Member Info for londoner7

I don't have access to the subscriber content, so I'd appreciate some one providing info on Harbour's exploration drill.

In June I said, "The duration of the EPL and the consequential cash flows will be captured in the OBR’s 5-year forecasts. At the autumn 2025 fiscal event, the OBR will provide their assessment and given the sunset clause, EPL cash flows would cease beyond the 4th year. That would be the test of Labour’s commitment to ending the EPL in 2029."

Yesterday we got the answer.

No surprises on the changes which were confirmed. but a gulf in possible outcomes on the final verdict on the EPL capital allowance. In that sense the North Sea fiscal regime is no clearer.

What is clear, is that an effective tax rate of c.78% will be part of any permanent fiscal regime still to be thrashed out, to ensure no cliff edge to any future OBR's 5-year forecasts.

This is the message on growth:

"The first oil from our Sangomar project offshore Senegal was a significant milestone, delivering against our growth strategy. Subsequent to the quarter, we achieved peak gross rate of 75,000 barrels per day and production ramp-up continues as planned."

First oil was 11th June. In 20 days since, 540K bbls has been produced during the first 20 days of ramp up.

The production numbers look good, but lets see out this converts to operating cash. Unfortunately, we might not get insight into the numbers until the finals are published in 2025 Q1.

Scarborough LNG is due online 2026 with a target of 8MTPA. I understand this project has been frustrated by regulatory and environmental issues with Australian authorities.

Following the unsuccessful merger with Santos, Woodside has turned its growth plan towards the US, with the acquisition of the Driftwood LNG development. Permits are in place. The inital phases (1&2), subject to FID 2025 Q1, are targeting 16.5MTPA LNG in 2029.

Woodside has set out a strong plan for growth, but key will be their execution of Driftwood and a supportive LNG market out to 2030 and beyond. I'd expect a lot of share price volatility while the market considers these variables

I've a modest holding here from the BHP divestment, and I plan to hold and watch with interest how the gas and LNG market plays out during the 'energy transition' and what looks like a significant demand for electricity over the next decade. If this increased demand comes to fruition I don't see the demand for gas going away anytime soon.

"didn’t think there was going to be a business case"

They hope there is a business case. It is the job of business to explore potential revenue streams - that is where we are.

Renewable energy, hydrogen storage and CSS are potential routes to net zero. Personally, I don't see the investment case for any of them, but feel free to fill your boots.

My take.

Vistry's Gearing Up Potential:

From their latest presentation – “capacity to grow”

• 26 business units - targeting up to 900 units p.a.

• 8 business units targeting 800+ units in FY24

• Flexible geographic coverage

• Output not constrained by private sales rate - build rate led - c. 350 build active sites - c. 200 sales outlets

Competition from Other Housebuilders:

Vistry’s advantage is that they are 100% focused on the partnerships model. This is a capital light structure which will release over £300m of current capital employed, adding to a 50% return on adjusted earnings, through dividends and buybacks, Vistry expects to return over £1bn in the next 3 years (2024/26).

In 2023 Vistry had c.14% of the partner funded market. A market which is expected to grow c.60% over the next five years, so room to grow, alongside their capacity to grow.

The traditional housebuilders have a partnerships component within their structure’s, but it seems to be largely a release mechanism for surplus/unsold stock.

Persimmon recently reported that partnerships accounted for 23% of Persimmon’s sales in 2023, up from 18% in 2022, but partnership volumes were still down 17%. Comments from the Persimmon CEO suggested to me, they were waiting to see the outcome from the election, which hadn’t been called at that time, and a reduction in the BOE interest rates to reinvigorate the housing market. A watch and see approach.

Market Anticipation and Share Price:

These are uncertain times for the traditional housebuilders. I believe the opportunity for their current speculative build model will return, but the timing is uncertain and likely to follow the market boom and bust pattern. But I think a key difference from the period under the Conservatives is that under Labour taxpayer funding will be better directed towards actually building houses rather than inflating prices.

Vistry has outlined near term (2024-26) targets for revenue growth, ROCE and adjusted operating profit. They now need to execute. Also, they need to keep a lid on the fire safety legacy issues, which all the builders face.

The certainty in the medium term is supported by the announcement last month of an agreement with Blackstone and Regis Group for a portfolio of homes worth £580m. “The portfolio, which is concentrated in the South-east of England and is largely plots from Vistry's former Housebuilding landbank, consists of c. 1,750 homes across 36 Vistry developments. The homes would be pre-sold in-line with Vistry's Partnerships strategy of pre-selling c. 65% of all homes across the business and will help the Group drive towards its medium-term financial targets. The first completions under the agreement are expected by the end of June 2024, with the majority of homes expected to complete within the next two years.”

I think it is this certainty around Vistry’s near term growth that has led to recent share price outperformance.

Correction

such as a likely increase in the EPL to 38%.

MightT, I agree with Tamovv's post, and here's my supportive comment.

Ithaca’s dividend policy is based on after tax operating cash flows. These cash flows can be used to pay down debt, grow the business through organic development or acquisitions, or return cash to shareholders through dividends (buybacks are also an option for returns to shareholders).

Pre-merger with ENI, which is effective today, but not formally completed until this Q3, Ithaca’s dividend policy was 15%-30% of after-tax operating cash flows with guidance of 30% for the current year.

Post the merger with ENI there is an agreement of an ‘ambition’ to pay up to $500m in total dividends in 2024 and again in 2025 (This would be financial year 2024 and 2025). In 2024 that payout is expected to exceed the 30% guidance. Post merger that equates to a 24p yearly dividend on each current Ithaca share – clearly attractive.

The questions are, will it be paid and is it affordable by the business?

My take is that the ambition to pay a $500mdividend has been agreed with ENI subject to meeting anticipated targets. These targets will be based on or around the outcome of three key factors:

1) Continued effective operations in accordance with plans – the risk here is that stuff happens, and in this sector when stuff happens it’s rarely good.

2) Continued supportive oil and gas prices – current prices are good.

3) No surprises on UK fiscal policy following the election of a Labour government. Ithaca and ENI will have anticipated changes, such as a likely increase in the EPL to 35%. I don’t know what their expectations are on changes to the investment allowances or licencing.

A recent credit review included this statement:

“continued commitment to conservative financial policies and leverage, notwithstanding the Company's ambition to distribute up to $500 million to shareholders in each of 2024 and 2025”

Which I interpret as the credit agencies supportive of the payouts under current conditions.

Completion of the merger is expected before 30th Sept 2024.

Ithaca would normally announce interim results late August, including the interim dividend. I suspect this announcement may be deferred until after completion, so the dividend payout is supported by the newly appointed CEO (post-merger).

Guidance is for a 1/3rd payout following the interims and 2/3rd following the finals in March.

Stevo12, thanks for your reply.

If I understand your point, the post-EPL v pre-EPL comparison of increased cash flows in slide 16 isn't a true reflection of the 'EPL benefit' because the cost of acquisition would be very different under each scenario, which might explain why the slide hasn't been repeated in subsequent presentations.

I guess I'll need to wait for working examples, though while the EPL policy remains unclear I suspect any deals will come with contingences - additional uncertainties.

Stevo12, you say, “In broad terms, Enquest losses would be available to reduce the taxable profits of an acquired company by 50%. If Enquest acquired a business with tax losses, these losses would not be available for Enquest to use for 5 years.”

In slide 16 of the 2022 results presentation Enquest made the case for acquiring a business with taxable profits to utilise their own losses and presented the case pre-EPL and post-EPL.

There’s no mention of the restrictions you outline, and as I understand them the outcomes would be much lower than the 66% and 160% gains presented.

Could it be that the application of ring fenced losses on North Sea projects operates differently to the application of conventional tax losses?

Desertsands, thanks for highlighting this. I'd opened the RNS but didn't scroll down to the end.

The FT has the top 10 institutional holders on 4.2% of all shares, c.40m shares. It looks think most, if not all, make up this independent shareholder group. The other 6%, making up the free float, will be largely retail who generally don't vote so their holdings are voted by the board (proxy) in favour of the resolutions.

The two largest independent shareholders (Newton, FIL) each have c.11m shares, so neither combined to vote down a resolution - max vote against was 16.8m. I'd guess one of these, Newton or FIL, plus a mix of some of the other independent shareholders voted against the re-election of certain directors. Only the latest addition, Mr Zivlin, had close to unanimous support. Clearly, the old guard on the board leave some IIs disgruntled.

In conclusion, I don't read much into this vote.

However, I'm happy that Eni can nominate the CEO of the merged group on completion, given Delek will still hold just over 50% of the shares.

I'd guess the corporate structure and limited free float of 10%, will preclude wider institutional interest. But I'm inline with the high near term dividends payouts (target of $500m in 2024 & 2025) which I guess has been driven by Delek. Also, good to see the recent comment by the credit institutions supportive of these payouts.

It’s an illiquid stock, so it doesn’t take much to move the share price. Perhaps there were favourable comments coming out of this afternoon’s AGM.

There are many areas that could be a factor:

Progress on Captain production/ Delek sell-down/ Cambo farm-in / ENI merger / Rosebank.

Clarity on this year’s dividend payout.

Take your pick.

Bottom line, if news has been shared then I’d guess it was favourable.

According to Delek’s numbers Cambo is a less attractive project, financially, than Rosebank. However, based on theor numbers I estimate Cambo development starting 2025 Q3 with production starting mid-2029. In their manifesto, Labour proposes to extend the EPL sunset clause to the end of the next parliament – mid 2029 – so no EPL to pay on Cambo production.

However, in my assessment, while Rosebank offers a reasonable investment case under Labour’s proposed changes and even beyond 2029 assuming the EPL is extended further, Cambo doesn’t.

Should Ithaca proceed with Cambo given uncertainty around the 2029 EPL sunset clause?

The duration of the EPL and the consequential cash flows will be captured in the OBR’s 5-year forecasts. At the autumn 2025 fiscal event, the OBR will provide their assessment and given the sunset clause, EPL cash flows would cease beyond the 4th year. That would be the test of Labour’s commitment to ending the EPL in 2029.

The issues around the EPL have got very messy. Projects will remain in limbo and union jobs will be lost, which now has me thinking that after the election a new and permanent fiscal regime for the North Sea will be thrashed out between the interested parties.

It seems to me a bit like Ford going into competition with Hertz.

The FT’s Lex column raises the key consideration for investors - despite Berkeley’s predictions of a recovery, what does this strategy switch says about the outlook for the core business.

The purpose of this post is to correct elements of my post last week (13/6).

Some background. Ahead of the Labour party manifesto I produced a simple spreadsheet taking in Delek’s ‘impairment tests’ on the Rosebank project. I focused on a development year 2025 and a production year 2027, with the purpose of assessing the impact of Labour’s proposals.

In the event, the Labour manifesto wasn’t conclusive, but I’m left with the expectation that the EPL will be increased to 38% and the super deduction element of the investment allowance will be removed, leaving the standard capital allowance deduction in place.

I’m confident in my posted adjustments to the 2025 and 2027 numbers. In summary, the net post EPL investment costs in 2025 increased from $36m to $54m, an increase of $18m, and the net post EPL production gain reduced from $113m to $95, a reduction of $18m. (The $18m increase on cost in 2025 and the $18m reduction in cash in 2027 is a coincidence).

Looking again at Delek’s data I noticed that it doesn’t take account of the investment allowance available on the supplementary charge (S.C.I.A) when production begins. In comparing projects, I can understand why this detail might be left out – it complicates the spreadsheet without adding much differential between projects. (If anyone investigates this and believes the S.C.I.A. is in the data please let me know). However, given the Rosebank project has a capital spend of c.$750m ahead of production, this allowance is worth a substantial $47m reduction on the supplementary charge, which can be realised in the first two years of production.

My correction to last week’s post is on my ‘rough terms’ assessment of the payback on the Rosebank project. Extrapolating one investment year (2025) and one producing year (2027) was erroneous.

Using Delek’s full data, with the inclusion of the S.C.I.A and my estimates for 2023, under the current EPL regime payback occurs late 2027. Under the revised Labour rules, as I’ve assessed them and assuming implementation end 2024, i.e. 40% of investment Capex spent, payback occurs early 2028. To be precise, a graph implies Dec 2027 and Feb 2028, respectively.

Not much in it, which would imply the decision to start Rosebank was the right one.

Cambo will have a different investment criterion. Delek provides impairment data for Cambo, but I haven’t yet run the numbers. However, given the impact of Rosewell production cash flows c.-16% from the 3rd production year (post S.S.I.A) I’m more optimistic than I was that Cambo might pass the threshold for a go-ahead.

My assessments assume a standard investment allowance against EPL will remain under Labour. If it doesn’t then it’s hard to see any new field development going ahead. Tie-ins perhaps but not a Cambo.

I still dream of that Kodak moment when Ed Miliband signs the authorisation on Cambo.

There seems to be differing views on future returns, when I thought the presentation and supporting Q&A commentary was clear.

The dividend for the 2024 financial year, when ends with the final dividend payment in June 2025, is 21.35p (5% higher than the 2023 payment). In addition, there is also a £200m buyback this year, valued at c.1.5% return.

The dividend payment for the next three years, starting with the 2025 FY will grow 2% per year. In addition, there will be further buybacks. The company is attributing the same value to dividends and buybacks as a 'shareholder returns' mechanism. I can understand some might not agree. However, on that the basis they are equivalent the company has stated that the total returns to the end of 2027 FY will be greater than if they had maintained a 5% p.a. growth in the dividend payout.

I’m very happy with the guidance that the dividend will increase by 2% p.a. for the 3 years after the current year. I’d prefer a special dividend rather than the share buyback, but that’s a minor quibble, particularly while buybacks are made in the recent price range.

Some analysts have said the guidance on capital generation and EPS guidance (6-9% p.a) is below their expectations. In their statements the BOD will have an eye on their 3-year long term awards. These statements will be the basis of guidance to their renumerations committee. The new team will be incentivised to max out their bonus, but be assured targets are unlikely to be a stretch. It’s the nature of the beast to take care of themselves first and foremost.

We're just here for the ride - hopefully forwards.

There’s another consideration here.

While I think my estimate that c.$600 (40% of fiscal target) is attributable to the increase in the EPL rate to 38% is correct, the actual fiscal return is very dependant on the actions of the North Sea operators.

If there is a higher than anticipated reduction in investment by North Sea operators, then their allowances against the EPL will fall and the EPL payable will be higher than anticipated.

There is clearly a tough consideration for Reeves in balancing the impact of EPL changes on jobs and the fiscal return. Investment plans for the next 12 months are largely fixed, but beyond that I wonder how confident she can be in current estimates and how helpful will the operators be in guiding her numbers.

A possible upside for the NS sector is that she proceeds with caution – get it wrong and it will be hard to get the sector back on track.

The long-awaited Labour manifesto is out and their policy on the EPL is consistent with earlier commentary.

“Labour will therefore extend the sunset clause in the Energy Profits Levy until the end of the next parliament. We will also increase the rate of the levy by three percentage points, as well as removing the unjustifiably generous investment allowances.”

The fiscal benefit to the treasury is forecast at £1.2bn ($1.5bn) average per year.

I’d hoped the manifesto wouldn’t have been so explicit because it doesn’t give Reeves much wriggle room. However, comments from an earlier paragraph conflict with their stated policy on the EPL:

“Crucially, oil and gas production in the North Sea will be with us for decades to come, and the North Sea will be managed in a way that does not jeopardise jobs.”

Clearly, an EPL policy which reduces the rate of North Sea development will impact on jobs.

As I said previously, I suspect this policy conflict will only factor into the debate in half a dozen Scottish seats. But post-election I’d expect a battle over aspects of the EPL with unions. I interpret “unjustifiably generous investment allowances”, as describing the super deduction element under the allowances and not the standard capital allowance, which I expect to remain in place. Labour might view this as sufficient to allay unions concerns, but it shouldn’t.

Running the numbers, I have the increase in the EPL rate by 3% accounting for c.40% of the fiscal benefit with a reduction in allowances accounting for the remaining 60%. (I don’t know to what degree, if at all, Labour’s expects an impact on the development pipeline). The fiscal cost of $1.5bn average per year equates to an average additional tax cost of $4.7/boe.

Assuming a 38% EPL and removal of the super deduction element only:

Rosebank 2025 CapEx phase, adjusting Delek’s numbers, post-tax cost increases from $36m to $54m.

Rosebank 2027, 1st year production phase, post-tax cash flow reduces from $113m to $95m.

In rough terms, cost of development over 4 years is (1.5*$36m)+(2.5*$54m) = $189m, plus interest cost of c.$40m (pre-production) = c.$230m.

Project payback will be close to 3 years, an increase from 18m-2 years before Labour’s proposed changes.

Unless the unions win some ground on the EPL I’d expect Rosebank to be the last full field North Sea development.

The tie up with ENI was good insurance against this possible outcome.

I think Cambo would be a marginal play and could be the unions battleground. The Rosebank development phase creates 2,000 UK jobs, leaving 525 jobs once in production, so a net 1,500 people looking for North Sea work late 2026.

The Energy Security Investment Mechanism offers Labour a 'get out of jail' card. Something to watch, but I'm not betting there'll play it.

I’d add another point on the valuation of LGEN.

The current lack of investor interest in UK stocks is well known. I haven’t looked back at trends, but I’d guess Brexit was a significant negative impact on sentiment in UK stocks. There’s a reference in posts to a 9-year trend down in LGEN, so the Brexit vote 8 years ago this month, is a likely catalyst.

The valuation of LGEN compared to risk free Gilts is valid, but I think the more relevant valuation is with the rest of the UK market. No doubt LGEN on an 8.5% dividend yield, which for the reasons outlined is likely to stay ahead of inflation, is a very attractive alternative to UK Gilts, but there are other UK equity options.

I have a portfolio of UK stocks, which have been similarly impacted by poor sentiment to the UK market, and by the increased interest rates which are subduing the UK economy. My investments have good balance sheets and are paying around mid-single digit dividend yields, however if and when a modest level of growth returns to the UK economy their bottom line (EPS) is likely to increase at a substantially faster rate than LGEN is likely to achieve.

Referring to the latest LGEN accounts, management long-term share awards have a 15% (threshold) reward at 5% EPS growth, and 100% reward for 14% EPS growth. (EPS represents 50% of award with the other 50% split between total return performance against FT100 shares (25%) and insurance peers (25%).

14% EPS growth from here for many UK mid-tier stocks is very modest.

While I maintain a decent holding in LGEN, I don’t expect it to be my best performing (total return) stock, say 5 years out.

Tamovv, I’m not inclined to post my full assessment.

There’s been plenty of well-informed comment on the current EPL and what a ‘proper windfall tax’ under Labour might mean. The consequences of a radical adjustment to the fiscal regime in the North Sea should be clear to all except environment ideologs – I don’t have Reeves or Starmer in the ideolog camp. The unions are concerned about the impact a cut back in North Sea investment will have on jobs and the Scottish Tories appear to have focused on the EPL in political arguments against Scottish Labour. In last night’s debate the Scottish Labour leader held firm on Labour policy - we await clarification on detail on the EPL in Labour’s manifesto. However, given the North Sea is likely to feature as a key topic in only 6 Scottish seats, I think Labour will hold firm through the election too, because a ‘proper windfall tax’ plays well south of the border.

In the Q1 update Iain explained his views and concluded, the decision is now Labour’s to make.

Post election, Reeve’s will have the opportunity to fully consider the implications of changes to the North Sea fiscal regime, without electoral concerns, but guided by any detail revealed in the manifesto. The manifesto should be released in the next week or so. Let’s hope they haven’t been rash.

As an investor with c.17% of my portfolio invested in the North Sea sector, I have made my own assessment of the outcome. My assessment consists of 5 elements and those are the cards I’m playing, but I’ll adjust as the game progresses.

Each investor should make their own assessment taking note of the players at the main table (Iain and others) not an anonymous poster on a chat board.

In my earlier post I said, "I don’t know if the FDP will define phases beyond the development of the gas cap, or defining the first phase is sufficient to satisfy the licence and further phases can be defined subsequent to the end 2024."

Reading it back, I seem to be implying a risk to further development, beyond the gas cap. I'm not. I'm trying to say that I simply don't know the requirements of the licence.

To be clear. Enquest do know the requirements of the licence, so will proceed in a manner that maintains their development options on Bressay.