Member Info for londoner7

Hi romaron, I think I read the same article.

The commentator debunked the myth that the taxpayer subsidies the decom of North Sea infrastructure.

When a company develops an oil field, drilling wells and installing infrastructure on the seabed, it incurs a decom liability. Conventional tax policy would allow for the amortisation (?) of this liability against production profit during the life of the field. (stevo12 – Norway?) To maximise tax revenues the authorities deferred consideration of the decom costs until they were incurred after the field had ceased production. This required the company to initiate or obtain a 2nd project to produce profits that would allow for the tax deductible decom allowance from the 1st field. A sort of musical chairs, or last man standing. (I think I have that right).

Not an attractive option, and I’d guess ‘first year capital allowances’ were the sweetener.

Time moves on.

The SC is introduced, but finance costs are not allowed.

The EPL is introduced as a temporary measure, but finance costs, decom costs and past CT losses are not allowed.

If the EPL isn’t temporary, and the EPL allowance is removed, then the musical chairs end.

I repeat. I believe a viable tax solution will be found under Labour. The North Sea O&G sector will continue for the foreseeable future. But there will be volatility, and failures.

I’ve long viewed my O&G investments on a medium-term investment horizon. I’ve only recently come to realise how brutal the UK O&G tax regime is compared to the taxing of other industries.

I now realise that Stevo12’s description of the tax regime was much as I viewed the 85% of my portfolio that isn’t in the O&G sector. As a rule of thumb, I use a Capex spend on 50% of depreciation as a maintenance of existing production. Any Capex over this amount I consider organic growth investment.

I thought that the O&G tax regime might have had some concession for the fact that CapEx on 100% of 2P reserves developed is fully written off over the life of the field. That’s before decom costs.

For independents operating in the North Sea, a retail investment is about timing, with long term projects such as Kraken, Catcher and Rosebank a high-risk gamble. I was in CNE with holdings in Kraken and Catcher launched at a similar time, each with 50K bopd targets. Catcher exceeded its target hitting 60K bopd and covered costs within 18 months (as I recall). Kraken never achieved target and struggled though the first year of operations to get over 40k bpd, while finance costs built up. A few years ago, I posted a breakdown of finances which implied Kraken would never be profitable. Baring the inclusion of a successful extension to Bressay I expect Kraken never will make a return on the investment. Not to say that if you get your timing right you can’t profit as an investor.

I continue to monitor EnQuest, Harbour and Ithaca as investment opportunities. But the North Sea is a tough gig

Stevo12, thanks for you reply. Clearly, you are qualified in this area.

I'm an engineer. There's something in this that still bugs me so I'll look into it further and if I come back with anything I'd appreciate your critique.

Stevo12, are you professionally involved in tax law, or are you, like me, an enthusiastic amateur?

Referring to EnQuest’s 2022 accounts, as an enthusiastic amateur, I see a component of $317m called ‘depletion of oil and gas assets’ included in cost of sales of $1,200m. Subtracting cost of sales from revenue results in a gross profit of $653m. Profit is subject to tax.

When EnQuest developed Kraken, they received ‘first year capital allowances’ against CT and SC taxes in place at the time. Ahead of production, in Dec 2016, EnQuest had accrued $6,787m of oil & gas assets at cost, and had accumulated depletion and impairment charges of $3,846m, leaving a net carrying value of $2,941m.

In Dec 2022, EnQuest has accumulated depletion and impairment charges of $7,000m.

If not through the application of depletion charges at the income level, how has EnQuest acquired the c. $3 billion of tax losses, which today result in no CT payable?

I may have this all wrong, but I like to understand where I’m wrong.

Stevo12, I agree with your overall assessment on the economics – madness - of new development under a scenario where the full allowance associated with the EPL is withdrawn by Labour.

Which is why I don’t expect it to happen.

Yesterday, I posted a comment by a spokesperson saying Labour would abolish the full 45% allowance. In hindsight, I suspect this was an ill-informed low-level response creating a good headline for the press. Over the coming days and weeks there will be discussions between Labour and the EOUK amongst others.

I expect Labour to clarify their intent to raise the EPL to 38% and remove the additional allowance (c10%) – the ‘loophole’.

On the detail of your Rosebank calculation do you allow for the depletion of assets against the CT and EPL taxes?

Correction

The SC was introduced under Labour in 2002. (not 2022)

In recent years the Supplementary Charge (SC) has been the mechanism for adjusting the UK tax regime to the volatile nature of O&G pricing. The SC was introduced under Labour in 2022, not in response to oil pricing but simply as an additional tax on the industry. However, it increased in 2006 in response to rising oil prices. Unlike CT the SC excludes finance charges. Under the Coalition government the SC peaked at 32% between 2011 and 2014. In 2016, following the SA initiated oil price collapse the SC reduced to its current level of 10%.

In 2022 calls were made to implement a windfall tax on gains made due to the impact of Putin’s invasion of Ukraine. The result, 25% EPL until Dec 2025, was a measure I supported.

I guess rather than modifying the SC, the EPL was invoked because there was a need for accelerated cash flows, hence the disqualification of previous tax losses and decom costs from the EPL. It was also temporary.

I thought the allowances were very generous, no doubt framed by the energy security concerns. However, given the timetabling of oil and gas investments Dec 2022 was a ridiculous time limit, so I wasn’t surprised by the extension to 2028, but I was disappointed by the tax increase to 35%.

If Labour use Norway as justification for their 78% tax other aspects of the Norwegian tax regime may be considered.

Here’s a link I found. If anyone has a better one, particularly on the handling of decom I’d appreciate it.

https://www.norskpetroleum.no/en/economy/petroleum-tax/#:~:text=The%20overall%20objective%20of%20Norway%E2%80%99s%20petroleum,partly%20obtained%20by%20the%20tax%20system.&text=The%20overall%20objective%20of,by%20the%20tax%20system.&text=objective%20of%20Norway%E2%80%99s%20petroleum,partly%20obtained%20by%20the

I’m looking forward to Thursday’s update when we’ll see much of the conjecture here replaced by facts.

I wish that were true of Labour policy in government, but this week’s revelations are helpful.

The updates we saw this week on Labour’s EPL plans represent the policy that is going into their manifesto in preparation for a possible May election. I do not know if an election will be called, but if it is not it provides some clarity on intent which the likes of the OEUK can challenge and might lead to amendment in the next iteration of the manifesto.

Under labour, I was anticipating the removal of the additional allowance to the EPL, worth c.10%. I’d guess the EOUK and Conservatives had a similar expectation. Yesterday, Labour challenged a civil service costing of their plans, which said the Labour numbers fell short of the £10.6 billion over five years anticipated from a ‘proper windfall tax’. The labour challenge is:

-----------------------------

Labour spokesperson

Labour noted that the Government costings assume the first-year capital allowance within the energy profits levy is retained, although Sir Keir’s party wants to scrap both that and the investment allowance.

The costing therefore only accounts for £10 out of every £45 of the allowances Labour would abolish, it said.

------------------------------------------

I could make the case for NS investment with a 38% EPL and the loss of the EPL additional allowance, but the loss of another 35% could be a game changer.

(At this point in the post, to add clarity, I expanded on the current tax regime. Due the word limitations I’ll post it separately.)

But there’s a wider and more important point on how such a policy impacts the North Sea sector at a national level rather than simply an investor level. Let’s be honest, as things stand Labour will not lose a single seat south of the border due to EPL. It might be different in Scotland, where 43 SNP Westminster seats are up for grabs.

The ending of the EPL in Mar 2028 presents a bonanza to the NS sector, particularly those companies that invest significantly ahead of 2028, and frankly I never expected it under a Labour government.

Removing the full 45% allowance under the EPL while maintaining the disqualification of decom costs has far reaching consequences that I don’t think Labour has considered, and which is why I don’t expect it to happen.

romaron, you touched on a very important aspect - the economic life of fields. Companies don't make balance sheet adjustments on the basis of manifesto policy, but companies can highlight the potential impact. I can imagine that impact will be the basis of argument from the OEUK and individual NS companies.

Stevo12, thanks for the reference.

Stevo12, amongst all the recent noise I haven't seen any comment on removing the additional investment allowance.

What's your reference?

Romaron, I added my reference to the Drew Hendry interview and my take from it as a follow on from my post on Bressay.

For some time, I’ve been doubtful that the Bressay development would happen, largely due to the talk from Labour of no new licences, and partly due to my view that Enquest can’t finance it – particularly following the withdrawal of Equinor and Chrysor (now HBR) from the licence.

On the financing:

The news of RockRose’s investment put Bressay back in the frame. I feel the arrangement provides cover to RockRose if Enquest is unable to progress the development, while providing some incentive with the modest payment from cash flows. But importantly, it looks like RockRose are on board for a development providing gas fuel to Kraken as well as ‘an early production solution’, which I interpret as a low-cost development of Bressay with the Enquest Producer FSPO as part of the solution.

The deal with Equinor in which a contingency was payable by Enquest if an FDP was approved, suggested to me that Equinor saw a probability that the FDP might be a low-cost development with the EP and Kraken key parts of the solution. In which case, perhaps too small in scope for Equinor. Hence the contingency, which doubles under the ‘sole risk’ scenario. At the time I queried this with IR who described it as a scenario where Enquest gain an 81.6% interest in the field and Equinor receive an additional $15m in consideration/compensation for that purchase. There may be other terms under which this contingent is no longer payable.

The threat of Labour:

Although Labour has said that no new licences would be issued under a Labour government, I was unclear how this related to approval to move existing licences into development/production. I expected in-fill type developments to continue, but what about a new field development like Rosewell, Cambo or Bressay. The political reaction to the clearance for Rosebank indicated to me that a Cambo or Bressay would not get clearance from Ed Miliband as Secretary of State for Energy Security and Net Zero, under Labour.

Recent events including the news on a dialog between the Scottish First Minister and the Ithaca CEO, and the interview with Drew Hendry, indicate to me that despite the public rhetoric on the O&G industry we’ll see pragmatic implementation of energy policy once Labour take office, irrespective of what Ed Miliband’s supporters hope or expect.

Oopps

Drew Hendy, is Economy Minister. not Energy Minister. The topic was jobs and energy so I stand by my interpretation of his comments.

What happens to Bressay under labour?

The Scottish First Ministers has been making public statements against new O&G development, however, a freedom of information release strongly suggests that in private conversations with Ithaca’s (now Ex) CEO Alan Bruce, the First Minister was supportive of the Roswell project and by implication, Cambo to follow, as communicated recently by Ithaca’s interim CEO.

Yesterday, Drew Hendry, the SNP energy minister in Westminster, was questioned on the SNP’s stance on the recent licence awards given the First Minister’s public statements. To be clear O&G activities are not a devolved issue, so the FM views are not enforceable. It’s for Westminster to decide. I thought the (Westminster) SNP Energy Minister’s response to questioning was interesting, and I think it provides insight into Labour’s likely response in government.

Here's my take:

O&G developments, including the award of new licences, will be subject to tough, perhaps tougher, environmental considerations, probably the toughest in the world, but they will be permitted. That will be the sell to the ‘progressives’.

Onedb, as it says on the packet, the deal is ‘Sale of 15% interest in Bressay and EnQuest Producer FPSO’, but I think examining the detail of the payments is informative.

Let’s split the two interests:

FPSO

Following the initial payment £34.75 ($44m), RockRose own a 15% share of the FPSO. Assuming this payment is largely, if not fully, towards the purchase of the stake in the FPSO, it values the FPSO at c.$300m.

In the latest balance sheet, the FPSO will have a value within the $2,288m property, plant and equipment (PPE) total. I don’t know the valuation assigned to the FPSO, but the FY balance sheet will reflect 85% of the gross value of the FPSO, based upon its anticipated utilisation, which may be higher or lower than the previous valuation. This change in the FPSO’s valuation reflects the impact of the deal, including the $44m payment which is assigned to cash.

Bressay Field

In 2020 Enquest acquired a 40.8% interest in Bressay. “The initial consideration is £2.2 million payable as a carry against 50% of Equinor's net share of costs from the point EnQuest assumes operatorship. EnQuest will also make a contingent payment of $15 million following OGA approval of a Bressay field development plan. There are no gross assets or profit before tax associated with the assets.”

“The contingent payment increases to $30 million in the event that EnQuest sole risks Equinor in the submission of the field development plan.”

Equinor has now relinquished their 40.8% share to Enquest but presumably a $30m contingent payment is still due on approval of an FDP.

Chrysor (now HBR) has also relinquished their share, but I don’t know the terms.

Today, Enquest holds an 85% share in the Bressay Field and RockRose 15%.

The balance sheet probably still reflects, “no gross assets or profit before tax associated with the assets.”

I understand from previous commentary that while Equinor and Chrysor were on-board a substantial amount of progress was made on the FDP. The licence extensions require a submission by end 2024.

On approval of the FDP Enquest pay Equinor $30m. (This contingency may have been cancelled by subsequent events)

Assuming the project progresses to production, with EnQuest and RockRose each paying their share of CapEx, then RockRose will pay £11.25m ($15m) to EnQuest.

In conclusion, the deal implies intent to progress Bressay towards production, but essentially Enquest has only made a partial sale of the FPSO, will little other impact on the balance sheet. RockRose are on a carry to approval of the FDP.

However, confirmation of intent to progress Bressay adds value from an investor’s perspective. I understand there are environmental requirements around emissions which will impact Kraken’s future operation. I have 2025 in my mind as a key date. I also recall a statement that electrification of the Kraken FPSO wasn’t an option, so I’d guess Bressay gas offers a solution.

I meant to add (from memory) that the Pierce FPSO had a mooring issue, which is expected to be sorted this half year.

Performance at Captain, following the polymer work, is key to Ithaca's near term performance. This is from the latest update:

Captain Enhanced Oil Recovery (EOR) Phase II project now ~80% complete,

supporting first Phase II polymer injection into the subsea wells in H1 2024, with

the following activities completed in the quarter:

Drilling: Completed drilling operations of all three Area E polymer injection wells

and the commencement of drilling operations in Area D

Subsea: Completed laying and trenching operations of all flowlines and umbilicals

Facilities: Turnaround successfully completed including facilities upgrades in

support of EOR II project

Tornado10, good to know I'm not the only saddo looking at this stuff ;-)

I download the csv file and sort it in Excel.

I've done a similar exercise to yours, working the numbers for each quarter, but come up c5% short of Ithaca reported numbers (Q1,Q2 & Q3).

My Q4 sum is 63.1K boepd, which I correct to 66K boepd, for Q4 EBITDAX $371m.

I suspect I'm missing non-operated fields. Can you add to my list?

(The % is working interest rounding number. I have the precise number in my work sheet.)

Abigail ITH 100%

Alba ITH 37%

Alder ITH 74%

Arbroath REP 41%

Arkwright REP 41%

Brechin REP 41%

Britania HBR 32%

Brodgar HBR 6%

Callanish HBR 17%

Captain ITH 85%

Cayley REP 41%

Columba BD CNR 6%

Columba E CNR 20%

Cook ITH 61%

Elgin Total 6%

Enochdhu HBR 50%

Erskine ITH 50%

Franklin Total 6%

Godwin REP 41%

Harrier ITH 100%

Jade HBR 26%

Mariner EQUIN 9%

Montrose REP 41%

Pierce BP 7%

Schiehallion  BP 12%

Shaw REP 41%

Stella ITH 100%

Vorlich ITH 34%

Wood REP 41%

10% invested in a polluting o&g company.

the thick end of £0.5m donated to the tories.

a fiver on ****nal to win the fa cup.

ab has no shame!

In a recent post I expressed my views on the retail part of the business, which was the part in focus on the day, and concluded with the comment, “I now have enough information to maintain my interest and increase my exposure.”

I had been holding funds for an additional investment in H&T once I had some clarity on the 2023 numbers, however, when I reviewed other parts of my portfolio, I decided there were better candidates for investment.

I had been concerned by the additional funding last Nov to fund the growing pledge book, because I wondered about the merits of growth over margin. The comment in the trading update, “The Group has implemented changes to its pricing structure for pledge lending, in order to improve yield and generate incremental revenue.”, is unclear to me. The changes to the pricing structure may be positive, but when I’m unclear on something I become cautious.

The Hardman & Co Research note on the company is interesting and there’s little I’d disagree with, but the reduced dividend forecasts and wage cost pressures, which may persist under a Labour government, is sufficient for me to temper my own expectations, so rather than add to my exposure I’ve decided to exit.

I only post this to counter my previous, more bullish comment. I’ve no doubt H&T will return to 400p soon and beyond in the next few years. I just think I see better candidates for my investment.

I’ve learnt more about the pawnbroking industry than I ever expected and will look at the final numbers and prospects. But for the moment I’ll be looking in from a distance.

Stevo12, I agree with the detail in the list, but where does your 121% come from? It isn't obvious to me.

What part of my post is wrong?

Stevo12, you say. “What is the financial impact of Labour removing the additional allowance uplift (reducing the allowance from 91% to 75%)? “

It’s my working assumption that Labour will be elected and will remove the EPL additional allowance uplift at the start of 2025.

I have the additional allowance as this (from Gov guide notes):

EPL 35% Investment allowance 29% (for expenditure) £10.15 relief on £100 expenditure

Which limits the first-year capital allowance to 75%. However, I expect the investment allowance under the supplementary charge (part of the old regime) to remain.

Supplementary Charge 10% Investment allowance 62.5% £6.25 relief on £100 expenditure

This allowance can be claimed when the investment starts generating income.

In your example this equates to an allowance of $600m x 6.25% = $37.5m. The first year of taxable FCF is $180m. Deducting the supplementary allowance leaves $142.5m. Post tax FCF in first year is $73m.

Time to payback on investment of $150m is 2 years 9 months.

$73m + $45m = $118m (2 years)

(150-118)/45 = (9 months)

The payback (under Labour plans) is extended by 18 months, but then ‘FCF profit’ on the $150m investment stills runs at $45m p.a. as it would be pre-Labour.

I don’t think loss of the allowance under Labour is a fearful outcome.

Labour could increase the EPL to 38% to align with Norway’s 78% total tax rate, but my expectation is that it will be removal of the EPL investment allowance or an increase in the EPL rate, but not both.

An increase to 38% EPL reduces the ‘current’ $45m to $40m.

The problem with the UK’s O&G tax regime is that it’s unpredictable, and for some to a point where it’s uninvestable.

Sekforde, so you’ve swapped Mar – Jun production @ $80.

It’s interesting to speculate on hedging options, but it’s the company’s transactions that matter. Worth remembering that Enquest took 0.8m bbls of swaps @ $88, probably around the time of the $95 in Sept, so Enquest are alert to hedging opportunities.

Let’s see what hedging positions Enquest reveal next month.

For comparison, Ithaca revealed their hedging for 2024 (as of 20th Nov):

14,750 bopd hedged with a floor @ $77, including 5,750 bopd swapped @ $82. The balance is capped @ $87. Hedges are 62% weighted to H1.