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Interesting comment from Equinor on Rosebank:

**If the UK fiscal regime changes again with higher taxes, Equinor will “need to look into what we want to do further with the Rosebank project,” Mathieu told Reuters.**

https://oilprice.com/Energy/Energy-General/Equinor-Warns-Windfall-Tax-May-Discourage-Its-UK-Investments.html

The market is the one being mad?!

Just a few weeks ago we were told the current ludicrous tax regime would be made even more punitive, with the removal of the investment allowance against the EPL and the headline rate of tax increasing to 78%. These changes on their own make UK investment marginal at best.

In addition, we were told that the government might reduce capital allowances (at a time when comany’s are trying to plan next years budget) which would further increase the tax take.

The government has also told us there’s going to be a successor to the EPL when it runs out in 2030, this further complicates investment decisions because we simply don’t know what the tax regime is going to be a after 2030.

Now we also have the complication of company’s having to justify the use of their product for any new developments. This might end up being a formality, or it might prove more difficult. It’s definitely being viewed as a win by the environmental groups so who knows.

Even with all the above, O&G will continue to be produced for decades to come. There’s still some post tax profits to be made, particularly for those that retain tax losses, but any new developments are now very much questionable.

The market is simply just reacting to these events, yes sometimes it overshoots, but there are good reasons for the current dreadful sentiment.

Dennis, it is nothing short of madness.

Buchan sign-off has definitely got a lot more complicated following today’s decision. Given the project economics have deteriorated further with the tax changes, you’ve got to wonder if the board will even try to progress it.

As much as I like optimism, the tax rises have already been announced. From November, the tax rate is 78% with no investment allowance against the EPL and where decomp and interest are excluded as deductibles. Basically, 80%+ tax rates for those without tax losses.

The only thing in doubt is the reduction in capital allowances, which is currently being consulted on. Keeping these would be a very small concession to the industry, but the damage is already done.

Serica need to move away from the clown show at haste.

Basically, the industry is

Tony,

Just my views:

If the business retained all FCF for the next two years (2025/2026) the enterprise value would be negative (assuming stable production and energy prices). This is clear miss pricing in my view.

Management paid too much for the Tailwind assets, new CEO now in charge.

UK government tax regime is utterly ridiculous, but Serica are the least impacted due to the combination of tax losses, low interest payments and a limited decomp liability.

The dividend policy will likely be adjusted at the H1 results (10th Sept). I’d be happy to get another big payout, but I’d also be happy to see the company retain cash to escape the UK.

There's zero chance Serica is going to max out its credit lines to buy a UK focused O&G company.

A merger might be a good idea (75% Serica 25% Enquest), but that's it.

The demise of the North is already guaranteed based on the tax regime that has been announced by the so called “grown-ups”. A 78% tax rate, with next to zero incentives, and where certain costs can’t be excluded when calculating pre tax profits. All leading to effective tax rate of 85%+ for any company that has interest and decomp (no tax losses).

No new equity isn’t going to flow into the sector, debt will become even harder to come by and company’s will invest their cash where they can get a better bang to the buck. And this is before the “grown-ups” decide if they want to reduce capital allowances, which is something EVERY other industry takes for granted.

Dennis, good post.

Labour have backed themselves into a corner with their rhetoric. They’re now getting lots of stick on social media due to increasing energy bills and removal of winter fuel payments away from pensioners.

Given their stance on windfall taxes prior to the election, they’ll likely want a headline from the budget to show just how tough (stupid) they are. Those headlines will hopefully just come from what’s already been announced, with the headline rate of tax increasing to 78% and the removal of the investment allowances on the EPL.

Imho the best we can hope for is that they leave capital allowances alone, which would leave an effective tax rates of 80%-90% depending on levels of capex, interest and decomp. Thankfully Serica will be protected from that insanity for a couple more years due to the tax losses.

One argument I came across recently. If Gas is only 30% of electricity generation (so far this year) and renewables are supposedly 8 x cheaper (Labour before the election), why is electricity 4 x the price of Gas per KWH?! Obviously we know that the 8x cheaper stat is nonsense, but the electorate isn’t going to be happy that they’ve been lied to.

With energy bills rising and the winter fuel allowance being canned, I doubt RR will be brave enough to change her mind on this ludicrous tax regime.

The big question is what will they do with capital allowances, a big reduction there and its game over for the UK O&G industry.

Dennis, given the current share price and anemic volumes it looks like a lot of people have already thrown in the towel.

If lunatics in the Labour Party do cut capital allowances then I’ll be looking for an exit also. There’s no money to be made in an industry that has to pay effective tax rates of 78%+.

Mercuria standstill agreement ends on the 21st September.

If I was them, I’d be readying a £2 per share offer for when the tax regime is fully known. Assuming Labour don’t be completely destroy the sector of course.

Interested in people’s opinions on the fundamentals following Labour’s announcement on the tax changes for the industry.

Previously, Ithaca was well protected from the EPL due to the high UK CAPEX. With the investment allowance being removed and a potential reduction in capital allowances, the tax bill is going to increase.

For 105k production and £700m in CAPEX, I have between $300m - $400m of FCF, which wouldn’t be enough to pay the suggested dividend without using lines of credit (which would be a terrible idea). Moreover, FCF includes the use of tax losses, once utilised FCF would drop further.

For reference, I’m assuming the capital allowance on the EPL is reduced to 80% of CAPEX (enough to offset the investment allowance on the SCT).

Thoughts?

Sekforde,

Assuming the tax changes aren’t too onerous, I agree. Aside from the usual caveats (energy prices, stable production etc) having a company that could have a negative EV within 2 years is crazy. Clear miss pricing by the market due to the dreadful sentiment.

Harbour have done a great job of diversifying away from the UK, they have a business of scale and full of opportunity. I would prefer this approach to anything in the UK, which is sadly dying a slow death.

Sekforde, obviously we still need confirmation of the final fiscal regime. But I agree with the point you’re making about the company being undervalued.

Serica is one of the lucky ones, anyone operating in the North Sea with high interest, high decomp and no tax losses has basically seen their assets all but nationalised by this crazy gov.

Shareholder returns are personal preference, but not buying the stock back when the company is trading at huge discount to its intrinsic value is a mistake in my view.

Couerdelion,

This was your comment:

“We can argue to for ever on the rights and wrongs of the government's tax policies but I fail to see what purpose it serves on this board”

Tax policy impacts fundamentals, which impacts valuation. That’s why it’s discussed so much. It really isn’t difficult.

The low carbon investment relief already exists, it applies only to the company’s assets so is very much limited in use. Now expanding its use would be a lifeline for the industry, but I won’t hold me breath.

Reading the various articles from the meeting yesterday, it appears that Labour really are a bunch of idiots. They’ve just committed to a 78% tax rate with the removal of investment allowances and there’s still a ‘conversation to have’ on capital allowances!! They appear to have no idea just how punitive this regime already is, whilst leaving open the option to increase the tax grab further at a time when the industry needs stability so it can plan next years CAPEX program.

The unions are totally ineffective, nicely worded statements are doing absolutely nothing to counter the hostility to the sector. Clown show all round.

Sasa,

Agree with your post, Serica would do well to emulate Harbour. Obviously any deal would be on a smaller scale, but with the looney Labour Party looking to turn the screw even further, there should be a renewed urgency to diversify away from the UK.

In fairness, the main positive for Harbour is the acquisition. The UK assets are being bled dry by HMRC.

Their effective tax rate was 85% for H1, which is before 3% increase for the EPL, the removal of the investment allowance and a reduction in capital allowance.

For comparison, Serica will produce more FCF than Harbour this year with less than 1/4 of the production.

Agree Sasa, being on AIM is doing us no favours. Hopefully when the acquisition happens it’ll be sizeable enough to ensure the move happens.

Mommur, everyone has their own preference on shareholder returns. My view is that the company is worth at least double the current price (assuming nothing crazy by Labour), so buying shares at half that price is an incredibly efficient use of capital. But as I say, each to their own.