Member Info for Stevo12

Sekford

The increase in EPL from 25% to 35% has a greater impact than 35/25. The reason being is that approx 46% of capital expenditure is offset against the 25% EPL tax and no further allowance is available as the tax increases to 35%.

25% EPL = $4.5b *.25= 1.125b less $900m cap exp at 46% = $711m
10% additional EPL = $4.5b at 10% = $450m
Total EPL =$1.16b

50% of 2022 EPL paid in Jan 2023 but once harbour moves into normal payment on account cycle in 2023, I don’t believe we will defer 50% of 2023 into Jan 2024 (2022 is a one time benefit due timing of new legislation).

Accordingly we should plan for FCF being reduced by $1-1.1b in 2023. This still leaves over $1b of free cash flow to repay debt and fund dividends.

Much easier to approve a $1b investment if government is picking up 91.4% of cost. Why would you not?

Please don’t get your expectations too high. It is just an industry discussion and even if Hunt agreed there would then need to be a parliamentary process to amend finance bill. This is not politically attractive and will be unlikely to happen unless new projects get pulled. The indications are that Rosebank and Cambo are likely to get FID next year which will validate that EPL is not prohibiting new investment.

Sekforde

I was using $65 to demonstrate a downside sensitivity “hopefully worse case” and then demonstrating upside for increase in oil/gas price.

Hbr has given us guidance that 2022 EPL charge will be $400m for 7 months at 25%. Accordingly 12 months at 35% will be $1-1.1b depending on allowable cap exp. Actual EPL paid in 2022 will be 50% of 2022 charge say $200m - so additional $800-900m to pay in 2023.

I would add that gas has been averaging below 200p a therm for much of q4 and oil below $100 pbbl. It looks like production has been strong though so I think the mid range of the $2-2.2b is a reasonable target (which has also benefitted from delayed cap ex.)

Accordingly I am expecting a guidance for 2023 of $1.2-$1.4m of FCF at current oil/gas prices while we use the remaining tax losses against core 40% tax. This will allow us to pay down debt and prepare for new normal where government has taken 75% of the equity while providing just enough crumbs for management to continue to participate in NS.

Sekforde

I have been looking at a range of valuation and I used $65 POO as a low case scenario . After we have used tax losses and hedges expire 2014/15, This yields $3.6m of operating cash flows assuming 200k barrels per day at $15 pbbl opex. Our share is effectively 25% or $900m of which we have to fund 25% of exploration costs (say $50m), 9% of cap ex ($90m of $1b spend) and 60% of decommissioning costs (say $200m). This leaves $560m of FCF and using 5 times multiple results in valuation of $2.8b or £2.3b or £2.75 per share.

For each $10 increase in long run POO above $65 pbbl the share value increases by a little over a £1. So $85 long run oil price should translate to a valuation of approx £5 per share which is probably the realistic upside. However use your own assumption of long run oil price.

We need to accept that the EPL as currently drafted has reduced Harbour’s upside valuation by close to £5 per share. Really important that we use the historical tax loss benefit for next 12-18 months to eliminate debt and diversify dependence on NS. However with government picking up over 91% of the cost of new projects then difficult not to invest in NS if you have oven ready projects.

Oil

The value of the company is based in expectation of oil price for next 3-5 years. However accept daily prices impact sentiment. We need to accept put that the pre and post EPL values of HBR are dramatically different. We will be paying more than our pre EPL market Cap in additional taxes over next 6 years. We are likely paying out an additional $1b per year in EPL. What value of reduced market cap would you place on a $1b per annum outflow.

The real question is whether North Sea is still investable. We will see if Ithaca and partners sanction Rosebank and Cambo next year. I think they will which will result in government concluding new taxes work.

The 91.4% allowance applies to post FID capital expenditure and does not cover exploration costs.

The tax allowance for N Egg exploration will be 65% (inc 25% EPL) and accordingly implies a gross cost of $37m.

However fully agree hbr worth at leases double Ithaca. Their positive is they have lots of new developments in the pipeline to offset WFT.

Real question now is whether HBR develops new NS fields or runs down portfolio over time.

Tornado

Struggling with your logic that because HBR has poor hedging deals, compared to Ithaca, makes us worth more.

There is some comfort that the government is now picking up 75% of the consequences of those historic hedges is some comfort but I would certainly rather have hanged at more attractive prices and be picking up 25% of that benefit in 2023+

Tarmak

Great analysis and a couple of observations

1. There were no contingent consideration payable on Magnus in H1 22. Not sure when payments start.

2. For 2023 I think you have finance cost too low. The lease payments are around $136m pa in 2023 and interest on high yield bonds will continue.

3. $50m contingent consideration payable on golden eagle in 2023.

I think it also worth running a sensitivity on oil price.

Mrc

Regarding your epl assumptions - what did you assume for allowable capital expenditure offset.

Thanks

Rookie

Realised hedging losses are allowable but fair value losses as a result of future hedging arrangements are not. Effectively the company gets taxed on net realised oil price after hedging.

Banbury

40% tax is only paid on U.K. oil and gas exploration. Super majors pay tax in the countries they operate and BP and Shell bring the overseas profit after posting local taxes back and pay it to U.K. pension schemes.

Sipp10

I agree that we need to use the cash generated over the next couple of years as a result of the historical tax losses reducing core tax (excluding WFT) to deleverage the balance sheet by paying down debt, paying off finance leases and clearing down deferred consideration.

This will then hopefully enable Enquest to commence shareholder returns from post tax earnings

The reality is that the global profits of Shell and BP fuelled the media frenzy and the Labour party’s call for WFT and Tory’s capitulation. The fact that very little of that profit is made in the U.K. has been conveniently ignored and Shell and BP’s CEO’s nonchalant attitude to WFT gave politicians the green light.

The likes of Enquest, Harbour etc are just not listened to.

There needs to be a number of cancelled new projects to wake the government up. It will also be interesting to see the value of the sale of operating fields owned by Shell and the other Super Majors. With 75% of operating profits taken by government and potentially large decommissioning obligations, I doubt there is much value to those fields unless Super Majors retain decommissioning obligations.

We have around $3b of losses to offset against core 40% tax. This should shield 2023 and some of 2024 from core tax and will result in windfall cash tax of 35% of an amount equivalent to roughly EBITDA less 45% of U.K. CapEx. Which is approx $1b of Windfall tax per year for 6 years. I recall the company estimated $400m of WFT for 2022 at 25% for 7 months.

I don’t think the government will be that concerned with Shell selling off established and operating fields. However if Shell and Equinor abandon the Rosebank field which was due to have received FID in Q1 2023 - that would be a big statement. Rosebank is estimated to contribute $26.8b to U.K. economy over field life. I think Ithaca also have a stake.

Marc

I took U.K. production of 43k per day from the half year statement. It looks like it might by 1k pd lower based on latest guidance but not material difference.

There were no profit sharing payments to BP in the first half year. However 5k pd at $65 pbbl net cash flow could be €120m per annum. Looking at the financial statements it describes the contingent consideration as 50:50 sharing of Magnus net cash flows -not sure if that is pre or post tax and how levy would be treated.

Capital repayment of leases is approx $130m pa and not sure whether all Kraken. But assuming it is then taxable profits would be reduced by approx $250m pa for Magnus and leases.

This would still leave $750m*.35= 262m-45m investment allowance =217m. EPL

At 25% it would have been $750m*.25= 187m -45m = 142m.

This is still way above Jeffrey’s target and not sure what average revenue pbbl assumption they used. I must be missing something?

Mini

Which analysts published these forecasts?

Cheers

Aimoilking

U.K. revenue 43k bpdX90x365 = $1.4b
Opex 43kX22.7x365 = $356m

Operating profit / operating cash flow $1.04b

The leases are finance leases and not deductible for WFT. Not sure whether Magnus contingent consideration is structured as an increase in purchase price or as a revenue share reducing Enquest profit. Anyone Know?

I have assumed capital allowance offset is $100m cap ex at 45% allowance or $45m