2017.
    In March, EnQuest reported FY 2015 revenues down 10.2% to USD 906.6m and EBITDA down 20% to USD 464.8m.
    Net debt at end-December 2015 was USD 1,548m and cash USD 269m. USD 902.3m was drawn under the RCF at end-December. The company also has a USD 650m 7.0% 2022 senior note.
  • VSI, thank you
    Their web-site has the official presentation
    http://www.enquest.com/investors/retail-bond.aspx

    Be interesting to see what happens to the bond price
    Recently went back in at 55p, after talking a large realised loss last October (my 1st)
    Hopefully overall losses maybe mitigated!
  • To be a bit blunt, with restraint, who cares if they pay an extra 1.5% when you potentially lose 30+ % of your capital.
    I do not understand the general lack of differentiation between the ORB listed bonds, meaning that I would happily hold for example CAF1 (charity bond), given that it has been around for many years, 1922 if I remember correctly, and has assets to debts ratio of 30 plus times, is a charity building block, and yields say 4.3%, (posssibly comparable to AD2 which has government backed payments and a 26 maturity yielding 3.8%) versus some of the 'dreck' for want of a better word such as IPF, which is at the whim of eastern european regulators (!!!) and has a 20 maturity yielding 7%.
    For example, PMO looks relatively cheap given the share price has gone from 25p suspension to 75p and there is real information backing the rise (Solan, purchase of cash generative assets).

    But it would be nice if a few more opinions were expressed on this forum, including those of Oliver, as opposed to it just becoming a way for issuers to raise interest in new issues. And guess what, there are hardly any, so therefore they do not have much interest/incentive, given they are short term, in providing information for the website.
    At the end of the day, its a bit like the cock roach motel, you can check in, but you cant check out.

    But what do I know, ie not much and at the risk of sounding like Katie Hopkins will sign off.
  • Enquest have today issued RNS Number : 3072Z which says, inter alia:
    " notice is hereby given to Retail Noteholders that as the Director's Certificate delivered to the Trustee pursuant to Condition 4(d) of the Notes certified that the Issuer's Leverage Ratio as at the Reference Date of 31 December 2015 was more than 3.0:1.0, the Rate of Interest for the immediate next following Interest Period commencing on (and including) 15 August 2016 ending on (but excluding) 15 February 2017 increases to 7.00 per cent. per annum."
    Does this mean what it says, ie that the coupon from 15 August 2016 will be not 5.5% but 7.0% ?. If so, why has the price not moved ?
  • HB1, The price has moved this morning, and no doubt will move further upwards over the next few days. I suspect many professional investors consider "Bonds" to be boring, and as such price movements tend to be slower (which is better for most readers of this forum!)
    Pdepp, I agree with your comments, however I tend to think the risk of specific holdings have been priced with their "higher yield". Having a good diversified portfolio is more important, and keeping an eye open on their "financial reporting".
  • While I can understand pdepp's point of view, it is not correct to write off the higher risk bonds such as Enquest's or International Personal Finance's as "dreck".

    I have read the two companies' reports, and various comment on them, and my view is that while default is certainly a possibility, compliance is the more likely scenario. It then all becomes a matter of risk assessment, the price of the bonds, and the direction of travel. I bought some ENQ1 a few months ago when the price had been very depressed (below 30 at one point) but seemed to have turned a corner. I paid 36.9 including commission costs. With today's bid price of 60.3, I am obviously in the money. However, I'm not saying I won't sell them if I sense things are starting to go awry again.

    I recognise that this "in/out" approach is not one that many bondholders like. Most will want to buy bonds at issue, forget about them, and sell at maturity. There's a lot of sense in that: no commission, predictable yield, etc. But it's not the only investing style with bonds.
  • And company's very swift (RNS) response to Telegraph article: -

    ENQUEST PLC, 20 JUNE 2016.

    Statement in response to media comment

    EnQuest notes The Telegraph article at the weekend about the UK Oil and Gas Authority's possible North Sea contingency plans. EnQuest routinely engages with the OGA and with the UK and Scottish Governments on industry matters, but is not involved in any company-specific discussions such as were implied by the article.


    Ends
  • Anyone here still holding this and if so have you received latest coupon which I feel sure was due on August 15?
  • I'm invested.
    Haven't received the most recent coup yet - should be imminent. I believe the rate has stepped up to 7% while leverage is high.
  • Hmmm - have emailed broker (iDealing) to find out why the delay.
  • YouInvest, Coupon received today & dated 15th August
  • They must have sent them out in cheque form. That's usually the reason for that happening.
    iDealing claim 4 working days for cheques to clear so expect it will show on my account tomorrow.
  • Laughton, extremely unlikely cheque clearance is the cause. More likely to be the accounts department (iDealing) allocating the interest / Dividends received to the portfolios.
    I cannot believe the company registrars would issue cheques to organisations like YouInvest & IDealing.
  • Same.
    Any reason why the coupon payment wasn't adjusted to the amended 7%?
  • My reading of their announcement is that it will be the current interest period that will be paid "the extra" ie the next payment due in March will be more.
  • Just re-read it - believe you are correct.
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