Member Info for Megla

"it looks like Labour’s making some big changes for the North Sea oil and gas sector, and while there’s a lot of worry about what it’ll mean, it’s not necessarily all bad."

Maybe ask ChatGPT to explain why Labour's policy change isn't all bad, or better still, write your own posts.

Thanks Tamovv, appreciate the explanation. Great for the workers, but not much of a concession for the industry,

Labour have all but killed the sector already, the budget is basically just how quick the decline will be.

We already know they've committed to no new licenses, a 78% tax rate (where certain costs are excluded as deductibles against the SCT and EPL), removal of the investment allowance and a potential reduction in capital allowances against the EPL.

If capital allowances are cut to zero, then they'll be next to zero new investment in the North Sea. If capital allowances remain, they'll probably be enough skin on the bone for selective investments to proceed. Anything in the middle then who knows.

Thankfully, Serica have a bunch of tax losses that will shield them from the insanity for a good few years yet.

Hi Tamovv,

What's the 'Green Pass' that you refer to in your post?

1000% agree.

It’s utterly insane that the county has a £1bln investment being held back because the operators don’t know what the fiscal regime will look like in 15 days time, never mind 2030.

Absolute clown show.

Hi Tamovv,

Yesterday, I had a response from IR on payment of CT and SCT. They do not foresee any material payments for the next few years. So although that doesn’t sound like it’s zero, it is much more promising than what I excepting. I will tweak my model post budget and see what comes out.

Why Chris Wheaton decided to review the price target pre budget is a real mystery, especially given how close it is. He is very well respected so I would like to understand the assumptions that’s he’s used - I’ll have a dig around and see if I can find anything.

Given the latest downgrade and the likes of Serica struggling, you have to wonder whether capital growth in the sector is now limited.

I say this because Ithaca & Serica are both in similar situations. They can both make mountains of cash whilst the tax losses last. But after that, and especially for Ithaca with its decomp bill, FCF will drop dramatically unless the tax regime is changed. My preferred method of valuing independents is on an FCF multiple rather than EBITDA, so post tax loss utilisation my valuation would drop significantly (other valuation methods can be used).

Obviously the caveat to that is that as an investor you’ll get some incredibly generous dividends over the next few years, but without a change to the tax rules, the only real winner in operating in the UK will be HMRC.

If a new company drills an unsuccessful well in the Norwegian North Sea, they receive cold hard cash back from the taxpayer.

It’s that secure, capital markets will allow you to borrow against that promise.

On the other side of the North Sea, Labour have convinced people that allowing company’s to offset capex against profits is a subsidy that needed to be removed, leaving the industry at a total standstill.

It doesn’t exactly inspire confidence in UK PLC.

Rachel Reeves “This will be the most pro business government the country has ever seen.”

Puts 200k O&G jobs at risk by threatening to tax the industry into oblivion.

But yes, hopefully we’ll get to keep capital allowances, which will leave a 78% tax rate, where certain costs are excluded as deductibles and with no sight of the actual tax regime from 2030 onwards. Absolute clown show.

Anyways, busy month for the company, divi, budget then a trading update early November where no doubt the outcome of the budget will be mentioned.

Terry,

I’m not going to defend either party, they’ve both been dreadful for O&G. Norway must think we’ve gone totally mad as they see record investment in their side of the North Sea.

The government can’t escape the OBR forecast (regardless of accuracy) so I don’t believe Rachel Reeves will announce an O&G fiscal regime where the OBR have predicted it’ll lead to lower tax receipts, thus if the OBR agree with the OEUK (I have no idea if they will), the worst case would be avoided.

The fiscal regime will still be ludicrous, there’s no arguing against that, but the market is pricing in the worst case scenario so anything else could see a decent uplift in the share price.

I bailed too soon, so glad to be able to buy back lower. Year-end mark up could provide a decent return from these levels.

Terry, the only thing you’re doing is bashing the government and government agencies. They might deserve it, but it is just a political rant.

Regardless of what you think, the government will make an assessment on the O&G fiscal regime, this will be used to determine a level of taxation. This level will be far too high, but might still allow some investments to proceed, which is what I’m interested in as an investor.

More of a fundamentals type guy, but now it’s broken the uptrend, what area is looking like a good re-entry?

Terry, I think this is a more a political rant than anything else so I’ll bow out on this one.

Yes, Terry.

The same OBR that, despite its challenges, will produce an assessment of the O&G fiscal regime, which the government will consider in its decisions making process.

But again, I don’t think you’re interested in staying on topic.

Terry,

You’ve totally missed the point about the OBR’s forecast, but then, I don’t think you really wanted to discuss the O&G fiscal regime.

Serica should operate in stable countries where they get the best return on investment, they’ll be able to work this out post budget.

What does make sense is tax deals, which is why the industry needs to consolidate. Enquest and Serica need to merge, not just for the tax losses, but so they have scale to invest in the future.

The document produced by OEUK compares the current fiscal regime (EPL2) against what has been proposed by Labour (EPL3). If the OBR’s analysis comes to the same conclusions then the worst case scenario will be avoided. No political party would implement a policy that would reduce the tax take over the forecast horizon at a time when tax revenue is in focus (imho).

The document suggests that keeping the current tax regime would be more beneficial than what has been proposed, but no doubt they’ll be a middle ground where the tax take increases, but investment still proceeds, which is likely the announced regime but retaining capital allowances.

I have spoken to IR about this, they considered a good result from the budget a retention of the status quo, but believe a realistic good result is keeping capital allowances. I guess we’ll find out in 3 weeks.

**Free to read OEUK document for those that missed it first time around**

https://oeuk.org.uk/wp-content/uploads/2024/09/OEUK-Impact-of-UKCS-Fiscal-Policy-on-UK-Economic-Growth-Autumn-2024-Analysis.pdf.pdf

Tamovv,

Thanks for posting. The big unknown (for me) is taxes, which is causing the big disparity in our numbers. Assuming Ithaca doesn’t have to pay any CT or SCT then my numbers aren’t far away from your own.

Did ENI have any tax losses that would be inherited with the assets? I’ll ask investor relations whether they expect the company to pay EPL only over the next few years.

Ithaca has billions in tax losses but where they can be used is often complicated. I had assumed we’d pay an element of CT and SCT, which if incorrect, definitely makes the current price very interesting.

Thanks Tamovv

“Ithaca is expected to generate some $211 million of free cash flow this year, $879 million in 2025 and $766 million the year after that.”

Can anyone make sense of the FCF number? I can’t get anywhere near it with my numbers. It must be pre tax, or pre capex, which doesn’t make any sense as a FCF number.

Also, what is the point in releasing some analysis when we’re just 3 weeks away from the fiscal regime being confirmed. There’s still the huge question about capital allowances to be answered.