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Couldn’t agree more, Happy. This a pathetic attempt to address the problems in the industry. How can we have a scenario where at higher prices can equal less free cash flow? Can you imagine trying to run a business under this scenario. Utterly absurd.
People are easily pleased on this forum. The changes are marginally better than nothing, but they've still screwed the industry.
Literally, a penny difference in the Oil or Gas price could be the difference in hundreds of millions of pounds in tax. This is utterly ludicrous. A higher price should mean more post tax profits, we're now in a situation where it could be substantially lower. I'm sure everyone would agree that income tax rates being marginal makes sense, so why can't it be the same for O&G companies.
Granted the floor price helps in the extreme downside scenario, but this is still going to cripple FCF at current energy prices.
Any changes surely has to be more sophisticated than a simple floor price [1] where the tax is either applicable or not. A $1 difference in the price under that scenario could mean, in Harbour’s case, paying hundreds of millions in additional taxes. Moreover, what would the floor price be based on, Oil or Gas prices?! Would it be marked prices or an individual company’s realised prices?!
The tax needs tweaking, I just hope they’ve actually thought about it this time rather than implementing another knee jerk reaction now prices have dropped.
DD, I doubt anyone expected the share price to rise massively on just news of the talks.
With current energy prices we’re getting the scraps, whilst HMRC are getting loaded with cash on the back of the company’s hard work. That hasn’t changed.
Harbour are rightly looking at options should nothing change in the UK, that alone isn’t enough to make a material difference to the share price. In my view of course.
Ideally, all major North Sea Oil & Gas producers would boycott the licensing round. The windfall tax is utterly ludicrous at these energy prices and they should be letting this known by not participating.
We’ve got a similar tax rate now to Norway, but without all the allowances that come with taking a development to production. The UK has got this hopelessly wrong and it needs to change.
Not sure about all businesses, the super deduction (125% of capex) is hugely favourable for most companies.
Unfortunately, we only get 91% and Labour want to remove/reduce that.
Losing the Harbour listing would be another unintended consequence of the ridiculous windfall tax.
GoCPI, agree with what you’re saying. Although I would say Harbour’s shareholders have the potential to benefit immediately. The combined group will be a big player and the valuation metrics, which are better across the pond, should recognise that.
It can’t be a merger of equals, so I guess it all depends on what the percentage split of equity would be for us to determine whether it’d be a good deal or not.
Personally, I’m instantly in the favourable camp. The UK is becoming a dreadful place for O&G companies, with Labour expected to make it eve worse, so diversify away from the UK makes a lot of sense.
It does read that they’ll only allow existing O&G licences to be utilised, so not sure there’s any rowback in that statement.
The real damage will come from increasing the tax rate and doing away with the investment allowance anyway. No one in their right mind is going to invest in an industry with a 78% tax rate, where you can’t offset CAPEX. Labour are an absolute clown show.
Dennis, you’re right of course. At some point they’ll be a recognition that their proposals are absolute fantasy.
The problem is, and assuming Labour win the election, how much damage will they do to O&G firms before they come clean?! It really is frustrating that we have a shadow chancellor saying they’ll increase taxes further, even when prices are back to inflation adjusted norms.
As you alluded to in an early post, the problem is basically household bills. Consumers/businesses are still feeling the pinch, so it’s very much a vote winner to talk about further taxes and redistributions. If bills fall, then maybe there can be some sensible discussions about tweaking/removing the tax.
Upomega,
Why is it too late to hedge for next year? The forward curve is above £1 per therm for all of next year. When the energy price cap gets lowered next month, energy supplies will start bringing out switching deals again, which will give producers plenty of opportunity to hedge (if they choose to).
The problem is still the EPL though, at £1 per therm and $75 oil I have FCF at about $300m. With normal gas prices (70p a therm) and no EPL the company would have produced nearer $400m of FCF. So basically the so called windfall tax isn't just a windfall tax anymore.
The good Doctor has a point.
With bills still x2 what they were, scrapping the tax doesn’t seem like an option, it’s just too politically toxic.
However, tweaking the tax by increasing the headline rate and removing the investment allowance is a possibility. All whilst introducing marginal rates for the EPL based on certain realised prices. Where there’s a will there’s a way.
Upomega, I can give you a FCF estimate for next year if you give me an O&G price to use? The forward curve for Gas is above £1 per therm for next year, so theoretically Serica could hedge at those levels.
I DO NOT want this to happen. But there’s always the potential that Gas does a moon shot in winter again. A couple of weeks of snowy, still, below zero weather and Europe is stuffed.
Personally, I would prefer normal pricing but with the EPL removed, not sure we’re going to get that though.
Great article, particularly like the last paragraph basically telling politicians to stop being children.
No new O&G licences is bad, but let’s not forget Labour also want to increase the EPL and do away with the investment allowance. The impact of that alone would be disastrous for the industry.
Kistos CEO talking about the windfall tax (EPL). Definitely worth a listen, even if he is just spelling out what we already know.
https://twitter.com/kistosplc/status/1664225983317114880?s=46&t=uz3in5yMdDdYvqnOjeh9vg