focusIR May 2024 Investor Webinar: Blue Whale, Kavango, Taseko Mines & CQS Natural Resources. Catch up with the webinar here.
If I’m interpreting this discussion correctly, I think there is confusion in the use of the phrases, ‘deducted on EPL’ and ‘used to offset the EPL’.
I’m also confused by the comment ‘but can hedging losses can be used to offset EPL in the same way allowable investment would?’
On the latter point first. The ‘same way’? Referring to the IR calculation in Pelle’s post, UK capex and associated tax relief is deducted from Taxable Profit (pre-Capex), to produce a Taxable profit. EPL is then applied at the rate (25 or 35%) to taxable profit.
On the first point. Hedging losses or gains are covered by the UK revenue minus opex summation. It doesn’t matter whether you use a realised oil price in the revenue number, or the actual revenue and the hedging loss is added to opex. The point is that the hedging component is included in the computation of the EPL. In much the same way as capex and associated tax relief.
If the view is that the hedging loss can be deducted directly from the computed EPL then I believe that view is wrong. As I write this, I find it hard to believe that is a consideration, so if I’ve misunderstood, please clarify.
HBR have several $billion of hedging losses. Investors there would be delighted if those losses directly offset the EPL – the tax man would owe them money. The easiest way to consider hedging in the EPL calculation is as a component of the revenue from the realised price after hedging. To be clear, that’s hedging realised in the accounting period.
As I said, if I’ve misunderstood the discussion please clarify your point, or correct mine.
* Game about to start. I hope the Welsh team hasn't exhausted itself singing their anthem and can give England a game.
mrc, on 26th May I posted, “Combined negative impact on cash flows over the next 12 month = $71m - $96m.”
That's $43m - $58m (midpoint $50m) for 2022 period.
In hindsight I’d say a pretty good stab ahead of the interims and a better understanding of the detail on decom and finance. (Dare I say remarkable)
In an Oct post I had ‘in mind’ $75m for 2022 (I wrote 2021 but was correctly pulled up for my typo).
I refined the process of my EPL calculation and posted it here a couple of weeks later. That calculation produced the same EPL number I got using IR’s calculation posted by Pelle. I thought I was clear that I didn’t post that EPL number, only my process.
I think that covers the history of my posts on EPL. I hope it helps.
27th May - “It (Enquest) is expected to pay an extra $14 million this year and $73 million next year, Jefferies said.”
I'll work my own numbers and leave Jeffries estimates to others!
mrc, a while back I posted my working assumption number for the EPL, which was challenged by one poster as being too high. I asked for evidence of their working, but he couldn't come up with it and referred to the Jeffries number of $14m for 2022.
In the meantime, I had a more detailed look and later posted the process of my EPL calculation - I ran a calculation based on the 2022H1 report but decided not to post the EPL charge itself. When I saw Pelle’s post, I immediately plugged in the called for data, again using the 2022H1 report. (There’s no need to estimate full year 2022 numbers. Using real numbers from the interim report gives you a good idea of the EPL’s impact)
Remarkably, both processes, which differ, gave me the same result (within $1m). I say remarkably, because although I was using the interim report both processes required some level of estimation, i.e., both data sets would have included some error.
I didn't analysis the differences between two processes, but I prefer the one from IR because it leaves the capex component till the end and clearly shows the degree to which capex would need to be increased to have a significant impact on the EPL.
In time, probably at the Feb update, Enquest will reveal their EPL for 2022. If it's close to $14m I'll feel very silly - I'm on multiples of that number.
But don't let that stop you from posting the detail of your calculation.
* Approx. 55% of the 2022 EPL is payable in Dec with the balance due in Jan 2023.
Dumbly, I’d stick with the c.$700m deferred tax asset likely to be utilised over the next 3-4 years and re-evaluate with the 2023 accounts next March.
As I’m sure you’ve determined, there are many moving parts to the composition and calculation of this asset. Not least the expected future price of oil, e.g., tax losses can only be included if there is an expectation that future profits can be realised against those losses. Therefore, potentially, as the oil price increases tax losses that were unavailable to use become available. However, on the P&L account a higher oil price can also lead to a reversal of impairments beside the more obvious increase in profits. I see the future of the GKA area being one potentially significant variable, and I don’t strictly mean this in a negative way.
is 280p/therm for tomorrow, after 150p/therm today.
This demonstrates the volatility of these prices and could easily reverse in a day. Days like today, colder and windless drive up the demand for gas. When demand increases, say due to less wind, the higher priced contracted alternatives come on stream such as biomass and interconnect supplies, but these are limited and gas is the marginal source, which can prompt spikes in the day ahead pricing like today.
In the first half of Q4 Day Ahead pricing averaged c.100p, so it would take a 2nd half averaging 300p to get to a Q4 average of 200p.
mrc, I don't have your confidence in analyst's estimates, however I did look back at a comparison of the Dec 2021 numbers to June 2022 and see a £7.6m adjustment. I also see a £1.2m adjustment in the previous 6 months but I could put that down to a move from non-current discounted provisions to current provisions. I can't say the same for the £7.6m.
If I had a significant shareholding here, I'd be asking questions of IR.
But I don't. However, I think a c.10% pullback covers the 'anomaly'.
To be honest I don't place any value on the comments or opinions put up on these boards to the valuation of PMG's prospects, or any other companies. I generally believe the market knows it. I follow the boards for facts not opinions. As I say, I believe the investment case here largely depends on the success of the GPA farm in. Too speculative for me but given the current environment I'd give it a good chance compared to much of the speculative stuff I follow - through interest rather than as an investment.
* Back to following analysts, I think you put too much weight in Jeffries estimate of Enquest WFT. I think it's a very easy calculation which, as far as I've seen, all ENQ posters have wrong on one side or the other. Something I might come back to on the Enquest board but following today's update there's other stuff I find more interesting. And yes, I recognise the possibility I might have the WFT calculation wrong too. Don't you love this stuff!
mrc, I follow this board to watch the rise of Tom Cross or will it be rise and fall of Tom Cross. Can he repeat earlier success or was he just lucky. I'm undecided but watch with interest and have a skin in the game small stake. He might yet luck out with the GPA farm out. If he does, I think the potential rewards could dwarf any financing issues.
When I saw yesterday’s update, I didn’t attach much significance to the decom being brought forward. You say, “decom costs have gone up £7m”.
Could you detail how you come to ‘up £7m”.
Hi L3Trader, when it comes to the distinctions between CapEx, Decom and their associated allowances there's a limit to the level of detail I'm confident on, so I'll pass on any examination of your numbers.
But I'll comment on some parts of your post.
I think decom commitments and associated costs were already in train for the next few years and I don't think they are activities that can be deferred to a period where there might be a better tax regime.
I agree that the level of windfall taxes applied across the board to the UK oil and gas sector is too high for the 'windfall' actually enjoyed, also it deters future investment in the North Sea, and, I'll add, increases investor risk thereby reducing share prices. Is that a double or triple whammy for investors? Given the situation I could see a case for a windfall tax but given the disparity between the windfall benefits that actually accrue, considering hedges etc, I think the 25% rate was just about acceptable to the sector, but exceptionally tough on HBR. The 40% increase to 35% is beyond the pale but driven by politics. There was always the threat of a c.35% rate or higher following the next election and share prices of the North Sea companies would continue to reflect that uncertainty. Having now increased the rate there is a case for thinking the government has cratered the argument for a much higher tax by Labour, though that leads me to my next point.
Not only is one government not beholding to the decisions of a previous government, but it is also clear that one PM and cabinet is not beholding to the decisions of a previous PM and cabinet. Those are the risks I accept as an investor in the UK. Unlike the US system I think it's almost impossible for us to mark our ballot paper in a way that leads to 'gridlock' in the UK system.
Today the politicians are lifting the 'windfall' gains of the UK oil and gas sector.
A few months back they were lifting the profits of the UK house building sector to cover deficiencies by other businesses (many non-UK that can't be touched and some that no longer exist) to cover deficiencies in building regulations and the illegal approval of materials by some suppliers.
A few years back (and it continues with a tax surcharge) they were lifting the profits of banks, though fair to say this was a situation of one robber robbing another.
I think this quote sums up these activities:
“(Why do you rob banks, Willie?) Because that's where the money is.”
Sutton denied ever having said it. "The credit belongs to some enterprising reporter who apparently felt a need to fill out his copy," wrote Sutton in his autobiography. "I can't even remember where I first read it. It just seemed to appear one day, and then it was everywhere."
Continued ...
Looking at 2). You might think that what I have written under 1) is altered by the text on pages 10-11, but I think the key part of the text is, the ‘non-cash’ reference. ‘ …. these half-year results would have included the recognition of an estimated additional one-off non-cash net deferred tax asset of $1.0 billion in respect of the EPL through to the end of 2025.’
The note is capturing the impact of the WFT on tax liabilities and assets on the balance sheet. There isn’t a cash implication.
Finally, you raise an interesting point on the cost of premium on a hedge swap, as opposed to say, a costless collar. I would expect this premium to be a normal cost of business leading to a deduction before the WFT is applied. However, without doing the numbers my gut instinct is that it has a marginal impact, but worth a look.
* The focus here has been on the running down of the 2022/23 hedges, but I agree with comments that there may be a case for capturing the current high gas futures with new hedging. E121 recently posted links to day-ahead gas pricing and historic numbers. While the gas futures pricing has remained above the often-mentioned 200p/therm reference, the day ahead pricing has not. These are the prices that HBR receive for their pipe-line gas. During the first half of Q4 I estimate the price has averaged 100p/therm. To achieve a 200p/therm average in Q4 will require prices of 300p/therm for the remained of the year. Given the volatility in these prices that’s possible. But it also reinforces the case for additional gas hedging like the latest reported at the interims. ‘Winter 2024 ZCC 200p floor vs 540p cap Last executed gas trade’.
Hi Banburyboy, I was following the calculation in your post (07:52) but I lost it at this point:
‘If market price is $100 there is a realised loss of $30 against the hedge which means tax is now only on $20 at 35% = $7 an effective saving of $12 on tax.’
Where does the £20 come from?
However, I think I get the gist of the point you are making.
1) You say, “Realised hedge losses are allowable against WT. You may say so what?”
2) And you point to the WTF reference under taxes (pg10-11) in the interim report.
Looking at 1). I think this simply means that hedging losses form part of the normal business and are not treated any differently under the WFT to treatment under the existing taxes. This distinguishes the treatment of hedge losses from the expenditures on finance and decommissioning which are not deductible under the WFT but are deductibles under the existing taxes.
I think your conclusion is correct if hedging matched production ‘Can't help thinking if it was possible to hedge the lot at $70 all the uncertainty would disappear we would know free cash flow with certainty and would only need to worry about operational issues.’. Another way of getting to it.
Let’s consider the top line, revenue, for 73m barrels of production, oil price of $100, and three situations, a) where 0% is hedged, b) where 100% is hedged and c) where 50% is hedged @$70.
a) Revenue = 73m x $100 = $7.3b
b) Revenue = 73m x $70 = $5.1b
c) Revenue = $7.3b above minus hedging loss of (73m/2) x $30 = $7.3b - $1.095b = $6.2b
For the calculation of WFT the same deductions for costs are applied. Let’s say they amount to $4b.
The post-tax profit after WFT but ignoring existing tax is, under
a) $7.3b – (($7.3b - $4b) x 35%) = $7.3b - $1.155b = $6.15b - no hedging
b) $5.1b – (($5.1b - $4b) x 35%) = $5.1b - $0.385b = $4.71b - 100% hedged @$70
c) $6.2b – (($6.2b - $4b) x 35%) = $6.2b - $0.77b = $5.4b - 50% hedged @$70
Going back to your conclusion, under b) the post-tax profit is $4.71b regardless of the price of oil, offering the certainty you refer to.
Under a) & c) the post-tax profit will be lower than under b) if the price of oil drops below $70 but is always higher at prices above $70.
At prices above $100, revenue minus costs gains will be taxed at the WFT rate of 35% but that still leaves the balance with HBR.
However, an attempt at 100% hedging brings its own risk. If actual production fails to reach or exceed the hedging obligations, then if the price moves the wrong way HBR would pay the difference.
I appreciate I may have misunderstood your point. If so, please correct me,
BHP has raised their offer from A$25 to A$28.25, with latest closing price A$26.3.
I've been an investor in BHP for many years and my read is that if OZ doesn't accept the raised offer BHP will walk.
I hope the deal goes through. I don't remember the detail but when I looked at this a few months back it seemed a good move by BHP.
This from the published statement:
;5.32 Energy Profits Levy (EPL) - From 1 January 2023, the EPL rate will rise by 10 percentage
points to 35%. The investment allowance will be reduced to 29% for all investment expenditure
(other than decarbonisation expenditure) broadly maintaining its existing cash value.
Decarbonisation expenditure will continue to qualify for the current investment allowance rate
52 Autumn Statement 2022
of 80%. The Levy will end on 31 March 2028. With these changes, the EPL is expected to raise
over £40 billion in total over the next 6 years. The government will legislate for these measures
in Autumn Finance Bill 2022, except the changes related to decarbonisation expenditure which
will be legislated for in Spring Finance Bill 2023.
Applying this to current ENQ UK CapEx c.$120m
120mx45%x25% = $13.5m
120mx29%x35% = $12.2m
As the statement says, 'broadly maintaining its existing cash value'.
32% would have maintained the cash value but I guess putting a '2' handle on the allowance negates some of the kickback on investment allowances from the opposition parties.
The 'Decarbonisation expenditure ... allowance rate of 80%' is a detail I didn't know about. Perhaps something for the future for ENQ.
L3, my focus was on the hedging impact relative to WFT as introduced by Wellintervention's post. Not the absolute level of the WFT in 2023.
*On the nstauthority numbers, have you forgotten Magnus had a 3-week shutdown in Sept, 'expected' to complete by end of Sept. It's the Oct number I'll be looking for.
Closing out my earlier posts.
A correction:
I should have added the additional WFT on the ‘hedging advantage’ in 2023 to the baseline of $932m, for a total of $1,174m WFT in 2023, assuming 35% rate.
In determining this I also concluded that the comparison should be made to 2022 FCF before the 2022 WFT is applied. (Nothing like a couple of pints of Abbot to clear the head)
Therefore, the correction is:
Another way to consider this is that the combined impact of the WFT and the change in hedging is a reduction in FCF of c.$725m compared to 2022 FCF before the 2022 WFT of $400m is deducted.
(The clarification of ‘before’ is a positive – it was a blonde moment on my part to have considered anything else)
Notes:
This is following my same again methodology – the same 2022 factors occurring in 2023, except for the WFT and hedging changes. ($2.0-2.2b + $400m - $725m)
I note Sekford’s comments on changes to CapEx and lower finance charges in 2023, which could benefit the FCF position in 2023. In 2022 non-WFT taxes were c.$500m, and changes to these taxes in2023 could also have a significant impact on FCF.
The 2022 cash tax payment is expected to be c$700m, against a tax accrued figure of c.$900m, so this difference will carry into 2023.
On a 2nd read this line jumped out at me
'Another way to consider this is that the combined impact of the WFT and the change in hedging is a reduction in FCF of c.$483m compared to 2022.'
Is that compared to 2022 before or after the WFT is applied to 2022?
The answer isn't immediately clear to me. I'm getting my supper then heading out for a beer, so might look at this later.
Anyone else have a view on this?
Wellintervention, an interesting post (12:06). You didn’t post numbers but invite us to DYOR.
I’ll restrict myself to 2023 and assume the WFT goes to 35% for 2023. The following is a copy of some notes and calculations I made on the fly. It’s single pass and may have obvious errors so I’d appreciate any feedback – numbers please. My reference is the hedging positions shown in the latest trading update.
Gas hedging in 2022 and 2023 is c.50p/therm.
In 2023 gas hedging is 2.3m boe lower than 2022.
Assume same again production and gas 200p/t and oil $100 bbl.
The difference between 200p/t and 50p/t is $106 boe.
Therefore, additional revenue from change in hedge position is 2.3m x $106 = $244m
Oil gains
11.0m x ($74-$61) = $143m
(18.8m-11.0m) x ($100-$61) = $304m
Adding these, 244+143+304 = $691m.
Impact of 35% WFT on $691m leaving $449m.
HBR has guided to $400m @ 25% WFT for 2022 (from 26th May 2022)
Extrapolating for full year c.$666m in 2023.
But increase from 25% to 35% is a 40% increase. WFT in 2023, 1.4 x $666m = $932m.
In summary, the change in HBR’s hedging position in 2023 covers 449/932 = 48% of the 2023 WFT.
Another way to consider this is that the combined impact of the WFT and the change in hedging is a reduction in FCF of c.$483m compared to 2022.
Notes:
I’ve assumed a same again position. I recall Sekforde guiding to over $1b WFT in 2023. I can see that too given perhaps higher market pricing, CapEx changes and a few barrels more production. But if say WFI is $100m higher due to higher profit then that implies c.$186m additional FCF.
Wellintervention raises an interesting point to consider given HBR’s hedging position, and the numbers are better still in 2024, but this isn’t a free ride. The 600p-700p analysts price targets earlier this year were before the introduction of the WFT - though also before some good trading updates. It will be interesting to see where Barclays come out after Thursday. However, HBR will still be paying c. $1b in WFT in 2023 that would otherwise have been available to shareholders.
Trencherpilot, reading my post again I think I've underplayed the point you make about diesel prices.
Managing diesel pricing through the pressures mounting on that particular oil component this winter will be a challenge for the industry. I understand Breedon's hedging activity operates on a rolling basis so that might provide some relief, particularly in competition with smaller players who may not have a hedging strategy. But ultimately, it will come down to the level of price increase they can implement.
In the coming update we'll get revenue numbers, but I'd be disappointed if there isn't some commentary on pricing and margins too.