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Hi Londoner7,

Apologies for not following through.

Let us assume that to finance my company I raise capital and borrow money. So Equity and debt are the 2 sources of capital. The return of the former is profit and of the latter is interest.
Suppose that after I deduct all the costs I am left with £250M, and that I have to pay £50M in interest.
For the ring fence corporation tax this means that PBT is £200M, after which I pay tax of £60M (30% tax rate).
But for the EPL, since interest is not deducted, I will pay tax of £87.5M (35% times £250M). Efrectively this means that I am paying tax on interest of £50M at 35%, and then tax on the other £200M (i.e., profit) of £70M.

As you will know there has been a debate all over the world about the need to stop allowing interest to be tax deductible. EPL has implicitly suggested that O&G companies should rely less on debt than they have been doing, because it does not receive any tax advantage over equity.

ATB

Hi Londoner7,

Have you seen any BREE or industry related news?
ATB

Hi Stevo,
I second Bensi's words about your input here. TA.

Decommissioning: Is there any link to a web-site file that describes how the government shares the cost of decommissioning? (Something brief, not HMRC manuals...)
Often you wrote that overall 75% tax rate in the UK is lower than 78% in Norway. But the difference of 3 p.p. is not everything when the definition of (taxable) profit in both countries is different and you get cash back in Norway when you run out of "profit" for tax purposes so that you cannot get tax relief through paying lower tax amount, but you donot get cash back in the UK.

Yes, a "development deed" for investment allowance might would surely help, but would not solve the problem completely, as this country is no longer trusted by international investors. So, next government could still do a U-turn and get the "deed" legislationto go to court. Even if it lost it would drag on for years.

However, that would be a start. Add tax relief on decommissioning expenses and a price floor of say $90/bbl under which EPL does not apply and some damage could be reversed. But we all know, that the current government is happy to destroy the O&G industry and send the Aberdeen area back to the 1960s.

I doubt "Bressay and Bentley" will go ahead apart from one or two wells being drilled and
linked to Armada Kraken. Too risky to drill more than that.
With EPL in place Kraken would never have been bought into production, IMO. It will not break even if you take into account capital costs (i.e., cost of financing CAPEX with debt, which is what was done).

ATB

Hi Slift,
I see your point: Looking at the HY results presentation TLW expects exit production rates of both Jubilee and TEN at end of 22 to be equal to those at the end of 21. So, new wells are only managing to keep production constant, not adding to it.
But, the problem with drilling TEN outside Enyenra, is that the company has shown it has no skill at finding oil in Ntomme, assuming it is there.
Thus, the trade-off is to continue drilling at Jubilee with smaller upside but almost always guaranteed versus drilling high risk wells in Ntomme that sio far brought no extra production.
Geology is a powerful adversary, but the geologists also must do better.

So, what course of action would you like to see going forward?
Thank you.
ATB

Slift,

You say Jubilee is underperforming, while TEN is overperforming, correct? In my view it is the opposite. What am I missing here?
Thank you.
ATB

Hi Stevo,
Thank you.
Wrt the decom calculations is believe the HY accounts show "At 30 June 2022, total liabilities amounted to $16,124 million (Dec 2021: $14,031 million) including decommissioning provisions of $5,092 million." So $5B, and this must be the discounted value, so the undicounted is larger. But, if I forget about this, I get assuming 2P is closer to 500m barrel, about $10/bbl. That means HBR should be spending >$700M in decomissiong expenses per year given its predicted production for 2023.

I might be wrong, but I expect activity to slow down a lot in the UKNSCS very rapidly for HBR and also for PE backed O&G companies. For the majors, their exit will be even faster.

Had the UK government and political establishment (i.e., including Labour) done the calculations correctly they would realize they would be collecting an average of close to $10B a year in O&G tax revenues (assuming current oil and gas prices) for the next 20 years (at current oil prices) if they did not have the EPL. This way, ie., with EPL, they will end up collecting substantially less than that over that same period...

ATB

Hi Stevo12,
Thank you for your reply and post.
We seem to have identical views on a range of issues:
1) "In reality the 91p only applies to post FID expenditure and I do fully agree with you that new green field exploration is dead and the projects which will progress are those that are already discovered or near field expansions."
W/out new green field exploration the decline of O&G production is inevitable.

2) "I deliberately excluded AbEx as it has its own unique tax regime and will roughly cost harbour $2.50 per barrel of 2p reserves after government contribution." Indeed, it is treated as a cost/expense for tax purposes for ring fence corporation tax, but not for the EPL. I have no idea how you get to $2.50 per barrel of 2P reserves. Could you elaborate further please?

3)"Would you really trust a Central African government not to streak your profit once you have spent the £billion needed." My answer is no, but I thought the Uk was different. In fact it is not, it is displaying the same behaviour as that of country where there is no rule of law, and very unstable from a taxation point of view. However, in the type of countries you allude to, often investment is regulated by laws that offer some protection, with disputes settled in courts in the Netherlands for example.

Where we do not agree is on the way forward:
4) "At least in the UK the government picks up 91% of the downside on the capital costs of a failed project as long as you are tax paying on your other in production assets." Above we agreed that it is not 91% for failed greenfield exploration (i.e., new fields/licences). Yes, the US offers safe harbour to O&G companies, like very few countries at the moment. But, I see that as the price of oil and gas stay above $90/bbl the need for countries here and there outside the "Greta zone of influence" to start offering slighly improved taxation/PSC agreements, because they need to produce internally to avoid having to spend a lot on importing energy.

Linda is doing the right thing. I just wish other CEOs would do the same. Would the government listen if that were to happen? I am not sure, but they could sure introduce legislation to set a price floor for EPL at $90/bbl and allow decomissioning expenses to be treated as a cost for EPL purposes. This, at least would send a signal Hunt and Sunak are not completely deaf. But may be they are.

Give them 4 consecutive weeks of below 0C temperatures, and they might change a bit their message, when we run out of gas...

ATB

Hi Stevo,
thank you for commenting on to my earlier reply to Londoner7. You made a valid comment, and i will get back to it in my further exchanges with Londoner7, at some point.

i was happy with HBR's TU about 2022. Clearly, there were working capital movements in Q3 that were reversed in Q4, so that debt came down in H2, although in my book i am adding deferral of part of the 2022 EPL payment to 2023 to the net debt HBR figure that was provided. So for me net debt is $950M. Formally it is not, but in my book is.

you write: "If you went to the Casino and the house paid you back 91p for every £1 you gambled and they let you keep 25% of the winnings there would be a big queue." Not quite, you do not get 91p paid back all the time. if your winnings are 0p, (i.e. the wells are dry, not only you do not get cash paid back, but you get a credit instead in terms of the amount of money you get to keep next time if you win, but that credit is lower than 91p).

In addition out of the 25% of the winnings that you keep you need to pay some of it, (say 25p - since 20% of the overall capex expenditure are decommissioning expenses, the other 80% are , as per the projection of HBR for 2023) to exit the casino (the decommissiong expenses).

i do not think you will see a big queue if the prizes in the casino are not that large. ( there are no large low cost capex and opex in the UKNSCS left).

Linda is being very rational: when getting ready to gamble she has no idea of whether the UK will change how much she will have to pay to leave the casino and how much she gets back when she gambles £1 ,and how much she can keep of her winnings.

The UKNS O&G industry is done. under the current rules no one would want to go for a field like Mariner or Kraken for example. see also Alma/Galia ENQ's disaster. This is a very mature basin. ..

Casinos with larger prizes elsewhere... even if the tax rate is high.

a way for politicians to back track on EPL is for us to first have 4 solid weeks of below 0C temperatures in London. gas rationing would change a lot of minds...

ATB

Hi Londoner7,

some people like to present EPL's calculations the way you describe "A baseline for the calculation of the EPL is UK Revenue (less) hedge loss (less) Opex (excluding depreciation and interest costs)."

I think that some people , not you of course, are mixing up OPEX with cost of sales which include depletion of oil and gas assets. The latter enters the EPL's calculation as a cost.
Because of this and similar things for my calculation of EPL I start from the standard definition of accounting profit for the Ring Fence Corporation tax and add interest expenses and decommissioning costs to get a very rough measure of EPL profit (although other things would have to be added or subtracted, such as decommisioning rebates, etc.,).

since interest expenses are not a cost it is as if they are being taxed at 35%, like the return to equity, i.e., standard accountint profit is also taxed for EPL purposes.

anyway, as i wrote, tomorrow we will find out how much FCF generation has been lowered by EPL in 2022 and the projected reductio for 2023. It is a larger effect than people think.

I like Linda's decisiveness about laying off people in Aberdeen (although i obviously feel for them a lot, who have been betrayed by the UK government). She is sending out a very clear message to the UK government. We are leaving! (next will be the exit from the CCS project in Scotland...)

ATB

Last week or the week before, I posted a reply to Stevo's post asking about net debt and estimates for net debt in 2023.
My comment to him basically implied that it is not clear to me that net debt will come in as as low for 2022 as we were told. This remark was based in part on my inability to reconcile no movement in net debt between end of H1 (HY results) and the end of Q3 (TU). Unless there was a large change in working capital, hard to explain no reduction of net debt over Q3. This would imply other charges/expenditure we might have underestimated.

At that time I mentioned the need to keep an eye on gross debt because interest expenses are effectively taxed at 35% (as they are not an expense for EPL purposes). So huge incentive to reduce them. But even a better investment than paying back the debt is to drill as many wells as you can in 2023 but to not bring them into production (like DUCs in the shale world) to lower EPL charges in 2023. Of course, there is zero incentive to engage in projects that have 2 or more years lead time on capital expenditure. Why would I sanction something now on which I can only start spending money in 2025, with a government that will remove the taz relief on investment?

Finally, Stevo, you write " the WFT reduces North Sea FCF by 58% for 6 years (previously O&G retained 60% of their taxable profits now reduced to 25%)." It is more than 58%, because there are decommissioning expenses. It is not 25%, it is les than that. And if you need financing it is even lower.

As the very honest and straight shooter Linda stated HBR can invest elsewhere going forward. She is the best CEO of any O&G company operating in the UKNSCS. She tells it as it is. She is the opposite of the plenty of CEOs in this industry who are teflon types...

Slift

"with ongoing drilling requirements in Jubilee and TEN." I do believe there won't be drilling in TEN except in the current rservoir. Ntomme is waste of time for amateur geologists.

FCF of $200-$300M will be a very poor outcome, because deleveraging needs to be larger for Tullow not to have to raise cash, unless it sells more of its oil fields and/or licences.

You ask an excellent question: "Where is the production increase over the past 2 years?" Ask mother Geology in TEN. That is what is dragging Tullow down.

ATB

Some of us believe PMG is a joke...

what should they say at the TU? that KRG are not trustworthy, and once again are withholding payments of tens of millons for the oil that GENL produced? i have no idea as to why thse kurdistan focused companies do not diversify? stop CAPEX there and invest elsewhere.

Hi Adieuk32,
Nice table with financial metrics. Thank you.
I was expecting production to have improved more with the new acquisition. Also expected that there would be fewer dry wells. The reason for the two misses is TEN. TEN's geology is taking the side of the shorters and bondholders.
Until Rahul stops wasting money on parts of TEN, I am afraid Tullow's finance will not improve. Tullow could have saved $100M this yeard had he not drilled Ntomme. He needs to stop wasting money until more of the debt is repaid.
ATB

"Mitch Flegg, CEO of Serica, commented:

"We're pleased to be publishing the Circular to Serica shareholders today setting out why we think the acquisition of Tailwind delivers exciting benefits to Serica shareholders"

I am so impressed with the "exciting benefits" that I am voting NO!

Hi Stevo12,

Thank you for posting very interesting and numbers-based analyses of HBR.

You ask about expectations for what will happen in 2023. It is hard to predict at this stage.
1) I had a so-so high level model of what HBR was doing but it all went Kaput b/w HY results and the November update, as I cannot identify why net debt didn't budge b/w 30 June and 30 Sept. Unless there were working capital movements that were very large it is hard to understand as to why net debt did not decrease.
2) I expect HBR to spend a lot more in CAPEX next year doing as many infills as they can, before Labour takes over and takes the investment allowance away. I do not experct them to continue with exploration drills in the UK, and perhaps they might also abandon some of the appraisal wells they had lined up. I surely hope so.

For 2023 we have to keep track of gross debt, because interest expenses are based on that and then we need to add 35% on top of them, because they are not expenses in the calculation of EPL. Gross debt at end of H1 was above $2B, in part because the had to have a huge cash balance, $845M, given their hedges. High oil and gas prices having moved down and 2022 hedges expiring, hopefully they have been able to pay down $500m of the gross debt.

ATB

Jefferies concludes: "Following a successful refinancing last year, shares in EnQuest could rise by 180% to 60p this year, in the most optimistic scenario."

Where have I heard the 60p figure before?....

having re-read the accounts and RNSs of the last 2 years, it is now clear to me this is not goong to rerate any time soon. Cash burn rate is a concern, unless it can generate positive OCF in the semester just ended.

I think spin... got it wrong here...

I am voting NO. but management are misbehaving by putting a deal on the table that only requires 50% approval.

Just listen to the presentation: there is nothing substantive the CEO can say about the merger, apart from the tax loss credits, for which SQZ is having to value Tailwind's reserves per bbl much higher than SQZ 2P reserves are being valued. The way he and the CFO answer questions shows they know this is a terrible deal. The relative valuation is loopsided against the SQZ shareholders.

Thus, I am voting no. I hope KISTOS comes back with a counter-offer. SQZ should have diversified by buying a company operating elsewhere, or otherwise merge/acquire other companies such as the UKNSCS based company of an international o&g company wanting to sell its UK assets that has tax loss credits.

ATB

- Saturn Banks 2H22 average production expected to be c.22 mmscf/d (SO BOTTOM OF GUIDANCE, ACTUALLY IT WILL COME BELOW 22 mmscf/d; THEY JUST DO NOT WANT TO SAY IT NOW)

- Southwark A2 well test and clean-up planned for next week with first gas expected by mid-January (BY WHICH THEY MEAN EARLY FEBRUARY!)

IOG's INABILITY TO DELIVER CONTINUES!
NO wonder the SP drifted lower in the last few days...