Member Info for StarBright

An up to date summary of the applicable tax regime.

https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/oil-and-gas-revenues/

UK oil and gas revenues consist of offshore corporation tax (which includes ‘ring fence’ corporation tax and the supplementary charge) and petroleum revenue tax. These taxes apply to the profits of companies involved in the production of oil and gas in the UK and on the UK continental shelf (UKCS) (“The North Sea”). In our latest forecast, we expect UK oil and gas revenues to raise £0.9 billion in 2018-19, representing 0.11 per cent of all receipts. The three streams of revenue are:

‘Ring fence’ corporation tax (RFCT) is calculated in the same way as onshore corporation tax, but with the addition of a ‘ring fence’ and the availability of 100 per cent first-year allowances for virtually all capital expenditure. The ring fence prevents taxable profits from oil and gas extraction in the UK and the UKCS being reduced by losses from other activities. The current rate of tax on ring-fenced profits is 30 per cent.

The supplementary charge (SC) is an additional charge on a company’s ring-fenced profits (but with no deduction for finance costs). The current supplementary charge rate is 10 per cent. It was reduced from 20 per cent on 1 January 2016.

Petroleum revenue tax is a ‘field-based’ tax charged on the profits arising from individual oil and gas fields that were approved for development before 16 March 1993. The rate of PRT was permanently set at zero per cent effective from 1 January 2016 but it has not been abolished so that losses (such as losses arising from decommissioning PRT-liable fields) can be carried back against past PRT payments. PRT was deductible as an expense in computing profits chargeable to RFCT and SC.

DegsyAlmomd - your information is 7 years out of date.

Red headed ranger - different rules/rates apply for oil companies. The main (referred to as RFCT) rate is 30% for oil companies, with an additional 10% supplementary charge.

Alan - I am not agreeing with you. You are misinterpreting what Vonk said, and you don’t understand how tax losses work. Once ANGS has made £10.4m in profits the tax losses will have been used up. This £10.4m will be reached pretty quickly at 1000bopd.

I revised imac1’s calculations for the im[act of corporation tax, incorporating the £10.4m of tax losses. The numbers coming from the revised calculation properly reflect the information that we have today, and should be used going forward. They indicate a range of 19.5p to 37.2p at 1000bopd.

Alan - the Weald producers will pay corporation tax at 40% on all profits once their losses are exhausted. ANGS £10.4m losses will be used up within a year if production is at 1000bopd.

The reason no Petroleum Tax (PRT) is due is that it has been set at 0% since 2016. If you listen to your link, Vonk says “....we don’t pay petroleum tax, only corporation tax”. This corporation tax (at 40%) is the component missing from discussion, and from the various valuations shared previously.

You may recall I posted a while back with an EV/EBITDA valuation. This works on the pre-tax numbers - which is why the methodology is more commonly used than the P/E multiple method. But posters seem to prefer the P/E method, which is fine - but must be based on fully diluted post-tax earnings.

You are reaching beyond the perimeters of your expertise. Why not open your mind and benefit from mine? Although the valuation numbers now look lower after the inclusion of tax, they are “better” in that they are more realistic. They still show a strong investment case for ANGS.

Thank you imac1.

Nianjabi - I said: “When potential value exceeds price - as I believe it does today - then it is a good time to invest...”

In other words - ANGS looks undervalued, so is worth holding as an investment. Never mind though eh...?

P/E calc is in my posts itsallaboutme. If you’re going to have a pop you should at least to read what you are trying to attack. Even if understanding it is a step too far.

Agree re mud-slinging.

40p would require pre-tax OPEX of $17/barrel and a P/E of 27x. It is clearly possible, but not really a central scenario. I am however happy to agree that it would be a nice figure for 1000bopd ;>

I have always found that valuations are good to debate because they force us to look critically at the numbers and assumptions that we are using. This little exchange in recent days - although painful - prompted me to get stuck into understanding the taxation of onshore oil producers. I was shocked to see that a marginal rate of 40% would apply. Once we beyond a certain level of production it is deeply unpleasant to contemplate that HMRC will be helping itself to 4 out of every 10 barrels of oil produced from the Weald. I guess this is the other side of the discussion a few years ago about the EY report that highlighted a £54bn “windfall” for the exchequer if the Weald was commercialised at an aggregate 40k bopd. This money has to come from somewhere, and it looks like the taxation of producer profits will be the single largest component.

Discussion improves models. Better models create better feel for valuation. This is invaluable to anyone considering themselves an investor with a long term horizon. We should always remember the distinction between value (which can be determined empirically) and price which is set by the market. When potential value exceeds price - as I believe it does today - it is a good time to invest in equity. Similarly, when price exceeds potential value it may be the right time to sell. Making these decisions requires us always to have a view on valuation, so it is a topic on which discussion should never end...

No. You are the one reaching beyond the perimeters of your knowledge with respect to valuation methodologies. It shows in every post you make on the topic.

itsallaboutme - frankly that’s a poor response, if not entirely unexpected. I am in no way a troll or negatively disposed toward Angus. I have been a holder for over a year. Yes, I have posted here more frequently in the last few weeks. But that is no reason to doubt my intent. I bring expertise on valuation and modelling (among other topics) gained during my career in M&A and fund management. I share it freely, in the hope of contributing to a board from which I have learned much,

In contrast to you it is not generally my style to play the man rather than the ball. I have tried carefully and patiently to point out the errors that posters here have made with respect to valuation, without looking to attack or belittle them during the process. However - whilst I can explain things to you, I cannot understand them for you.

As this valuation is posted frequently - which is good - I think it is important to tie down the major components as accurately as we can. This doesn’t mean getting too deep into annual accountancy; it does mean that we should recognise that the government will be collecting a significant proportion of ANGS’s earnings. We know that the marginal rate for this is 40%.

At 1000bopd, the tax losses of £10.4m will be exhausted within the first 308 days of production. Their value - even if 100% realisable on day 0 - is limited to 40% of £10.4m = £4.2m in any case. I am happy to work with this as a best case scenario.

The only other special reliefs (that I can find, happy to take further input) that apply are those relating to capex, where accelerated offset is possible under the field and investment allowance provisions. Capex has to be expensed over the life of the project, so the effect of the special reliefs is only to advance timing. As such, I would expect these to have only a marginal impact on the effective tax-rate in the long run. Let’s say it is reduced from 40% to 38%.

Mr Vonk has variously suggested $17 and $25 as operating costs:

If we use $17, then tax will be $20/barrel so total operating expenses $37/barrel.
At a P/E of 20x, that is a market cap of £116.9m to which we will add the tax loss recovery of £4.2m
At 404m shares (let’s ignore the options for now...) that is 29.9p per share

If we use $25, then tax will be $17/barrel so total operating expenses $42/barrel.
At a P/E of 20x, that is a market cap of £99.2m to which we will add the tax loss recovery of £4.2m
At 404m shares that is 25.6p per share

Taking the full range of operating costs discussed (from $17 to $25) and the range of PE’s (from 15x to 25x) referenced previously, a revised valuation range would be between 19.5p and 37.2p

As we’re all hoping for production way beyond 1000bopd, it’s easy to see how the top end number can be exceeded.

imac1 - Operating costs for a P/E multiple based valuation must include tax. If the marginal tax rate for a UK oil producer is 40% (there’s a short summary here https://cwenergy.co.uk/uk-upstream-oil-gas-tax/ but I did post more detail on this when asking the same question last week) then I cannot see how operating costs can be just $25.

Even if there were no costs for running the rigs/site, no transportation costs and no other corporate overheads, the minimum level of operating costs per barrel would be $28 because of the 40% tax alone.

I believe that the $17 and $25 per barrel costs indicated at different times by Mr Vonk are pre-tax, and that your valuation (with which I am comfortable in all other respects) should be adjusted to reflect this.

If you have an alternative explanation as to how post-tax operating costs might be as low as $25, I will happily withdraw my question.

bladehater - your summary is good.

And I could not agree more regarding the infantile tribalism displayed in the many UKOG v ANGS posts. Not to mention the related and pathetic personal feud stuff that seems to rumble on endlessly. The biggest story - and the biggest gains for shareholders - will be seen if the Weald concept is proven as a whole, across all of the sites. This could underpin the idea that Weald oil is of national significance, smoothing the path to commercialisation and economies of scale - for example in transportation. Better this than mixed results which create winners and losers, but at the cost of diminishing the total prize. The strongest returns for investors will come from broad success.

baits - I think you’ve got it ;>

Imagine two companies. Each has £100 in the bank. No other assets or liabilities. Company A has 100 shares, valued at £1 each. Company B has 1000 shares, at 10p each. Why is it easier for Company A to do a placing than it is for company B?

Baits - the sp makes no difference. All that matters is the amount sought and the discount required. If (say) £5m must be raised, it’s easier to do this from £100m market cap than it is from £50m.

As always - it is the size of the pizza that matters, not the number of slices...

Good spot bladehater.

So now we have 150 days (RNS), 180 days (OGA letter) and 210 days (UKOG website)..?

Crocqman - I don’t recall seeing the Xodus report on Portland. Only a mention of figures evidently approved by Xodus in some way. I wonder if/when we’ll get the chance to see the full document. In CPR form they tend to be used when capital is being raised etc. Not sure it’ll be shared in other circumstances.

Thank you Pboo. That document says “Total duration of the three base case tests is estimated at around 180 days...”. It talks of a 50 day test for the Portland, but doesn’t repeat that for the two K layers.

50 days testing on each layer within a 180 day period is one possibility that is also consistent with the June RNS.

I think that posters trying to count 150 days from the end of June may be disappointed.

tkr234 - to be fair, the sp could not be any more stable.

Phil7390 - your point about expectation setting is spot on. The creation of artificial deadlines benefits only those looking to ramp, or to troll. If you read this board frequently, it is obvious that there are many posters whose focus is on creating and fuelling another pump and dump opportunity. It’s a febrile atmosphere which I suspect discourages potential long term investors.