Member Info for Stevo12

Sekforde

I fully agree that Enquest has some very positive qualities and the Bressay nd Bentley reserves look very interesting - although Harbour has recently given up its working interest in Bentley.

However I would be a little more cautious in extrapolating the Enquest 2022 EPL for 7 months of $75m. There will also most likely be a significant drop in production in 2024 from 2022 levels due to natural decline and limited new investments. I would expect ENquest to be closer to 35-40k per day by 2024 of which approx 5k belongs to BP.

Also utilising losses in acquired businesses against core profits is not easy and there are various restrictions imposed by HMRC. They can be utilised but not that quickly.

Tigar

Perhaps I can explain it better with an example. If O&G made a taxable profit of $1b and incurred $100m of interest and $150m of decommissioning costs the EPL would be $1.25b @35% or $437.5m or 43.75%. Core UK tax would be 40% of $1b or $400m. Accordingly total tax charge would be 83.75% as opposed to headline rate of 75%.

By not allowing a deduction for the decommissioning and interest costs results in income being taxed at 75% while these costs only receive a 40% deduction. This is one of the reasons why Harbours tax rate for 1/2 year was over 100%.

Sekford

Unfortunately because interest costs and decommissioning costs are not allowable costs against EPL, the effective EPL tax rate is way higher than 35% for Enquest.

Protect

Gas revenues for six month to June 2023 were $750m at a post hedge realised price of 58p per therm vs the average market price of 108p. Sales and FCF would have been approx $750m higher if 2/3 of gas sales were not hedged at 40p (I have rounded a little for simplicity).

I have simply annualised the first 6 months impact of $750m to arrive at annual impact of $1.5b, of which $1.125b will be paid in tax, leaving $375m for shareholders - grand theft!

Another way of looking at it is that Harbour is producing 36.5m barrels of oil equivalent in gas per annum and the hedge reduces realised prices by a little over $40 per barrel equivalent.

Hope thus helps

Never sell

I think there is a really good chance that the shell deal is back on now the gas price is more predictable and I would not be surprised if a contingent consideration element linked to future gas prices. The key advantage of Norway is that it is predictable and can be serviced from Aberdeen team as opposed to uncertainties of Mexico etc.

Valuation will be interesting.

1/2 year results were very much as predicted with the level of reduction of the RBL being the only real surprise. The only real disappointment in 2022 trading performance for me (other than share price) was the lack of 2P reserve replacement - we really need to see 2P reserves added in 2023 for the $700m of UK investment.

The reduction in gas hedges in 2024 will add an additional $1.5b of FCF at 110p per therm. However it will also be Harbours first year of full EPL and also core Corporation tax. The timing of the 2024 tax payments is difficult to forecast and depends when UK historical tax losses are fully utilised - the worst case scenario is that we have to pay 2023 and 2024 EPL in same year.

Megla

I cannot argue with your observations. I would hope that the $800m Capex being spent annually would add some reserves and maintain production in the 180k per day range - however 2022 capex added pretty much nothing to 2P reserves

If you think of Harbour as a solid ex-growth company generating a 20% return on your investment annually, through dividends and share buyback, you wont be too disappointed.

Sekforde

A new parliament can change legislation, but it cannot rescind contacts entered into by a previous government and approved by parliament. This is a mater of contract law as opposed to tax law. This has been applied in the decommissioning relief deeds which guarantee the decommissioning relief allowances for individual fields. These are commercial contracts as opposed to changeable tax law and any future government who sought to deprive a company of the specific benefit agreed in the deeds would be subject to court action.

Dumbly

Your scenario would be quite likely if we were in the easily years of a new government. Whatever the outcome of the call for evidence to reshape the tax regime, it can be overturned following a labour victory at next GE. Accordingly unless Labour agreed to support any changes to the fiscal framework (which they wont), then the same level of uncertainty remains.

The only way I can see this working in the short term is the route of the decommissioning agreements where parliament approves a decommissioning agreement on a field by field basis which provides contractual assurance of the decommissioning tax treatment, which can not be changed by future tax legislation.

If a similar contractual agreement (approved by parliament) was put in place for Rosebank and any other new fields, a subsequent change in tax legislation would not impact these individual approvals. This would provide the certainty to invest.

This is the only ways I can see O&G investing until Labour show their hand if they are the next government.

For 2023 approx 2/3 of gas sales are hedged at 41p per therm. The company’s assumption is that the remaining 1/3 of gas sales are at 150p per therm to achieve the 2023 FCF forecast.

I estimate that the 2023 gas hedges will cost over $2b of lost profit (pre tax), if Harbours assumption of 150p per therm average is achieved. Pretty significant I would say. Yes it gets better in 2024 as averaged hedged rate improves and percentage of sales hedged decreases substantially.

Oil hedges are not the problem it is the gas hedges that are killing us.

Greenoil

No i am saying the current market cap of harbour reflects the future projected EPL payments and this is the prime reason the share price has halved. The share price dropped from £5 to £3 on the lead up to and announcement of extended EPL in Nov 22.

Accordingly any reduction in EPL will benefit the share price. However I see almost zero chance of this happening in 2023.

Greenoil

Uk government is looking to raise approx $6b of additional EPL from harbour through to 2028.

NPV of the future EPL is approx £3b if it runs to 2028 which looks like what the market is factoring in when pricing Harbour share price - no simpler or more complex than that.

Jan24

I agree that politically it would be very difficult for Harbour to buy enquest. They would potentially take over the debt in a distressed situation like PMO and wipe out equity, but this would need oil to drop into 50-60 range.

Unfortunately, although i hate to admit it, the market has applied a negative equity value for Enquest excluding the tax losses which must be worth over £400m. Serica paid a lot for tailwinds tax losses so this is an attractive asset. The big question is what is the value of Enquests 2P reserves of 190m barrels (less BP’s 37.5% interest in Magnus) and is it greater than the liabilities that come with it - debt, leases, decommissioning etc.

Kraken

Agree if oil stays above $80. Then announcement of div in Q2 24. Probably 1p interim in sept 24 and 2p final in may 25.

Buybacks could start in Q2 24.

XPO

You are absolute correct that a revised estimate has been produced for EPL tax raise for government at a little over $20b at $75 oil and $105p therm gas. However Harbour has also projected that its FCF would reduce by $450m pa if oil averages $75 and gas 100p a therm in 2023. So yes if oil and gas prices remain low, harbour will pay less tax but our FCF will be materially reduced as well.

Sekford

I agree that post tax FCF should be approx $4b over next 6 years, but from this we will need to fund 50% of decommissioning costs - $150mX6 =$900m and 8.5% of CapEx (say $750m per year) - $380m. This leaves approx $3b of cash flow at oil $85 and Gas 150p a therm. Accordingly current market Cap is approx 5 years FCF which is about right for O&G company with a required ROI of 20%.

I also meant to add, I calculate that Harbour is targeted to pay $6b in EPL over next 6 years as part of the $40b plus the government has targeted - which sort of makes sense as Harbour produces 15% of all UK O&G. The $6b of additional tax is more than our market cap before the EPL and has reduced the value of 2P reserves by 55-60%. Using Harbour as an example, our 2P of 400m barrels have decreased in value from roughly $20 per barrel to closer to $8-10 which is a loss of value of $4-6b.

Accordingly I am not sure we are materially undervalued with EPL in place to 2028. Our 2P reserves may have a value of $4b but our decommissioning liabilities are over $5b (of which UK gov will pay 1/2).

XPO

I concur with your overall sentiment that there are more positives future events for Harbour than negative and I d think O&G prices will stabilise over $85 and 150p per therm, but there will always be ups and downs and I can see gas prices spiking again this winter if there is a normal winter in Europe.

I have been invested in O&G for more years than I care to remember and this is the 3rd windfall tax regime I have witnessed and this like the other previous 2 windfall taxes will ultimately be removed. However it will take a material drop in NS investment, time (at least 2 years) and for energy prices to fall out of public agenda..

While Labour can play to their green credentials and intent in wooing voters, the reality of being in office is very different. It is clear that even in the most optimist renewable pathway (ignoring that we do not have the technology to store renewables or the infrastructure to transport it) is that by 2050, hydrocarbons will make up 25-40% of our energy needs.

We are in a bit of a catch 22 at the moment as it is both political difficult to remove the EPL and the predicted tax revenues are needed to fund increased public sector spending and keep the OBR happy. However once it becomes visible that investment is falling (putting Rosebank, Cambo and other projects on ice) and that field lives are being shortened and decommissioning is being pulled forward, there will be a change. Decommissioning costs for NS are estimated at $45b and UK gov has to pay roughly 1/2 of the bill. The pulling forward of these costs due to reduced investment to extend field life has a huge impact on the treasury.

The question which any government will need to face is, do we import it or use our own. The answer is simple and a Labour government will find a way to ensure we access our own O&G reserves rather than import it.

I am still a little confused, as I think is the Treasury, to O&G sectors response. While I am sure they expected a lot of noise they thought that the Government funding over 91% of the cost of new projects would be sufficient motivation to invest - if an O&G company only has to fund 8.5% of the capital cost of projects and gets to keep 25% of the profit, that a good deal right? However unless Labour agree to honour the current deal (which they are saying they wont), it is just too big a risk.

Assuming labour get in power at the next election, I think it is going to take at least 9-12 months for a new more supportive tax policy to be introduced. However Unite and other unions will push them hard to maintain NS jobs.

While I hate to burst anyone’s bubble I think we are stuck with EPL until end of 2024/early 2025.

XPo45

The EPL does not allow previous year capital allowances to be offset. Effectively the allowances in previous years created taxable losses carried forward.

These losses can be used to offset core tax but are not allowed as offset against EPL. Scandalous that losses in bad years are not allowed as an offset against profits in the good years.

In reality the government needs to raise more taxes and O&G was an easy target with the overall negative sentiment. the resultant lack of investment is going to make our society worse off as we imported increasing amounts of O&G.

XPO

Could you post a link to the Fitch report, would be interested to compare.

While there is a lot of complexity, there is also a very simple way of looking at it. The company has forecast $1m of FCF and they have told us this is after payment of $450m of tax in UK and Overseas. They have also told us that they wont pay EPL on 2023 profit until Oct 24 and that 2023 profits will also be partly shielded from core UK tax due to Historic tax losses (these tax losses will be fully exhausted by end of 2023 or very early 2024).

So we know 2024 tax payments will be substantially higher than 2023, my estimate let is $1b higher but could be a little lower or higher. The UK Government is targeting to raise $7b per year for 6 years in EPL alone and Harbour produces 15% of UK O&G, which broadly translates to $1b EPL per year for Harbour. Just a rough triangulation of my Harbour specific estimate of $800m.

I do however think Harbour has low balled 2023 FCF.