Member Info for Megla

Pete,

I don’t follow your logic here. Why do buybacks only benefit the board and CEO?

Serica’s share trade under the NAV, therefore buybacks are incredibly good way of returning value to shareholders. Yes, you don’t get the money in your pocket, but the share price should (eventually) respond.

If it was up to me, I would have cancelled the interim dividend already and be buying back shares.

Sasa,

Markets hate uncertainty, which is what we’ve got in abundance with Labour springing the reduction in capital allowances surprise.

Once that uncertainty is gone then the share price should get back to level that reflects its true valuation, which of course will be dependant on what Labour announce in the budget. Assuming it’s just a bit of tinkering around the edges rather than anything drastic, then it could be a positive catalyst for the share price even without any concessions.

A nearer term boost could come from the interim results, it’ll be the first time we’ve heard from the new CEO, so will good to understand the current shareholder returns strategy (I’m massively in favour of buybacks over dividends at the current share price) and whether there’s been any progress on the M&A front.

Couerdelion,

Our views on here make zero difference, I’ve spoken to my MP and IR about the changes, but even that is mostly pointless. The industry is lobbying the government hard to get an outcome that has the least impact on the sector. Unfortunately it’s already a twilight industry (all whilst Norway is seeing record investment) but maybe they can ensure there’s enough left on the table for the likes of Buchan to get the go ahead.

Why you want to shut down discussion on this is the confusing part. People are going to be frustrated, they’ve bought a solid company with a strong balance sheet and are seeing their investment get hammered by the clowns in charge. Where better to vent those frustrations than a forum, which sole purpose is to discuss the company?!

Moreover, there is still a range of outcomes that could be announced in the October budget. This will range from making investment in the UK totally pointless, to a small tweak that offsets the investment allowance on the SCT. Discussions on this are on topic and in the right place.

Couerdelion,

You’re mistaken, no one can argue whether the governments tax policy is right or wrong because we don’t know what it is yet!! The big problem is the potential reduction in capital allowances, which could be disastrous for the industry. This is why there’s so many posts on the topic, including people expressing their frustrations with the current government.

Imagine trying to plan a $200m CAPEX programme without knowing if the investment will be profitable, that’s what Serica are expected to do whilst Labour play politics (oil & gas giants bull****) and decide on how big the tax grab will be.

We’ve certainly come a long way when a ‘capitalist purist’ is someone that argues against insane levels of taxation that would cripple an industry that supports 200k jobs and pays billions in tax revenue.

Brutal writeup by Kelty, but 100% correct - 78% tax rate, certain costs of doing business excluded as deductibles, massively reduced investment allowance, and now they want to put the final nail in the coffin by reducing the capital allowances. Labour are an absolute clown show.

“This is utter economic insanity and the additional revenues raised will be a tiny fraction of the amounts claimed by the Chancellor. While the virtue-signalling points raised will be significant, the clear takeaway is that the new Government has zero understanding of the energy transition, energy security or markets.

The irony is that this policy will mean that the ‘hard-working people’ of the UK will face both higher energy bills and taxes to pay for the expensive renewables promised and the vast amounts of imported fuels needed, whilst also increasing the risk of blackouts and fuel shortages.”

All whilst Norway is seeing record investment.

https://www.reuters.com/business/energy/norwegian-oil-companies-further-boost-investments-2024-2025-2024-05-28/

Sekforde,

I’d also be very happy with that, an average of £175m over the next two years is more than the current EV.

Auctus analysis is very good (ignoring 2027 onwards) but the point still remains the same, this has been built on assumptions and we still need confirmation from the clown show before accurate FCF predictions can be made.

The assumption from Auctus is that the capital allowance will be reduced by enough to offset the investment allowance on the SCT. They haven’t mentioned anything about potential changes to the first year capital allowances.

Sekforde, your analysis is too simplistic, read the latest broker note by Auctus. They have about £175m of FCF for next year based on their revised assumptions.

The point is, they’re just assumptions. We don’t yet know what we’re going to get, and we certainly don’t know how that will impact on capex spend. Basically, it’s just guesswork at this stage.

The Labour clown show rubbles on until October.

Sekforde,

I agree with the sentiment of your post. Serica is undervalued. It will likely produce more in FCF over the next two years than the current enterprise value.

However, we just don’t know what the fiscal regime is going to look like yet, so accurate FCF forecasts are impossible. There’s also a chance that the first year capital allowance will be canned in favour of a multi year depreciation style approach. Along with the cut in capital allowance, this would further reduce FCF generation in the short-term.

Let’s see what the Labour clown show have in store for us in October.

the entire industry should postpone all but essential capex until changes to the fiscal terms are known. releasing the occasional nicely worded statement is just falling on deaf ears. if investment is cut, the obr have to take this into account when doing their projections for tax revenue.

it does feel like the entire industry is asleep at the wheel, just bending over a barrel and taking everything that successive governments throw at them. do the unions not care about the 200k jobs that the industry supports?! or are they happy to buy lng from countries thousands of miles away at the expense of uk jobs.

i really cannot believe we’re in a situation where energy prices are back at inflation adjusted norms, and yet the ‘windfall tax’ is going to be made more punitive for the 4th time!!

the conservatives were bad, but this labour government are an absolute **** show.

If Auctus are correct (we have no idea if they will be) the capital allowance against the EPL would reduce to around 80% of CAPEX. So for every £1 in CAPEX, the tax bill would reduce by 76p, which would be comparable with Norway.

So for next year couple of years, Serica’s effective tax rate would be roughly 60%, rising to just over 80% once the tax losses are fully utilised (interest isn’t deductible for SCT or EPL).

Serica would be okay, but companies with high interest and decomp costs would find their effective tax rates much higher than the headline 78%. Norway allow both decomp and interest as deductibles so the 78% is what you actually get.

I guess we’ll find out in October.

The industry has to stick together on this, there’s a real chance that a sizeable reduction in the capital allowances (against the EPL) would lead to a premature ending for the industry.

I’m sure there’s lot going on behind the scenes, put it appears that the government isn’t going to listen until they understand the consequences of their actions.

For that matter, every company operating in the North Sea should cut non essential capex until there’s clarity on the tax regime.

“We should run down our UK assets with as little spend as possible and merge with Kistos concentrating our spend in Norway and the Netherlands.”

Totally agree with this. The industry needs to pack up and move on. There’s no point trying to engage with a government that’s hell bent on destroying the sector.

Flexmw,

The last paragraph is the great unknown, leaving an industry in a state of flux for several months is disgraceful behaviour. Serica have to try and plan a $200m CAPEX programme without knowing what the fiscal regime will look like.

The UK was crying out for good leadership, it got a clown show.

Couerdelion,

The investment allowance was there to ensure company’s continued to invest in the face of an eye watering tax rate of 75%. Increasing the tax rate to 78%, removing the investment allowance AND potentially reducing the amount of CAPEX as a deductible against the EPL is anything but fair.

There isn’t a suspicion that capital allowance might be reduced, they’ve literally told us just that in the briefing document. The reduction could range from making investment in the UK totally pointless to a small tweak that will still allow some new developments to be profitable.

“”The government will also remove unjustifiably generous investment allowances from the Energy Profits Levy, including by abolishing the levy’s main 29% investment allowance for qualifying expenditure incurred on or after 1 November 2024. Expenditure incurred prior to making the changes on 1 November 2024 will not be affected. As part of this, the government will also reduce the extent to which capital allowance claims (including First Year Allowances) can be taken into account in calculating levy profits.””

Couerdelion,

The capital allowance is basically just CAPEX spend. This is included as a deductible when calculating profits. For O&G this is typically in the year the money was spent.

EBITDA = £700

CAPEX = -£200

Taxable profit = £500

The investment allowance is basically a CAPEX uplift, for the EPL this is currently 29% (soon to be zero). So the more a company spends, the bigger the reduction in taxable profits.

EBITDA = £700

CAPEX = -£200

Investment Allowance for EPL = -£58

Taxable profits = £442

The concern here is that they’re going to “reduce the extent to which capital allowance claims (including First Year Allowances) can be taken into account in calculating levy profits.”

No one knows that this means yet, but say they only allowed 50% of capex as a deductible, the EPL example would like this:

EBITDA £700

CAPEX = -£100 (half the £200 actual spend)

No investment allowance

Taxable Profits = £600

We basically have to wait until October to find out what this means.

Increasing the tax rate & removing the investment allowance against the EPL is unwelcome, but expected given it was in the manifesto.

The real concern is the reduction/removal of CAPEX as a deductible. If they remove all CAPEX then investment in the UK is dead, they won’t need to worry about issuing new licences.

The problem for SQZ et al is they have no idea what this is going to be, so yet again businesses are supppsed to plan hundreds of millions in CAPEX without knowing the fiscal regime that the investment will spent under. It really is despicable how the industry has been treated.

The EPL isn’t part of the permanent regime. What they’re talking about here is removing/reducing CAPEX as a deductible when calculating EPL profits.

“As part of this, the government will also reduce the extent to which capital allowance claims (including First Year Allowances) can be taken into account in calculating levy profits.”

This is the concerning part, it appears that they’re considering removing CAPEX as a deductible for the EPL.

“and by reducing the extent to which capital allowances can be taken into account in calculating levy profits”

Couerdlion,

Agree with your post, it’s impossible for the market to price Serica correctly when we simple don’t know what Labour are going to implement.

Even on the latest broker note (pg22) the analyst has had to list four different fiscal regimes to understand the potential FCF and associated NAV of the assets.

The brokers ‘expected’ scenario, which values the company at 313p, assumes the removal of the investment allowance (loophole) on both the EPL and SCT. Personally, I think the removal will be limited to just the EPL, which would leave just enough meat on the bones for some developments to be sanctioned.

The sad thing is that the company would be better off under the ‘low commodity price’ scenario, which shows just how ridiculous this so called windfall tax is.

(Broker note that is freely available is linked below)

https://www.serica-energy.com/downloads/research/SQZ-IC-26.06.24.pdf