Member Info for Stevo12

Corrie

Agree Falklands would be a perfect location from a tax perspective. However harbour is not keen on big green field development and has always focussed on buying producing assets with other near field opportunities.

Question: will they change their business models and invest in more green field projects that have 3-4 years of capital cost before revenue.

Chilling

The quantum of epl payable by Enquest has been debated on this board quite extensively. It is likely in the $200-250m range pa but depends on quantum of cap ex and of course POO.

Looking at it over 6 years of epl likely to be in $1.2-1.5b range - government are forecasting £40b in total over 6 years.

Accordingly EPL payments are are more than double our market Cap which has to impact share price in the short term at least. I believe that Enq will still generate sufficient FCF post EPL to more than support current market cap but this is contingent on POO averaging $100 pbbl given we have a lot of hedges with maximum price in $70 range which will bring average realised price closer to $90.

A fall in poo to below $80 starts to make it very tight.

Mexico is not a particularly friendly environment for overseas investors in O&G. Multiple taxes and royalties and a left wing government who are actively hostile to foreign investment. Zama should be a lesson with Permex awarded opertorship and majority of field.

O&G everywhere is an easy target for governments with budget pressures and high energy costs.

Excellent. Well done harbour. The only way to amend the EPL is through actions and not words. I hope other large NS producers follow Harbours lead

Mrc

I had a read through the oil and gas tax legislation - that is 2 hours of my time I will never get back!

The tax allowances allowable against core tax for new investment are offsetable against any and all NS upstream taxable profit and are not ring fenced to specific fields. These allowances are however ringfenced to NS upstream extraction and can not be offset against other sources of profit (refining, distribution etc if you are a Shell).

However for companies such as Enquest with large tax losses, title is not clear whether the 91.4% allowance can be offset against EPL or whether only 45% is against EPL and balance added to our brought forward losses to be used in future periods. Very important distinction from a cash flow perspective.

Mrc

Thanks. I thought that capital expenditure produced a reduction in tax equivalent to 45% of the cap ex against core tax and 46% against epl. I also thought that the allowance against core tax was not ring fenced to that particular field but could be offset against any non epl tax payable that year.

Any tax experts on the board have a View?

Mrc

I recall the Enquest debt ratio target was made pre the increase in EPL (October credit update) in autumn statement which has almost trebled the amount of EPL to be paid by 2028. I am interest to see whether their approach will change once they have digested new legislation.

The reason I also look at lease payments and deferred consideration as quasi debt is that they are a first call on Enquest cash and will be in £250-300m pa for next 3-4 years. Assuming oil remains in $90 pbbl range this will be about 30% of operating cash flows.

I appreciate that kraken lease and Magnus deferred consideration will also reduce EPL for next 3-4 years by approx $80m per year which provides some more headroom. Also current deferred tax losses provides a shield against core tax for next few years. I guess my key thought is that we have 3-4 years to use the benefits of the historical tax losses combined the lease and deferred consideration shield to get the ship in good shape.

Assuming $1b of operating cash flow pa at $90pbbl, I am projecting $500m of FCF after EPL, lease and deferred consideration in 2023 which drops to $250m in 2026 onwards.

My point on debt is that if government is funding approx 91.4- 95% of the cost of projects, why do you need bank debt? Particularly when interest is not tax allowable against EPL.

Mrc

Trying not to be negative but probably conservative. Just not sure high cost debt works in a post EPL world and it will interesting to see whether company resets debt targets in 2023 trading update.

Going forward there will be no need to borrow to fund new NS projects and our 25% share of profits should be available to fund decomm and shareholder returns, as opposed to servicing debt.

I hope you are right and any form of Shareholder return would be very positive for share price. However my gut feel is that the company will want to reduce debt and other financial liabilities while tax losses benefit FCF for next 2-3 years. In addition to debt, enquest has $1b of lease liabilities and deferred consideration payments to make over next few years.

However even a relatively small buyback programme of $50m pa could make a real difference to share price.

One of the few positives from the EPL is that NS O&G will no longer need banks to fund projects. Government is now the defacto banker funding 91.4% of capital cost of projects (higher if you build in a few green elements).

Infact with interest costs not offsetable against profits for EPL purposes, any debt funding is now highly tax inefficient.

With losses brought forward, Enquest will not get the full benefit of 91.4% government funding for a couple of years. As an example if Bentley capital costs were $1 billion and with green bells and whistles it would probably cost Enquest less than $50m. We would have significant ringfenced losses to offset against core tax and accordingly Enquest would keep 65% of profits for several years while funding less than 5% of costs. Sounds a no brainier if you can trust government to honour the investment allowance.

Groundhog

We have to recognise that the market is still trying to digest the impact of EPL on the business.

What we know is that government has “taken” over $6 billion (additional $1b of tax for 6 years) from HBR with the EPL which was more than market cap before EPL announced. I cannot see a material change until Feb next year when HBR provides some clarity as to its strategy going forward and projected post tax FCF. At least we have tax losses to offset core 40% tax for next 1-2 years and we could still be debt free by end of 2023.

Banbury

Your logic is irrefutable. However this is pure and simply a tax raid and Jeremy has refused to include a floor. Accordingly this is the new normal and we wait too see industries response. I think there is too much self interest on the boards of O&G Companies to walk away from NS and the investment allowance is too attractive - companies no longer need debt to fund projects.

Terry

I agree that EPL is now a permanent tax unless either oil and gas prices fall below $50pbbl equivalent for an extended period or the large NS projects approaching FID are cancelled.

Failed exploration cost are offsetable against EPL and core tax and, accordingly, government is picking up 75% of the cost of unsuccessful exploration wells.

If you looked at this from a different angle and we were partnering with Shell or Exxon and the deal was that Shell will fund 75% of the exploration costs and 91.4.% of project costs (over 100% of any green elements of the project) and we get to keep 25% of any resultant profits, would that be a good deal?

As long as companies are confident they can spend the money and get the 91.4% contribution before next election, I think we will continue to see projects such as Rosebank and Cambo sanctioned in 2023. However the lack of trust and Labour Party rhetoric is a problem.

I believe the Treasury have gamed this and they believe there is enough meat left on the table for oil and gas companies to continue investing in new production with the investment allowance. You should also not underestimate the desire for Board’s to maintain size of business/ their pay. We will see in 2023 whether the Treasury are right or wrong. I believe that the government wants U.K. energy security and this currently trumps greenism. They have just signed off on a new coal mine!

A very big bet made by Jeremy and the boys.

January

I think your FCF forecasts are a little optimistic for 2022. FCF for H1 was $330m and this did not include any Magnus payments and EPL. Also oil prices will be lower on average in second half. My expectation is $450-500m for full year a more probable outcome - still pretty good.

I am not anticipating any shareholder returns (divs or buybacks) until debt is largely repaid as we also have close to a $1b of lease and Magnus deferred consideration to fund. An interim dividend for Fy2024 paid in late 2024 would be a realistic expectation if oil stays above $90 pbbl.

Scooby

Hunt and treasury are not stupid but they are making a big bet that the 91.4% of government funding of new projects will be enough to motivate independents to progress new projects. On a go forward basis not too bad a deal with offer being “you pay for 8.6% of investment costs and we will let you keep 25% of the profit”

Naturally a horrible deal for existing assets that have been principally funded by combination of debt and equity.

A real Catch 22 - will independents walk away from NS investment or is the government funding of new projects just to good an offer to ignore? We will see in 2023.

Hopefully an experienced and well resourced farm in partner on the horizon. Serica would be ideal given North Sea windfall tax makes U.K. less attractive and their big exploration project turned out to be a duster last week. They have over $0.5billion of cash in the bank and are looking to diversify away from North Sea. Harbour could be another great partner with experience and funding.

Sekforde

Agree we are all guessing a little onEPL and difficult to forecast how much cap ex will qualify in 2023 and beyond. Naturally oil and gas price assumption will also be key.

Harbour’s business model has been focussed on buying producing assets rather than new greenfield development, which is now a much less viable strategy due to EPLand treatment of decommissioning.

Mrc

I hope you are right as U.K. government will only listen to actions and not words. I think their logic has been to replicate Norway’s tax regime which has not prevented investment.

I worry that there is enough of an inventive with gov funding 91.4% of investment for companies to sanction projects that have been progressed close to FID. However you would be nuts to undertake high risk exploration on new blocks. Unfortunately the impact of declining exploration will not be felt for several years and well beyond our politicians horizon.

The business model is predicated on trading carbon credits and harbour will be paid by carbon emitters to store their carbon (as opposed to paying to plant a tree). There will be normal tax allowances for capital investment but the intent is that it stands on its own two feet rather than rely on government subsidies.

The question is how much will it cost and can we really afford it now government has effectively nationalised 75%of the business. I am not sure we get anything for green credentials as has been shown and unless these projects have compelling and low risk financial returns we should walk away.

I for

Carbon capture does not qualify for super allowance I am afraid. Shell and others have been pushing for this but currently only applies to decarbonising actual upstream operations such as using wind power to power rigs electrical needs.