Member Info for Megla

Following the previous announcement from the chancellor, we already know the EPL will increase to 38% (total tax rate of 78%) and that the investment allowance will be removed. So what now is ‘good’ outcome from the budget for the industry?

- Retaining capital allowances against the EPL?

- Investment allowance for renewable investments?

- A more forgiving tax regime from 2030?

- Interest and decomp to be included as deductibles against the EPL?

Sekforde,

I don’t believe the board have talked about numbers that don’t match their forecasts. My numbers definitely need to be taken with a pinch of salt, they don’t take into account changes to capex, interest, OPEX , decline rates etc, they’re only there to highlight that oil is provided the vast majority of the company’s free cash flows due to the tailwind assets being partly shielded from the madness of the Labour Party.

All hypothetical at the end of the day. Maybe we’ll get a surprise in October that provides some upside to the boards estimates. Have a good weekend.

Due to non-IFRS, otherwise would have been 56%.

Sekforde, that’s incorrect.

Gas will be taxed at 78% from November.

Oil is taxed at 38% from November (whilst tailwind tax losses last).

10p a therm is an extra $7.50 per boe, HMRC take $5.85, we get to keep $1.65. Over the 4 years forecast horizon (assuming 8m BOE per year) it’s an extra $52m in cash flow.

For every $5 of oil profit we get to keep $3 per barrel. So taking the forward curve for oil at $70 we’d lose $96m in cash flow (8m BOE per year).

So net loss would be $50m’ish based on the current forward curve.

To be fair, no one knows what O&G prices will be, so this is all a bit pointless really.

Sekforde, your numbers have no relation to what that the board have provided:

“A $5 change in oil price and a 5p change in gas price in combination would result in $90 in incremental cash flow”

Oil is price is currently down on those numbers, gas price are currently up but have an effective tax rate of 75%. These are also spot prices, forward curve is vastly different, especially for Gas, which is lower than the 80p in lots of periods over the forecast horizon.

Sekforde,

I don’t follow your logic here. Remember oil is part of the Tailwind assets so due to the tax losses is taxed at 35%, whereas Gas is taxed at 75%.

All Serica provided was a guide based on simple assumptions, you’d have to drill deeper to work this out correctly.

Moreover Serica isn’t mostly Gas, the weighting will likely be over 50% Oil next year due to resolution of issues and this years investment programme.

Deeks,

It’s still in place. Hopefully it’ll be increased inline with inflation as well. To note, both Oil & Gas need to be under a certain threshold for two straight quarters for the EPL to be removed. Problem is, the threshold are so low that it’ll be tough for it to be ever triggered. Although I do think Gas will get cheaper over the coming years as LNG export capacity grows, particularly in North America.

If NAV is 180p and you pay 180p you don’t anything for free (in terms of assets), which is why I think it’d be crazy to make a move before the budget.

The big issue is that cash flows drop off a cliff when the tax losses are fully utilised. So even though the company has potential to make lots of cash very quickly, it drops dramatically when they’re gone.

Okay, you’d get a good company, credit lines and the potential for some sanity to prevail in terms of fiscal policy, but I just don’t see a bid until everything is known. Will be happy to proven wrong of course.

Why would they when they don’t know the fiscal regime from November, never mind 2030?!

Assuming capital allowances are removed against the EPL (worst case scenario) Auctus have NAV around 180p. Mercuria would have to offer that amount to get a yes vote, so there’s no real incentive to bid at this stage. If captain allowances remain, and the share price stays low, then they may make an approach.

Totally needless as well.

One side of the North Sea (Norway) is powering forwards with record amounts spent of exploration and development. The other side hasn’t drilled a single exploration well whilst it awaits the 4th change to the fiscal regime in two years. And the sad thing, killing our own industry will cost jobs and tax revenue, but will also ensure CO2 emissions are higher as we import LNG from the likes of Qatar and the US.

The adults are definitely back in the room. Sigh.

Pete,

Serica are best placed to mitigate the madness of the UK government, but they’re still impacted by the negative sentiment.

There’s plenty of focus on the October budget, but even if we get to keep capital allowances the industry is screwed. I know there’s some Labour voters on here that like to put a brave face on things, but the effective tax rates from the already announced regime will render UK investment all but pointless, and company’s will pivot away at the first opportunity.

Once the October budget is announced, Serica need to be clear about their future strategy and shareholder returns policy. It goes without saying that once the tax losses are fully utilised, FCF will drop dramatically, (along with the dividend) so they a longer term plan.

Expensive debt and high decomp, exactly the company you don’t want to buy with the fiscal regime dreamed up by the current clown show.

“As the worst case is not going to happen….”

No one can say this for sure. Check out the CFO’s LinkedIn, he posts regularly on the topic. One of his recent posts was in reply to someone who thought the removal of capital allowances was set in stone.

“Common sense will prevail”

Three different tax elements, giving a combined rate of 78%, no investment allowance against the EPL, interest and decomp excluded as deductibles ensuring effective tax rates much higher than 78%, and possibly over 100% in certain years. Company’s significantly better off with lower energy prices (triggering the removal of the EPL).

Failing some form of u-turn, this is the best outcome from the October budget. Now maybe someone could explain how any this is ‘common sense’ and not a complete an utter clown show?

The sector is in wait and see mode for the budget, although I would probably argue that the current share price takes into account the worst case outcome.

Labour are killing the sector, the question is, will they be stupid enough to fully cut capital allowances that will basically end most investment in the UK?! All at a time when Oil trades at 74 bucks a barrel.

A balanced autumn statement?! Maybe if you forget the prequel where Labour increased the tax rate to 78%, canned the investment allowance, told us they’ll be a successor to the EPL and left a chopping block over the industry by threatening to remove capital allowances. All without zero consultation and at a time where energy prices are back to (or below) inflated adjusted norms.

I win now from the Autumn statement is retaining standard allowances and getting some clarity on the tax regime from 2030, but the damage from an industry perspective is already done. Only company’s that retain tax losses can produce any meaningful FCF from their operations in the North Sea, everything else is very much marginal.

Serica is a freak company, it has limited interest costs next to zero decomp liability and a billion in tax losses. It will do well (at this share price) regardless of what the clowns in charge decide.

Sekforde,

Sercia’s net cash position is a differential between the other midcap UK listed O&G company’s, along with the available credit lines it means that can move quickly on an acquisition. I don’t have any problems with the cash balance reducing due to high capex (whilst investment allowances are in place) but your proposal of using borrowed money to fund buybacks isn’t something I would ever support.

Let’s not forgot, once the tax losses are fully utilised the dividend will need to be cut substantially if the business hasn’t managed to find a suitable acquisition.

I fully expect the company to build cash new year as capex reduces and production hopefully increases on the back of this years investments.

Sekforde,

The company spelt out what we’ve been saying on the here for the last couple of months. Free cash flow in the short-term will be equal to the market cap, so the company is still very much mispriced. They also based their assumptions on the worst possible fiscal scenario, so this estimate could prove to be very conservative if Labour listen to reason.

On reflect, my only real concern is that net cash will fall year over year. I appreciate this is a high investment year (which is smart given the current allowances) but it does call into question their desire for a grand overseas acquisition.

Auctus have reduced their projected year-end cash net cash position by $90m, which will be one of the reasons the share price has fallen today.

Https://www.serica-energy.com/downloads/research/Auctus%2010.09.24%20HY%20results.pdf

For those that want to take a read…..