Member Info for Megla

Very confident presentation by the CEO, CFO. Definitely a few hiccups in H1, but they do seem confident going forwards if they get the right fiscal regime.

One thing that’s now clear, is that Labour have floated the full removal of capital allowances against the EPL, which is why the OEUK document was produced and why the CEO describe it as a battle.

It really is despicable behaviour by Labour. Increasing a windfall tax when windfall profits don’t exist is bad enough, but removing the same allowances ALL other industries are able to utilise is absolute madness.

Hopefully some common sense will prevail come October.

Got to question the slide in the deck that basically says the cash balance is now wiped out.

We all know cash positions move up and down, why the need to highlight it?

Production at lower end of guidance, close to cash neutral position at the start of September.

Divi maintenance doesn’t feel like right decision when we need to escape the madness of the Labour Party.

What would be the value of the final dividend (per share) if the company hits its target of $500m shareholder returns for the year?

Sekforde,

I certainly hope you’re correct, but I think the 78% tax rate and the removal of investment allowance is now certain. With the only question mark being around capital allowances. Both changes have already been announced, so making a u-turn to the so called ‘proper windfall tax’ would be too politically damaging at a time when energy bills are going up and pensioners are loosing their winter fuel allowance.

Again, I hope I’m wrong, the 78% tax rate and removal of the investment allowances will be bad enough for the sector, but it might just allow some selective investments if the tax regime post 2030 was made clear.

Sekforde,

This type of analysis can only be done post budget. But assuming Auctus advisor’s assumption turns out to be correct (capital allowance cut on EPL to offset investment allowance on SCT) then your effective tax rate would be about 5% too low.

I have different assumptions for my numbers, more conservative on everything, but there’s nothing that I can see that stands out as being incorrect.

Alavib

I try not to worry about what the share price is doing. Yes the daily drops are frustrating, but given the current sentiment it isn’t all that surprising.

OEUK have put a solid document together, but up until it was circulated, I don’t think anyone seriously considered capital allowances would be fully removed against the EPL. I’m not sure I believe it’s a possibility now, but with the numbers in black and white and the CEO talking about run-off mode, maybe this has actually been floated by the gov. Increasing a windfall tax in an industry without windfall profits is bad enough, but this would be utterly insane from Labour.

In terms of buys & sells, I don’t understand the numbers. A trade is a transfer between a buyer and a seller so I’ve never understood why the values are different. Happy to be educated on this?

Agree on the divi, the yield is irrelevant provided it’s affordable. Anything more than a modest cut would be disappointing, unless the cash was earmarked for an acquisition outside of the UK.

NewKOTB,

I’m not sure we can read too much into his comments. Run off mode would be the default position for all companies if capital allowances are removed from the EPL. There might be some tax deals, maintenance capex etc, but the industry would effectively be done

The question for me is whether the full removal of the capital allowances is really on the table. Labour only talked about a reduction, which would be much less drastic than the EPL3 scenario in the document produced by OEUK.

It certainly feels like there’s zero hope of retaining a sensible tax policy, more just waiting to see how far the clowns in charge go.

“The chief executive of one of the North Sea’s biggest oil and gas producers has warned it may move into ‘run-down’ mode if the industry’s worst fears about the Government’s tax plans are realised in The Budget.”

This but this would be a logical conclusion if EPL3 doesn’t contain capital allowances. UK investment would be totally pointless.

For what it’s worth, I can’t imagine anyone would be that stupid, but then we are still talking about changes to a windfall tax when the windfall profits are long gone, so who knows.

Just my views, not bashing Enquest:

- Main asset is the tax losses

- $700m decomp liability

- High cost of debt

- Minimal FCF in H1 despite solid oil prices and tax payments made in H2

- No meaningful shareholder returns

- Complicated structure (profit share on Magnus)

I’ll probably have another look next year if they’re able to manage decline rates effectively.

NQM,

Great find. At the very least, the document is proof that the industry is finally collaborating in the hope of getting a fair result from the current government.

My main concern after reading the document is that EPL3 involves the full removal of capital allowances. This would be an astonishing act of self harm, which the document has spelt out better than I ever could. Buchan would certainly be toast under this scenario.

OEUK make the case clearly, whether the government believes it or not is another matter. And even if they do, how do they get out of the massive hole they’ve dug with all the proper windfall tax rhetoric?!

Harbour’s UK O&G assets have been all but nationalised by successive governments. No doubt they’ll be upping sticks (US listing) if Labour don’t thrown them a bone at the next budget.

I blame the COVID vaccine.

Tony,

The comment is from Auctus Advisors, there note is freely available on Serica’s investor relations webpage (linked below).

One thing to note, for the fiscal regime to revert, both oil & gas need to be under the stated prices for a period of two consecutive quarters, so unlikely to happen.

https://www.serica-energy.com/downloads/research/SQZ%2030.07.2024.pdf

Labour are incredibly hostile to O&G so it’s impossible to understand what they’ll do in October. The already announced tax regime will see effective tax rates of 80%+, probably closer to 90% for Harbours decomp heavy UK assets. Making it even more punitive by cutting capital allowance would be the final nail in the coffin.

One question that will likely remain unanswered in October, is what the tax regime will look like after 2030. We’ve already been told they’ll be a successor to the EPL, so the fiscal uncertainty will remain. Project economics will likely have to be based on the continuation of the announced regime so the likes of Buchan may have to be cancelled.

A logical lifeline for the industry would be to extend the green capex allowance to include all renewable developments. This would at least give company’s something to work with.

Bottom line, which we already know, Serica need to invest outside of the UK. FCF will be incredibly strong over the next two years is it works through its tax losses, after that it’ll drop dramatically.

Let’s see what the new CEO has to say next week.

Hopefully the divi will remain the same as H1 2023 (9p), this would go a little way to ease the pain of the sliding share price.

I cut to shareholder returns wouldn't be received well by the market, unless of course an acquisition has been lined up.

Notsofastyou,

I'm confused by your post. Are you saying people shouldn't be moaning about the tax that Serica has to pay? Or was this just a totally off-topic rant?

Agree with this Thunder.

Buchan would be around £200m-£300m of CAPEX for the privilege of paying an effective tax rate of around 85%.

I certainly hope the company can find better opportunities for the cash than that.

Not great news for Buchan, but not unexpected given the treatment of the sector by the Labour Party.

78% tax rate

Certain costs excluded as deductibles

Incentives to invest removed

No guidance of what the tax rate will be from 2030

Threats to remove capital allowances

What an absolute clown show.

Tony,

That’s a good way of summing it up. Although the company is in an enviable position to be fair. With a cash positive balance sheet and available credit lines it can move on a deal with relative ease, it’s just finding the right assets outside of the UK, and of course, not overpaying.

I would be very much in favour of Serica buying I3E (or a merger), I had it on my watch list for next year once LNG export capacity had been built out, so I’m disappointed it’s been bought out at the current price. I understand why management have accepted the deal given current gas prices in North America, but the buyer is one that’s getting the better deal imho.