What a bargain we are getting30 May 2017 13:53
3 June 2011
Seismic reflections
Move to mitigate UK North Sea tax change?
Premium paid
Tullow Oil announced last week that it had agreed to acquire Nuon E&P for €300m.
This will add a portfolio of 25 licences located offshore The Netherlands and add
9,000boepd to the company’s current North Sea production of 13,300boepd and
add reserves and resources of 28mmboe. Based on this, Tullow will be paying
$14.3 boe on an EV/reserves and resources basis for the transaction. Recent oil
deals in the North Sea (KNOC/Dana, Enquest/Stratic, Dana/Petro-Canada) have all
been done at around $11-12/boe which is already at a significant premium to the
average $8/boe on an EV(2P + 2C) basis for North Sea companies covered in our
oil screen. If we look at gas deals, Ithaca acquired in 2010 a number of Southern
North Sea assets for $3.5/boe. And the most comparable company in our screen,
Northern Petroleum, is trading at an extremely low EV/2P of $0.5/boe, with
production from gas fields mainly onshore The Netherlands of around 2,000boepd,
and Dutch 2P reserves of 18.9mmboe out of a company total of 89mmboe. Even
based on the Dutch assets alone, Northern is trading at $2.8/boe.
Stable regime is key
There is no doubt that the acquisition will complement both Tullow’s existing UK
Southern North Sea assets and its Dutch licences, with the access to key
infrastructure and potential for growth that it brings. However the company
highlighted that these new opportunities also come with the advantage of a stable
tax regime, which may be the key to its willingness to pay such a premium for the
deal. The Dutch tax rate of 50% compares favourably with the 62% now in force in
the UK since the recent budget. Coming on top of a tax hike in 2006, the tax
outlook for the UK is now seen as uncertain. For UK gas producers hit particularly
hard, the addition of assets subject to a lower tax rate and stable regime makes
sense.
Also pointing to a more general negative sentiment in the region was the news
last week from Encore Oil that it had cancelled the flotation of its spin off XEO
Exploration blaming a loss of market appetite for UK North Sea exploration since
George Osborne’s tax increase.