Member Info for Dumbly

Megla,

For the combined entities.

I suggest to wait for the others to comment, hopefully there will be an approximate consensus.

I’ll list my assumptions, so if there are major differences in the estimates we can maybe see where they come from.

• EnQuest at mid 2024 had around $1.9b of recognised tax losses. Should be a little less now, say $1.7b

• At current oil price and UK baseline production EnQuest estimated around a decade to utilise the $1.9b, so $190m per year.

• The rules allow 50% of Serica’s annual CT/ST estimate of $80m to be offset using EnQuest’s tax losses.

• To offset this $40m of tax would require utilisation of $100m of losses per year.

• EnQuest’s standalone annual estimate of tax losses utilisation of $190m plus Serica’s potential utilisation of $100M = $290M per year.

• $1,700,000,000/290,000,000 = 5.8 years,

• From 2026 EnQuest should have a further $1.2b of tax losses available within the entity assumed to be the one to (reverse) takeover Serica.

• $1,200,000,000/290,000,000 = 4.1 years.

• Total = 9.9 years

Why I say around 7 years…? Nothing certain, just a guess that production will increase (e.g. with new Kraken drilling) or new production will be purchased, or oil price will be higher, or EPL rate be reduced so potentially more CT/ST to be offset using tax losses.

Hope this helps, and should I be way out and others can explain where and why, then still useful 😊.

A “stabilization clause” is the term I was looking for, a variation of which could maybe be part of the permitting and consenting process, or elsewhere, to bind the then and future governments.

“A stabilization clause in a government contract protects the contracting party (usually an investor or private company) from adverse changes in laws, regulations, taxes, or subsidies that would negatively impact their financial position or obligations under the contract. These clauses are commonly found in contracts related to large infrastructure projects, extractive industries (like oil and gas), and public-private partnerships (PPPs).”

Megla, based on comms with EnQuest and the back of a ciggie pack, my estimate is around 7 years

Well put…

Stevo, well out, and my thinking is the same. This combo deal provides a good bridging platform to see out the EPL whilst build further scale. (Note, the end date of the EPL is 31 March 2030, not 2029.)

The companies would do well not to trust the government and instead require new investment be contingent on legal protection being put in place to, as far as possible, guarantee no worsening of the future fiscal conditions. Maybe something like the safeguards put in place regarding decommissioning or as provided to protect investors in renewables contracts with the government.

Thanks again, Stevo. Super helpful explanation.

NewKOTB, Stevo’s explanation shows when and how tax losses can and could be used in the chain of existing and possible transactions involving Tailwind, Serica, and EnQuest.

Thanks, Stevo, that’s a helpful explanation in your 23:19 post. (As only 50% of the Serica legacy gas profits could have EnQuest losses immediately applied, a condition which would be the same for any production EnQuest acquired, I don’t understand how EnQuest IR can say an acquisition/s doubling UK production at Brent around $75 could accelerate the consumption if their currently recognised tax losses from around a decade to around 4 years.)

Yes, as others have commented too, the timing of the various RNSs yesterday indicates something possibly “flushed out”. You suggest the situation as the Serica deal or possibly something else but it could also be the Serica deal and something else. Maybe EnQuest had/has another production purchase deal/s in progress and they wanted first to secure this other deal and then announce the deal with Serica and firm up the offer. These two things could still happen, but with a different order than preferred by AB. Agreed, little point in further guessing and we should know more soon.

Romaron, regarding your post about the lack of the reported “media speculation” Pete640 posted as below.

Pete640, lucky educated guess or a little bird told you something?

ENQ and SQZ to merge!! 30 Jan 2025 20:12

You heard it here first!! It will be announced on 5 Feb 25.

NewKOTB, let me rephrase my question. The tax losses Serica had upon completion of the Tailwind acquisition were all or mainly from Tailwind or a mix of from Tailwind and from tax losses already in Serica before the acquisition of Tailwind? I am trying to understand if the tax losses used since the acquisition are those from Tailwind or pre-existing in Serica before the acquisition. Put differently, are any of the tax losses currently within Serica in any way time-barred for use?

NewKOTB, maybe then what I am thinking is incorrect. Acquired tax losses, per tax rules, normally cannot be used by the acquiring entity until 5 years have passed from the acquisition. The tax losses Serica has now are all or mainly from Tailwind or a mix of from Tailwind and from already in Serica before the acquisition of Tailwind? Serica’s acquisition of Tailwind was also a reverse takeover, so maybe this allowed the tax losses from Tailwind could be used immediately after the acquisition by Serica. The difference with the deal being discussed now between EnQuest and Serica is that EnQuest already has the tax losses and is looking to accelerate their use through an increase in production and, one hopes, in profits.

NewKOTB, Serica’s c.$1bn of tax losses you refer to come from the Tailwind acquisition in 2023, and therefore according to the tax rules cannot be used to offset CT/ST on profits until 2028? If this is the case, a reverse takeover by EnQuest should instead allow EnQuest’s losses to be utilised immediately on the profits from Serica’s contribution to the enlarged EnQuest entity.

The IC article states “A merger would also bring together both companies' built-up tax losses, seen as an asset given they offset corporate tax. EnQuest has around £2bn of tax losses while Serica had around £850mn as of mid-2024, acquired through the Tailwind deal that closed in 2023.”

EnQuest at 30/6/24 had $1.9 billion of recognised tax losses. Next year they are looking to incorporate a further $1.2 billion of tax losses associated with the Bentley entity into the EnQuest Heather Ltd entity (the entity I assume would be the vehicle for the reverse takeover). Regarding the $1.9 billion of recognised tax losses, and assuming a long-term oil price of $70-75/bbl and production from the existing portfolio, it would take around a decade to consume the tax losses. Should the UK production be doubled, as the deal with Serica would more or less achieve, this could accelerate the utilisation of the currently recognised tax losses to around 4-5 years and should deliver an incremental increase in NPV10 value around the same as EnQuest's current market cap.

If the IC article is correct, that Serica has around £850 million of tax losses as of mid-2024, acquired through the Tailwind deal that closed in 2023, then presumably these losses could not start to be utilised until the required 5 years had passed, so from 2028. I don’t know whether EnQuest acquiring Serica would mean the required 5-year period to use these tax losses starts again. Assuming the 5-year period would not start again, it would still mean there would be around 3 years when only EnQuest’s current tax losses could be used to offset CT/ST on the profits of a combined EnQuest/Serica.

To note regarding the currently recognised tax losses and from when they can be utilised against profits for both EnQuest and Serica, that there are discrepancies between my figures, the IC article, and Tarmak’s. Clearly these discrepancies need resolving for accurate calculations.

Aim, let’s get this new “fair” fiscal regime designed, as per the announcements today, and then having something concrete to reference, push to have it implemented earlier.

Such wasting BS. The EPL was constructed at the drop of a hat. Then twice increased. But, to come up with something supposedly fit-for-purpose it takes more consultations. What’s the difference between this consultation and the previous Oil and Gas fiscal review? Feels like they are buying time.

OK, good to know the EPL will end in 2030, but Labour could also be gone by then.

My reading is these consultations quash the likelihood of Miliband getting reshuffled. They could, though, have been put out now as advance defense for upcoming announcements on Scope 3 reporting requirements which will allow existing licenced fields to get permitting and consent fairly easily. The government can argue they will legislate to ban new licences, as they said they would, that Scope 3 reporting requirements will be obligatory for already licensed fields to progress, and point to the content of these 2 consultations.

David Whitehouse of OEUK is right in saying these consultations “ will help to BEGIN to give certainty to investors…”. His message being this is just a start and won’t yet change much.

To EnQuest. The “worry” deals could be delayed due to fiscal regime changes seems unlikely if no changes will be made before the EPL end ls in 2030. Between now and the new “fair” fiscal regime, the company has the tax losses to use up to cushion its tax burden. And once the new fiscal regime is known, presumably before the end if this year, they can decide whether and how to invest in B&B for big new production to start no earlier than the end of the EPL.

So… on balance, today’s announcements (as referenced in my post “The time is right”😊) I consider mildly positive for the industry and very positive for EnQuest.

Is this good or bad news or indeed news at all? https://www.bbc.co.uk/news/articles/cn7vd32myeko.amp

And… another blimmin consultation https://www.gov.uk/government/consultations/oil-and-gas-price-mechanism-consultation

See this related announcement too: https://www.gov.uk/government/news/government-to-unleash-the-north-seas-clean-energy-future

Assuming there will be a major energy policy change Miliband can’t accept, what would be better for the party/Starmer; an announcement and reshuffle together, or an announcement and Miliband resigns to the backbenches? My guess is the latter. Where else could Miliband go, and resigning shows he has some agency and provides a little face-saving cover for him.

The greater understanding of the trade-offs of Net Zero by 2050, the risks and costs of a NS “cliff-edge” loss of supply chain, and, above all… the need for greater defense capabilities, makes the time right for major policy shifts.

Emissions regulation, permitting for existing licences, and fiscal policy, should and can be wrapped up all together in one policy announcement, with the implementation fast-tracked (no need for endless consultation and calls for evidence and the like). Makes sense as they need to be connected for coherent and successful policy. And will be greater understanding and acceptance, less push-back this way and for the reasons given.

I am hearing something along these lines is about to be announced. The voices in my head say plenty of other things too.

My pleasure, romaron 😊. I also watched a fair bit of the Scottish Affairs Parliamentary Committee video. The 2 ladies from BP and Harbour Energy were impressive. I agree, it now sounds more likely a successor fiscal regime will be announced sooner rather than later. The message has been received that without changes to the fiscal regime there will not be much new investment, and without new investments the so called “valley of death” energy transition scenario will play out and impact on the supply chain for renewables too. The question now becomes more when the fiscal changes will start. Before or after the current EPL end date? My, hopeful, guess, is before. I wonder how the government will give the stability aspect of the fiscal regime. Indeed, can they? Can Labour guarantee the fiscal conditions beyond the next General Election? Are there ways in law to do this which could not be repealed/changed by future governments? I also wonder whether the increased likelihood of changes to the EPL being announced could be impacting M&A? Contracts can, and do, include clauses conditional on the price of oil to compensate the parties, but including clauses to compensate for changes in fiscal policy must be nigh on impossible.

Yes, a very good and informative Q&A article from Benny Peiser.

Tamovv, yes, that was my impression too, that the wording and sentiment in that last government statement had changed slightly for the better. For fiscal policy changes there is now also the additional "cover" of "needs must" for defence and general security purposes.

romaron, thanks for video of the interview with Prof Gordon Hughes, watching that will be my weekend penance.

Miliband did meet, tho, on Wednesday this week with Aberdeen & Grampian Chamber of Commerce Chief Executive Russell Borthwick https://www.agcc.co.uk/news-article/chamber-pushes-energy-sector-concerns-with-miliband-at-westminster

“Mr Borthwick raised concerns from AGCC members about the impact that the Energy Profits Levy is having on investment in the North Sea, and how the policies of the UK Government are accelerating the decline of oil and gas at a pace that places a vast number of jobs at risk.” “We need clarity on future oil and gas licensing; we need clarity on the future tax regime;” “Our message to the UK Government is simple: the growth you seek is sitting on our doorstep – we just need the political will to go and grab it.”

“A UK Government spokesman said: “The government recognises oil and gas production in the North Sea will be with us for decades to come and is committed to managing the energy transition in a way that supports jobs in existing and future industries. We will work together with the sector and others to develop an approach, giving the sector and its investors the predictability they need to keep investing while ensuring that they will pay their fair share of tax on excess profits in the future.”

The same old platitudes, or could this the comment, especially that after the final comma, signal something is afoot regarding a successor fiscal regime?