Member Info for Stevo12

Dumbly

There is no way the tax losses can be removed and are probably worth over £100m per year of reduced tax payments.

The question I am asking myself is do I prefer Enquest with an effective 50% tax cash charge and debt to repay or Harbour with no debt or tax losses, who will have a tax cash charge which will be in the high 80%.

The operational update should reveal more.and my focus will be to understand the cash cost per barrel projected for 2024

Yes sorry guys. Feeling very negative today as I see our politicians striving to destroy a critical industry that is a true world leader in many aspects. If renewables had any chance of working I could sort of understand.

The reality for Enquest is that EPL is closer to an effective 50% tax rate due to interest and decom not being an offsetable. However we do have tax losses protecting Enquest from core 40% tax and accordingly we will be able to continue to pay down debt. I was really trying to emphasis how valuable these losses are and we would be screwed without them.

BT faith

There is no one going to takeover Enquest with the Labour Sword of Damocles now hanging over the sector.

The inconvenient truth is that without the tax losses, Enquest would probably be bankrupt as it would not be able to repay debt and fund decom costs from post tax FCF.

Nitro

The threat was to backdate to 2022 but this would be against all established tax precedent and would be subject to legal challenge. It was never going to happen.

I am struggling to see whether Harbours UK operations are a going concern under Labours proposal. How can we retain enough profit/cash to pay for the $4.3b of decom liabilities if almost all profits are nationalised.

I estimate the reduction in FCF as a result of labour changes from 2024 to 2025 at £200-300m. This assumes UK CAPEX decreases from approx $1b in 2024 to $500. This would basically wipe out FCF and leave $300m for overseas CAPEX which will not be enough for the 2025 overseas programme including ZAMA.

Reducing UK CAPEX to Zero in 2025 would save a net $110m and would still leave Harbour with close to Zero FCF without a major restructuring and downsizing which is in itself expensive. I cannot see how we can fund CCS. Ultimately due to decommissioning and interest not being offsetable the effective new tax rate will be 90% plus.

Sekforde

Let’s put this on hold until we get 2024 guidance next week. We know FCF was $132m for 10 months to October 23 which included some one off cash outflows and inflows and obviously a much lower EPL cost than 2024.

Tornado

I hope so but if it goes in the manifesto it will be difficult to back out of. I agree the unions are our key allies but the O&G companies need to come out very loudly, pre manifesto, and state that they will not invest in new field developments if the tax changes are made.

They should also be clear that they can not fund CCS projects post these changes and we need to get away from constantly referencing Shell and BP who have largely vacated NS upstream.

The real killer in all this is that the government still expects the companies to pay 60% of decom costs while only receiving 22% of profits during production (unlike Norway) and to bear any losses in downturns (unlike Norway)

Sekforde

Is 15 Feb a confirmed date for the operational update?

Only another week before we can have an informed debate on 2024 FCF and debt reduction. My gut feel is you are overestimating 2024 FCF by $100-120m due to your assumptions on payments to Malaysia government, interest expense and 2024 EPL, but lets wait until we get guidance next week and we can have a proper debate.

Londoner

Extracts from yesterdays Aberdeen times.

LABOUR has published its plans for a “proper windfall tax” which will see the North Sea taxed at an eye-watering rate of 78% should Sir Keir Starmer become Prime Minster this year.

In a briefing note for its “Prosperity Plan Policy”, Labour confirmed its manifesto would propose a hike to the tax rate from 75% to 78%, the same as Norway, and “end the loopholes in the levy that funnel billions back to the oil and gas giants”.

“A General Election win for Labour will also see the Energy Profits Levy (EPL) extended to 2030 and investment allowances removed, making it one of the most punitive energy tax regimes in the world. Together the measures will raise £10.8billion in the five years from 2024-25, the party claimed.”

The labour party have confirmed their plan to raise an additional £2.4b per year from O&G from the current Conservative plan. The rise in the EPL from 35% to 38% will only raise £500m at the most. The impact of reducing investment allowance would need to make up the difference.

Kraken

Fully agree that the the permits we already hold for Bressay and Bentley would not prevent these projects going forward even under labour’s mandate.

The issue is that they are just going to be uneconomic if labour enacts its proposed changes to EPL. We need a large operator than can take a 50% plus stake and has access to cheap finance to fund. However if the EPL additional investment allowance is removed these projects will just not be financially viable.

I fully agree with you that there may be an increased opportunity to buy producing fields from exiting players and use our tax losses against core tax, does not help against EPL unfortunately.

The bigger impact than the 3% increase in the EPL is the removal of the additional investment allowance which will increase the net capital cost of new projects from 8.6% (after 91.4% tax relief) to 22% which is an almost 250% increase in cost of investment, which, combines with post tax returns falling from 25% to 22% massively changes IRR and paybacks.

Clearly there is going to be a gold rush to get short cycle projects completed in 2024, but beyond 2025 I can not see there being any major new HS developments that are not near field extensions. Massive drop in investment and overall NS depletion rates at 15% per year, as opposed to 7% expected. Net impact - more imports, less jobs and less taxes in a couple of years.

A quick back of the packet calculation for Enquest will result in approximately £12-13m of additional EPL per year (on the basis that 2023 EPL is $140-150m and remains at similar levels going forward). We will pay this for at least 5 years under labour so $60-70m, so discounting cash flows should have an impact on market value of approx $35-40m or roughly 10% of market cap. Unwanted but not disastrous.

I am a little more concerned over the impact of removing the additional investment allowance. This will have a bigger impact on those without tax losses. Currently the net capital cost after receiving 91% tax relief (85% in year of investment and 6% in year 1 of production) will fall to 78%. Accordingly net cost of new developments increases from 9% to 22% which is a 240% increase in net cash cost of new projects, with returns on successful projects down from 25% to 22% and a requirement to fund 60% of decom cost. This pretty much trebles the cash payback period and massively reduces the IRR on new projects and I would not be surprised if Rosebank is put on ice until Labour policy becomes clear.

Less of an impact for Enquest as our net cash cost of new projects, after tax relief, goes from 55% to 62% and our share of pre tax profits goes from 65% to 62%. This excludes the impact of interest and assumes new investments are funded from FCF and no additional net borrowings.

Accordingly I don’t think the additional labour tax changes Enquests plans for short cycle near field developments and you can see a rush across the sector to complete as many as possible by end of 2024. I do however think it puts an end to any hope of Bressay/Bentley developments as IRRs have been crushed for the larger player who are full tax payers.

The new tax should also reduce the cost of acquiring in producing fields by approximately 12% to sub $8 per barrel of 2P reserves

Romeron

It is not just the LCOE of offshore wind farms. The greater costs are the infrastructure need to transport the energy from offshore Scotland to the big citied in UK answer particularly souther UK and even greater than this is the cost of storing electricity for when the wind does not blow (which is up to 10 days in a row during winter).

Commentators only focus on cost of building and operating wind farms and not the wider costs of a sprint to decarbonise the electricity grid by 2030.

Very little in presentation around financials or 2024 fcf. Tax payments in 2023 are close to $280m and it would be helpful to understand if tailwind losses and increased capex will reduce 2024 tax.

It looks like Serica was fcf negative in 2023 pre dividends which is concerning. How have we gone from approaching $500m of net cash to less than a $100m, even allowing for Tailwind debt and payments to Tailwind shareholders.

Kokomo

Certainly diversification is a good thing for Harbour, but please do not think the overseas tax regimes are any better than the UK with EPL - in fact most are worse.

For example, Mexico imposes a 13% royalty on gross revenue. It then takes a % of operating profit based on the bid submitted at time of awarding licence. Normally 40-50% and I don’t think we have ever been told what the Zama PSC % is. Mexico then imposes a 30% corporate rate on profit after deducing operating costs, royalties, PSC payments and an investment allowance. Then if remaiming profit is to be paid back to UK, a further 10% withholding tax is applied.

Assuming revenue of $80 per barrrel, PSC of 40%, OPEX of $15 per barrel and CAPEX of $15 per barrel. Tax paid will be $34.2 per barrel and retained profit will be $15.8 per barrel before withholding tax and $14.2 after withholding tax. This is before interest costs of funding CAPEX as there is no generous investment allowance like UK.

So Mexico tax rate - 34.2/50 = 69% before interest impact and 85% after interest. Interest costs are approximately $10 per barrel at 5% interest rate.

So while diversification of risk is important, we are not accessing lower tax regimes than UK. Only places with lower tax than UK is US and Falklands.

Romaron

The numbers are pretty easy. It will cost each household between £8,000-£10,000 per year excluding the costs of insulating homes which will be minimum of £25,000.

This is based on actual costs today of installing and operating offshore and onshore wind and most importantly the cost of storage capacity for when the wind does not blow. This is the really expensive element.

The pro renewable lobby then assume there will be massive reductions in cost in the future with the cost of storage dropping by 90% and the capital cost and maintenance cost of offshore wind halving. This is of course B*lls*hit as costs are going up and not down but the only way to get politicians onboard. The risk is that it will be too far along the road before the reality hits homes. The green ecozeolots would be happy to bankrupt Britain on the alter of net zero. MeanwhileChina and India build hundred of coal fired power stations.

BT Faith

While I know I will be lambasted as a heretic, I am invested in a number of NS oilers in addition to Enquest (Harbour, Serica and a speculative punt on Rockhopper - not NS I know) and I am unfortunately underwater on all (thankfully BP and shell have compensated). However when I look at the key metrics, I do not see Enquest as undervalued compared to other NS oilers.

For example, Serica and Enquest have very similar debt/cash adjusted market caps at £650m and both have significant tax losses. The key differences being that Enquest has much higher decom liabilities, significant lease costs and £0.8b still owed to BP to be paid over next decade. Production levels are similar but with Serica having more gas and much lower OPEX per barrel and paying a 10%+ dividend.

I still believe, due to leverage, Enquest has a higher chance of a doubling or trebling of its share price compared to other NS oiler if debt can be reduced to £200-300m over the next 2 years and shareholder returns commence. The 2024 guidance is going to be key in a few weeks time with 2024 FCF guidance and debt reduction being pivotal. A good deal in picking up a producing field at sub $10 per barrel 2P for minimal upfront cash would also help.

So far all the NS oilers have disappointed with their 2024 guidance and we need Enquest to be beat expectations. I believe 2024 is going to be a challenging year for O&G in general given the excess over capacity and todays oil price is being supported by geopolitical risks (which could ease or get worse but I think we have hit peak Gaza). However from 2025 onwards the market dynamics look much more attractive and oil should be $80 plus for next decade. Enquest has stated that they can survive at $60 oil and the trick is going to be staying in the game and hopefully reducing debt in 2024.

BTFAITH

All the NS independents are taking a bashing at the moment. The 2024 guidance given by Harbour and Serica over the last couple of weeks have painted a pretty gloomy production, OPEX and FCF forecast, together with significant increase in tax payments due to EPL.

I am assuming Mr market has effectively downgraded Enquest expected 2024 FCF based on other NS oilier recent forecasts and await the trading update to see whether Enquest has followed or bucked the trend. If Enquest can maintain 2024 production at 2023 levels and keep OPEX at close to $25 per barrel, I think there will be a positive market response as reduced lease payments and lower interest expense should offset a chunk of the increased EPL payments.

The year end debt and guidance for 2024 debt reduction is going to be key for SP in short to medium term, together with completion of any of the deals referred to by AB.

Sek

You are a ray of light on a dark and dreary day.

Looking forward to debating the 2024 and 2025 forecasts once we get guidance in a couple of weeks time. I will be surprised is we get an actual FCF target but hopefully there will be enough pieces of the jigsaw to work it out.

Still scratching my head on where the gas production highlighted by AB at Davos is coming from.

Odd that they are selling non operated producing assets which will be benefiting from their tax losses and yet want to purchase other non operated producing assets.

It sounds like Scott is too small to be of interest to them and they are looking for larger 2P/ BOE per day.