RE: UKCS firms look at investment allowance options14 Jun 2022 10:59
Extract Part 1
"UKCS firms look at investment allowance options
Producers eye spending to offset windfall tax hit
AIM-listed independent Kistos is “assessing opportunities in the UK that would enable us to take full advantage of the investment allowances implicit in the recently introduced Energy Profits Levy (EPL)”, according to the firm’s CEO, Andrew Austin. Other companies are also investigating upping planned spend to set against their windfall tax bills.
UK-listed Serica Energy is “evaluating additional candidate projects designed to increase the productivity of the Bruce hub” above its previous capex programme. Based on its current understanding of the EPL, the firm expects its planned c.£60mn 2022 light well intervention campaign at the Bruce Keith Rhum complex and its North Eigg exploration well to qualify for incentives, with each £1 invested by Serica offering an overall tax saving of up to 91.25p. “This will offset a large element of the EPL that would otherwise be payable on Serica’s profits this year,” it says.
"Our established strategy of investing in our portfolio to enhance production and create greater value means that Serica is well-placed to take advantage of the investment incentives included in the EPL,” says the firm’s CEO, Mitch Flegg.
“Serica is well-placed to take advantage of the investment incentives included in the EPL” Flegg, Serica
“Capex plans for 2022 are relatively light in the context of Serica’s production base,” says Daniel Slater, oil and gas research director at brokerage Arden Partners, while acknowledging that additional activities are being assessed. “Unless the company alters its capex plans, it is fair to expect it to have a material windfall tax liability, while nevertheless generating material cash,” he warns.
Enquest is another UK continental shelf (UKCS) producer where Slater sees the potential for plans to change. A late May trading update continued to focus on deleveraging, “but clearly the windfall tax now creates a new incentive to increase capex instead”, the analyst suggests, given its planned $165mn spend this year is “relatively restrained”. “If Enquest elects not to alter its capex plans, then we would expect it to pay a relatively material windfall tax bill compared to some others,” he cautions.
Troubled Hurricane Energy could also face a hit. “Given its focus on debt paydown, Hurricane has little in the way of confirmed capex plans,” Slater notes. “As such, we would expect the company to pay a significant amount of windfall tax.”
Drilling another well at its sole remaining Lancaster asset would be an “attractive offset” for the windfall tax. But Slater still feels that further activity at Lancaster is more likely to be based on field performance and geology rather than tax structuring. Hurricane could also opt to deploy Lancaster cash flow, buoyed by high oil prices, on new UKCS assets."
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