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Quite an eye opener when considered in the manner you set it out.
It begs the question as to why industry leaders have not put the question to government in the same manner. Perhaps they have and it has fallen on deaf ears. In any event once the CNS is dead, watch out Tesco or maybe the banks with Q1 results due in a couple of weeks.
............if you've read Part 1, in fact additional revenue generated by the increased BC price would fall straight to the bottom line (as shown in my example). Don't quite know why I confused the issue with my "pro-rata" nonsense. Out it down to age and general infirmity.
Any ideas on whose gonna win the Masters, anyone? I've backed a few outsiders at long odds (a bit like betting on AIM listed oil juniors except that the Conservative and Labour parties can't shoot the golfers at Augusta).
Tips for Saturday's Grand National also appreciated. I'm thinking of liquidating about 10% of my JOG holding and backing one of Willie Mullins horses but might decide to put the money on a golfer as he's less likely to fall over.
........."so you shouldn't suggest some kind of allowance is due".............not should
mea culpa
Goodnight and goodbye (for now at least)
Part 2 (ie Part 1 contd)
Work it out – it isn’t rocket science but for some reason everyone, including the useless OEUK, has been conned into calling it a windfall tax, when it quite clear it goes way beyond that. Just wait until Labour get in and finish off the job of killing the North Sea.
For the less mentally adept, had the so-called “windfall” tax (called EPL to discourage challenge) not been imposed our company would have had a profit after tax of £86m. It now has a profit after tax of £36m.
In a nutshell additional pre-tax income of £43m has led to a tax charge of £50m – an effective tax rate of 116%. And this is before Labour gets to work by increasing the (so called) wft rate from 75% to 78% and removing the “anomaly” of re-investment relief and disallowing decommissioning and interest costs, plus removing the ability of companies to use b/fwd losses to the full (perhaps ‘at all’, if the chancellor whose legs touch all the way up from her ankles, gets on a run).
“Dear Government – would you please let us lift and sell enough oil to enable us to give you 100% of the additional profit we make as a result of what we accept was a windfall event. We won’t charge you a penny to do this, so not only will we not make anything as a result of the windfall event, it will actually cost us money as we’ll be working for you for nothing”.
“Dear Nonentity we don’t care about, because we’re only interested in virtue signalling and getting cash in so that we can pay people’s energy bills, which will make us popular and keep us in power…………no you can’t do what you suggest because it doesn’t get us enough money. And before you say anything else, we don’t accept that the 3 year dispute between the Saudi the US governments that caused the price of oil to fall off a cliff and stay there for about 2 years+ from 2014 to 2016 was a windfall event (ie outside the industry’s control). Nor Covid, which caused BC to crash to $25pb. These were everyday events so you should suggest some kind of allowance is due to offset against the latest wft - it doesn't work like that. And 7 years of wft (at least) is fair enough even if prices are now back to normal (near enough)”
dyor
DYOR
Part 1
Before a “windfall” event, imagine a Brent Crude price of $70pb.
Further imagine an upstream operator, focused only on the UKCS, making an annual profit before tax of £100m.
Tax charged on the £100m or profit would amount to £40m (40% of £100m), leaving £60m after tax.
A “windfall” event occurs that causes the price of Brent Crude to increase to $100pb.
In the (say) 12-month period following the “windfall” event, the upstream operator would make more profit (which for simplicity I have calculated “pro-rata”, although in practice it would be higher because fixed costs would be recovered over more barrels, thereby reducing $ cost pb).
But for the introduction of a wft, the upstream operator’s P&L would look something like:
Profit before tax: £143m (increased by BC$100/BC$70)
Tax @ 40% = £57m
Profit after tax = £86m
So, our upstream UKCS operator would be better off to the tune of £26m as a result of the BC price increase (£86m - £60m).
Along comes Sunakhunt and (after deciding 65% tax was too low and increasing it to 75%) imposes a tax (stating it is a wft) of 75% across the board on all UKCS operators’ profits. Never mind the enhanced re-investment relief (important to companies like NEO and SQZ but irrelevant to, say HBR and Enquest who had just completed multi-year investment cycles costing billions, to which the enhanced relief is as much use as tits on a bull). See my last post about getting dragged into a 78% forever tax regime with no capital allowances under labour, which won’t lift the tax when 2030 arrives because the ill-informed net zero agenda groupies will be making an even bigger issue of fossil fuels than we’ve had since a conman somewhere planted a seed that led to the ugly Swedish truant and now hypocrite, as she’s said to be worth £20m and travels everywhere as comfortably as possible)
What does our upstream producer’s P&L look like now, with a tax of 75% slapped on its entire profits, at the same time denying it the ability to claim decommissioning expenses and interest – and just for good measure restricting the use of b/fwd losses to 40%, not the full 75%.
I reckon it’s as follows assuming BC holds at $100pb):
Profit before tax £143m
Tax @ 75% £107m
Profit after tax £36m
What tax rate does this mean our company has paid on the windfall profit of £43m?
tbc
I'm about to make a post that will spill over into two setting out some basic arithmetic that shows just how dishonest both political parties are in labelling their destructive taxes as being tax on "windfall" profits. They are no such thing. It's probably another complete waste of time spent trying to stimulate meaningful discussion that might lead to something positive happening. By all means challenge my logic. But please also bear in mind that what I have included in my posts to follow does not take into account the carnage that Labour's latest dishonest or perhaps plain economically illiterate proposals will cause.
We are at a watershed moment and we are getting from OEUK and most companies with UKCS interests is: "we're making progress in discussions with Labour officials in our efforts to persuade them it is better to have the industry as an ally during the transition to net zero by 2050, than a foe. The naivety of these people is unbelievable. For a start, they HAVE TO stop calling this shortsighted and fundamentally flawed tax grab as a "windfall tax". Yet again: IT ISN'T - it's a heist.
If you can't find fault with my logic - copy what's written and send it to your local MP, the Media - whoever. Everyone is being conned. Wake up to the fact.
imo/dyor
I assume the comment about not wanting talk of JOG's share price is directed at me. Apologies if I came across as a GOM - I've been under the weather for a while and it's affected my general demeanour. It's not my place to comment on whatever anyone wants to discuss. Talk about price to your heart's content - to me, it's understanding JOG's underlying situation that's important as a LTH.
JOG's present low share price is imv the result of the Government wanting more money to pi55 away on pleasing the masses - and choosing the UKCS oil & gas industry to destroy for the purpose by dishonestly imposing what it calls a windfall tax (wft), when it is no such thing. A wft would be charged only on windfall profits, whereas what Sunakhunt have imposed is a punitive tax on ALL UKCS upstream producers' profits, at the same time removing the ability to offset (against the "above normal" element of these profits) categories of spend like decommissioning and interest cost. In addition, b/fwd losses can only be used for offset at up to 40%. Under Labour, most expect it to get worse.
A tax rate of 75% on all profits is here to stay accounting to Hunt. In the circs, who cares about whether companies can offset investment in new projects at up to 91p in the £, when the profits these will lead to, which will take years to achieve and involve lots of opex, are then taxed at 78%, with a lot more being disallowed, inc capital allowances on future capex, by the Labour cretins cheered into office by people who don't understand that what they're voting for, which is an unaffordable and freezing cold form of Armageddon.
The plans and aspirations of tens of thousands of highly skilled workers and their families, plus those of hundreds of thousands of people in connected industries are being flushed down the toilet by politicians, who don't appear either to understand the industry, the Laffer Curve or anything else, inc simple economics. Labour doesn't appear to give a monkey's toss about energy security, or anything else that would concern a patriotic individual of average intelligence. Labour might be able to collect extra tax revenue from a few companies locked into the UKCS as a result of recent multi-billion investment in new projects, where it is less costly to pay the 100%+ tax rates implied by Labour, than to throw the towel in; but otherwise it's a "no-no". And tax revenues will fall dramatically pdq. A gloriously destructive complete waste of time and lives.
Why invest in the UKCS unless you're overseas owned and see cost and tax rates as secondary to the energy security of your nation? eg ENI, VAR and ITH (Delek).
Makes sense (not) for the UK to shut down the NS, then import whatever oil and gas it needs in order to function effectively, at much higher prices from abroad than it would cost on our doorstep - and at about 10x the carbon footprint. 10/10 for stupidity.
The UK is responsible for less than 1% of global emissions.
dyor
90% of the house analysts’ targets then I’m very happy. Sorry though some of you don’t like it I think it’s more than ok to discuss the share price. Official Fdp approval comes much earlier than expected I hope.
The 2024 list has been. (very delayed) just been issued - here is what has been said about JOG - He remains bullish.
Jersey has been busy in recent years building up the Greater Buchan Area into what will be one of the biggest and cleanest developments in the UKCS as well as doing two of the best farm-out deals in recent years. With undoubted demand for a development such as this, the management deserve credit for taking this from start up to a substantial and extremely valuable prospect, it gives the shares a huge upside I conservatively value at over £10 per share.
Perhaps someone with the ear of Sunakhunt and Kweir could explain to them that pushing NS fields to uneconomic status asap will not only destroy tax revenue and remove any semblance of fuel supply security, but will accelerate the government's decommissioning liabilities! (Most likely they won't care, since they have been able to issue gilt confetti until now in order to pay for every vote they want to buy, but when the world wakes up to the fact that the UK is broke, they'll get a swift, unforgettable lesson in fiscal responsibility!) As an aside, the UK's fiscal situation rather reminds me of that lovely Clarke & Dawes skit about Greece, where the interviewer says to the economist: "Greece's broke, right?" and the economist responds: "Ha, they would be if their economic situation improved out of sight!"
Https://www.heraldscotland.com/news/24232398.wet-blanket-brings-chill-north-sea/
Steve Brown from Orcadian published yesterday. The consequences for Labour are so dire by meddling with this, I think the industry is in disbelief that it will happen.
"...it's not a U-turn for Labour to clarify this in a more advantageous way."
-100% agree. From where we were to where we are it's easy to see the sky falling in, but all is not lost and the market has yet to adjust to the new realities. Just imagine if Labour DIDN'T win!!! As I said the other day, I'm sure Labour will back off from their perceived loopholes. They will 'moderate' their position; we haven't touched on paying for a 20-50% increase in defence spending to counter mad-Vlad's ambitions. I think O&G is already sucked dry from a HMG revenue perspective and they will turn their attention to banking 'windfall' profits. Hasn't anyone noticed that raised rates and consumer inertia has left banking rolling in the green stuff?
DU's NAV calculation
I don't want to shock the board, I haven't sold and I will say I even added recently (which is crazy but there you go). The reason for me is: the worst case scenario is still investible, with a massive upside if Lab back off loopholes.
I believe the project will continue its sprint to FDP. I also believe Neo and Sereca will pay their FDP millions to JOG - sometime in H2 this year, pre-election. People all over (Ping with Orcadian) are planning to spend small amounts (in comparison with project CAPEX, Revs and profits) to create oven-ready (sorry) options to develop fields that would be hugely successful in the right tax regime. This money is stranded in UK regime anyway. The alternative with Neo is basically to shrivel into nothing and HiTech lose their money.
DU's NPV calculation shows JOG's oil unvalued, with cash in bank and tax losses alone valued at this market cap. You will note that NS M&A is a desperate effort to optimise tax losses, rather than an excitement to get new money into UK barmy banana regime.
Unlike pre-farmout, where JOG's value goes to zero on failure, we are already bouncing along the bottom with worst case baked mostly in.
For reasons in my other post, Lab will moderate its stance pre election - and we will finally be released from our grim grinding down.
I'd welcome some critiquing to my post, ideally not in the form of a giant elephant defecation.
Thanks for you very comprehensive answer. I shall study it and the references it provides.
I suspect that (ironically) the fiscal situation will be very similar whoever wins the next election. Tax revenues will be essential, and so either party will need to get taxes from oil and gas without killing the industry. Labour will probably face greater pressure from public sector unions for higher wages, so face either (winters of) discontent or stagflation.
I think it depends on the profile of the firm. If you own producing assets, having bought them with leverage (or added to your assets through M&A), you have a finely-tuned model that has been blasted to bits by EPL. Consider - if you have an expensive, moderately producing asset with loads of tax-losses, you are not paying 40% normal corporation tax for O&G. Pre-EPL, you eek out your profit tax-free, minus cost of leverage and decommissioning costs (paid into an escrow account and adjusted for inflation). During the last few years, EPL (not deductable) has cut a big hole in your profits. The cost of leverage has skyrocketed. Inflation has pushed up your decommissioning cost payments. This renders some firms basically bust, and meanwhile you have to ask the regulator to be able to stop producing, a timeline of maybe 2 years! It's basically nationalisation.
If however you don't have tax losses, and you have more profitable fields, Investment Allowance is more critical. GBA is in shallow water, reused infrastructure and should be a profitable, lower cast development. GBA can tolerate EPL at 78% - the asset value just drops to accommodate the yield. However in our case the Investment Allowance is critical as it dramatically reduces CAPEX.
I believe from having talked around, the worst case tax scenario (both EPL increase + removal of all allowances) puts GBA at risk - even then Neo might proceed as what else will they do with the FPSO - instead of modest profit they now scrap it, lose an asset as well has reserves etc. I think some kind of moderation will save the project. As 'loophole' is undefined, it's not a U-turn for Labour to clarify this in a more advantageous way.
Finally - I have had industry friends tell me that if Labour does remove the investment allowance completely, all NS investment other than a bit by BP and Shell (who do it probably to take pressure of their global profits by their HQ nation) will stop. Cambo, Rosebank, pretty much everything. This will be communicated to Labour - I doubt they will want be forced to renege on punishment taxes in order to facilitate high-profile developments that ignorant greenies in our country hate. That is some egg banjo eating.
To address your question more specifically, I don't think you can use the allowance to invest in renewables. I had a look here: https://www.gov.uk/government/publications/cost-of-living-support/energy-profits-levy-factsheet-26-may-2022
One interesting point is that there are a whole host of deductions (loopholes!). Labour could remove only one deduction and still have 'closed a loophole'.
I'd be interested to know if I have this correct:
Under the present tax regime its better to not pay dividends ?
So in the early years you reinvest profits into the project thus minimising taxes.
In the later years you reinvest profits into (for example) a wind farm, again minimising taxes.
At some point you sell the assets and pay taxes on the capital gain.
Under this scenario its the reinvestment relief changes that are the most critical ??
Re: onthe6 - " Dividends after 78% tax. How much would that be? "
If Neo/Jog/Serica think there will be sufficient profit at 78% tax to go ahead with the development, there will be sufficient profit to pay good dividends - and I dont think neo and Serica have come this far to be deterred by another 3%tax, and I think the latest Zeus note says it doesn't have a big impact on anticipated net revenue
It would be sadly amusing to see crude prices rise (many have a demand bull case until 2040 - I don't think the developing world ex-china -is going Tesla align with the growth) whilst with little UK production no tax receipts to offset this. Just a little island with a windmill up its @ss
Headline in the Telegraph: Demand for electric cars slows sharply as customers revert to petrol. Red Ed on the wrong side of public opinion (again).
labour mindset:
pre-election
1) say enough pro-green stuff to attract votes and internal stability
2) grab money from any source to max spending (especially the hated o&g sector? two birds)
post election (or as we get closer to reality)
3) projects being pulled, such as cambo, rosebank etc
4) tory epl is already busting value investors that made levered purchases of mid/ late life producing assets - we will start to see bankruptcies etc from independents in coming months says industry mate.
this precipiates
5) job losses en masse, angering gmb and unions in solidarity, make headlines
6) as per zeus, medium term fiscal wrecking ball (don't underestimate how fine tuned budgets are; strip out 5% tax revenue and uk plc has a big problem)
7) massively curtailed spending and optionality in government
they will be working this out now. don't underestimate how ignorant politicians are - they spent 50% of their time just surviving internally, and the rest thinking about what to say externally making them popular. many people on this board are well better informed.
loopholes is not yet defined. lobbying is going on hard and the **** has hit the fan in ns regardless. we will get moderation i think now before the election - projects and thus tax reciepts have, are being, and will be cancelled soon.
the stock must then shoot up. don't be out now.
You haven't upset me, MPO
UK fiscal uncertainty may be over emphasised by the stock market. The recent dip in the
JOG share price has coincided with a degree of UK oil and gas tax regime uncertainty. In the
recent UK budget, the Energy Profits Levy was extended to run for a further year, from 2028
to 2029. Prior to this, the Labour party (seen by many as the incoming UK government) had
released a statement proposing an increase in the EPL from 35% to 38%, extension to 2029
(now enacted by the existing Conservative-led government), and the addressing of what
Labour referred to as “loopholes” in the existing UK oil and gas tax regime. It has been
interpreted that these loopholes could refer to the investment uplift allowances in the EPL
regime.
When the EPL was originally brought in in 2022, it was designed with relatively generous
investment allowances (such that, overall, new UK upstream CAPEX investment could attract
up to 91p in the pound of tax relief). This has created a significant incentive for existing UK
producers to invest in new projects – indeed, our modelling estimates that it can increase the
value of a new UK project to an existing producer by up to 61% if tax allowances are able to
be used against existing production. As such, any government watering down of the EPL tax
allowances could impact industry decisions to invest in new projects, including potentially
Buchan.
In our view, the danger of changes to investment allowances may be limited. While we expect
that both the incumbent Conservative government and the Labour opposition are including
the significant benefit to the exchequer from the EPL in their fiscal calculations for the next
five years, we find it hard to believe neither would look beyond this period. Altering tax
allowances could have a more significant negative effect on future UK North Sea projects
and investment than the existing EPL regime (which, for all its faults, is relatively well
designed for encouraging new investment), and this could in turn have an impact on
government fiscal calculations beyond 2029. Damaging the UK oil and gas industry in the
longer term would be economically self-defeating for an incoming Labour government,
ultimately damaging government spending flexibility. This would be a choice that Labour
would have to face up to in government, with potential serious consequences if it were to
degrade UK oil and gas tax allowances. In our view, the move from campaign rhetoric to
implementing policy is more likely than not to see Labour take a moderate stance in practice.
We also consider the fact that 72% of total UK energy supply in 2022 was from oil and gas,
the c.200k well-paid UK jobs that UK oil and gas activity supports, and the substantially lower
emissions from domestic oil and gas production versus most imports (particularly LNG), as
further strong points in favour of a moderate government approach to oil and gas taxation.
We t
OOP'S sorry if that upset you DU that was not intentional. I'll shut up now.
Garbage seems to proliferate on the JOG forum these days. Constant price, price price. Give it a rest, will you?
Read what the Sage (of Omaha) says about it. "Price is what you pay; value is what you get".
Price is a measure of supply and demand. More people buy than sell and the price goes up. If it continues? The price goes up more. Still with me?? And vice versa.
Predicting what the scrambled and befuddled minds of a whole lot people, who wouldn't know what affects share prices if it stood up and slapped them in the face, will tell them about any number of real factors that are relevant to an understanding of what value should be put on (in this case) JOG's shares at a point in the future , is a very silly game. Let's all talk about what we want it to be, shall we? And tick up people who say it will be high. That's really clever.
If politicians don't prevent it (which they might) LTHs should get a good result. How good? Consider what various brokers and professional share commentators have to say - they're the ones who have put in the hours.
So have I and have come up with NPVs (based on DCF projections) for JOG, NEO and SQZ (the value is different for JOG because it won't have any Capex - fat lot of good this will do if NEO and SQZ decide it just isn't worth it).
Risk is what is holding back JOG's SP. The risk of virtue signalling, commercially inept, dishonest politicians deciding to ignore advice offered to them on the error of their ways - and proceeding with plans that will not only significantly damage our nation's energy security, but generate less revenue from NS taxes, trigger rampant energy inflation and destroy the jobs of countless thousands of highly skilled employees directly and indirectly in the industry, along with the plans and aspirations of all these people's families.
And all for what? I doubt there will be any measurable difference in anything in 26 years (ie in 2050). It is a flick of a finger in astronomical/geological time. The sun (the earth's only energy source) has been around for around 13.5bn years and the earth close to 5bn years. And Man can change what it falsely thinks is wrong in 2 minutes? Labour's plan is to turn GB into a shivering nation that either can't afford or can't buy countless items that rely on oil they are used to picking up off the shelf in a supermarket, or anywhere else. Wait 'til the fat and greedy masses can't get their cheap flights to Costa del Vomit. There'll be riots. So let's all vote Labour shall we? That Kweer Stoma seems ever such a nice man. And that lovely Rachel - it's not her fault her legs touch all the way up from the ankles. She used to be ever so good at chess, so she's bound to be a good chancellor. Oh, and there's that lovely Angie too..................
dyor/imo
PS: the 332p opening quote doesn't mean anything - it's a number put up by those who fix the markets - sorry: enable people to trade