Member Info for Stevo12

Bensi

Very much agree that Harbour is probably the most conservative and low risk of the NS Oilers in that they focus on buying proven, producing assets. However this will not work as well going forward due to EPL and the offsets for new field development - of course it all depends on price and if Shell and BP want out there could be deals to be done .

However I see a significant opportunity for Harbour to take over discovered and assessed, but pre FID, fields from the juniors. The sector is now unbankable for new developments and Harbour has the balance sheet and more importantly the tax payments to offset further development expenditure against. We could pick up some very cheap undeveloped assets.

As an example an additional €1b of investment would cost harbour $89m and we would get to keep 25% of the profit once producing. At a 20% ROI the project would yield $200m per year and we would keep $50m pa - two year payback.

Sorry meant merger not member - auto correct!

Rookie

I must say the Neptune member does not excite me. Too many end of life fields in U.K. Also too much gas. Need to remember gas assets were dogs before Putin’s misadventure and Russian energy will re-enter the system eventually. gas might never return to 40-50p a therm, I believe it will be sub 100p per them in medium term.

We will still need to invest in U.K. to offset EPL and it needs to be in developing new fields not buying tired assets.

Monty

I have assumed buy backs stop at end of this year. Looking at my working I have actually used a $1.3;£1 exchange rate as a more normal run rate and I used 850m shares. It could be 20m lower than this by year end.

I don’t think debt will have drop by more than $300m in Q4 with the buybacks, first tranche of the EPL payments ($150m) and back end loaded cap ex. In fact it might only fall by $100-200m - remember it went up in Q3.

Sekforde

I don’t think we are that far apart. Oil prices having been running below the $100 publ assumption for much of q3 and q4 to date, gas very difficult as it is up and down like a fiddlers elbow. Accordingly I would not assume we will be above the upper guidance. I would add that we will only have paid half of our 2022 EPL by December with balance payable in January 2023. Also cap ex will be lower than normal rate due to delays in 2022.

Accordingly I would assume that 2023 with a normal €1.3b cap ex will be closer to $2b FCF and an additional $500m of EPL above 2022 will result in $1.5b before debt repayment. I think we have to assume no more tax shield in 2024.

Monty you have to convert dollars back to £. I have used $1.2:1. However this is a very low historic rate due to current dollar strength. If we return to more historic levels it will reduce Harbour £ share price.

Useful debate and just to some up.

I think we should be expecting free Cash flow of $1.5b in 2023 of which approx $800m used to pay down remaining debt.

Free cash flows will then likely reduce in 2024 to $800m as we will have used the last of our historic tax losses but hedges will have fallen away which would add to this - say an additional $1b of profit of which we get to keep $250m. Accordingly if energy prices remain elevated, free cash flows of $1-1.1b a year for foreseeable future with no debt (roughly $1.10-1.20 per share).

How the market values those cash flows is the million dollar question.

Sekforde

The value of the tax losses at 31 December 2021 were $1,314.5k (see note 8 of financial statements). $263.5m were used in the first half of 2022 with $1,051k still available. This will fall again to less than $800m by year end.

the U.K. profits have been higher than expected at the point of the merger due to oil and gas prices which has resulted in the losses being used faster. I think you are looking at total deferred tax assets which includes many other items which do not impact tax cash flows such as deferred tax on unrealised hedges.

Hopefully harbour will get clarification on this. I assume the intent of the government is to encourage the likes of CCS and would be surprised if there is not some major tax incentive.

To be clear I am long (a little too long) and saw Harbour as the most undervalued quoted company before EPL came in. However we will be paying an additional $5b in tax over next 6 years (850m per year) and this has put a big dent in the potential upside valuation. I saw this company having a $9-10b market cap in 2023/24 with fossil fuels prices at elevated levels for next 10 years. The EPL has probably reduced that potential to $5-6b or £4-5 per share.

Regarding the cutting of green investments, there is no logical reason to cut expenditure as the government is paying us £1.05 for every £1 we spend. From both a PR and a financial sense we would be crazy not to do more. It is not clear in the government documents whether the CCS investment will benefit from gov funding 91.4% or 105% relief.

Just to provide a little more colour on the value of the tax losses. At 30 June 22 the value of the tax losses carried forward were $1,051m after using $263m during the first half of year. Assuming a similar usage in second half of the year, we will have $$790m left to shield 2023 profit and there will be be very little left for 2024.

Accordingly I think I am correct in assuming that from 2024 onwards we will be paying both the underlying Tax at 40% and the EPL. Unfortunately Sekforde’s assumption that the tax losses will shield us for another 3 years is wrong.

Comrie

Perhaps I can described the forecast post EPL cash flow in another way.

The latest forecast for 2022 is cash generation $2-2.2b. Using the higher estimated I have estimated $2b from U.K. In arriving at that cash flow we will have paid $600m in tax (per latest presentation) of which $300m will be EPL ($50m per month per company presentation). So pre tax the cash generation is $2.5b ($100m is overseas tax). EPL will increase to $70m pm with higher rate or $840m per year. Our core U.K. tax once the brought forward loss are used up will be a similar number to the EPL at 40%.

So we have $2.5m of free cash flow going forward (after CapEx and AbEx) and we will pay $1.7b in tax (once U.K. losses used) leaving us $800m for shareholders. As the hedges fall away both profit and tax increases.

I assumed we pay little normal U.K. tax in 2023 due to offsetable losses brought forward and this $800m benefit is used to repay the remaining debt. It is difficult to tell how long these losses will last for and I have assumed they are used up in 2022 and 2023 but they may also benefit 2024 (I recall Harbour stating they would benefit the company for 3 years) so there may be an additional $800m in 2024.

However the market will value the company on long run profitability at a sector multiple and then adjust for the cash value of different leverage models, value of tax loss shields etc. I have assumed we are debt free by end 2023 and then into normal tax. An additional year of tax shield beyond 2023 would add about 70p per share to the value which I agree is very sensitive.

I would say we are pretty close to fair value with the current uncertainties. Lots of drivers to increase price but unlikely to happen in short term.

I think we need to go beyond probably 2023 recession (Q3 or Q4 2023) for price to recover back to £5. At this point the debt should have been repaid, the end of hedges will be visible and the long term oil and gas prices will be clearer.

New capital will not come to NS but existing operators are in a Catch 22 and will continue to invest if Government fund 91% of cost (100%+ for decarbonising projects). When will government realise this? Possibly never.

I should add that after paying dividends of say $250m per year this will leave $0.5b per annum for overseas investments or buybacks.

I would add that I would not count on any other government other than US from similar tax raids - the oil lobby groups in US are very strong where the U.K. oil lobby is useless - Shell and BP don’t care with less about 5% of their oil production in U.K.

Having now read all the government literature, the essence of the EPL has resulted in the Government taking an 80% equity stake in HBR (EPL is effectively 40% not 35% as it does not allow interest and AbEx to be deducted). Not great for Country which purports to uphold property rights. On the positive side the government funds 91.4% of new capital investments (over 100% if decarbonising).

So the new rules are we get to keep 20% of future EBITDA and only have to contribute 8.6% to future capital projects. What does this mean in monetary terms – EBITDA for 2022 will be approx $4b which, all other things being equal, will rise to $6b when hedges end. So on a go forward basis we get to keep $800m in 2023 and $1.2m thereafter if oil and gas remains at 2022 average levels. We will have to fund our share of Capex (say $100m) and post tax cost of ABEX (estimated $150m). This leaves us $550m rising to $950m in 2024.

Assuming debts are paid off in 2023 from the benefit of historic tax losses against the core U.K. tax, how would the market value the above U.K. cash flows and the value of our overseas assets. Taking a mid point between the above (oil at $90 pbbl and gas 100p per therm) would yield approx $750m net cash per year and, using a multiple range of 5-7X, results in a value $3.75b to $5.25b or £3.30 to £5 per share for U.K. business. I have no idea what overseas assets are worth!

We have effectively been nationalised, without compensation, and now get 20% of profits to operate assets which we have funded.

I am still stunned at todays autumn statement that a Tory government would effectively nationalise North Sea oil. While I was expecting an increase in the levy to 35%, I have taken a look at the detailed statement and the investment relief for new capital expenditure has decreased from 80% to 29% (except for decarbonisation related expenditure). Accordingly the investment offset has also been materially reduced.

It should also be noted that interest cost and abandonment cost cannot be offset against the WT and so the real additional tax rate is much higher depending on debt levels and decommissioning costs - probably more like 45-50%. I think it is this detail that drove the price further down late afternoon. Further there is no longer any commitment to remove the windfall tax even if oil and gas prices drop to more normal levels.

On the positive side Harbour has tax losses carried forward from Premier to use but only against the core tax and these will probably only last for 2022 and 2023. After that the cash tax rate could be as high as 90% on reported profits- if oil prices fall below $70 the tax rate could be over 100% of reported profits.

This has certainly killed any M&A of existing U.K. fields which are now effectively worthless. Why would anyone take on significant decommissioning obligations and significant operator risk, when the government takes up to 90% of profit made. Also any new field developments are now highly unlikely - the risk/reward models simply will not work. This level of tax take might work in a Saudi/ Iraq environment where operating costs are $3-4 per barrel with simple and relatively low upfront capital costs, but it just will not stack up in a very expensive and complex North Sea as the risk return model has been destroyed.

Jeremy Corbyn and Greta must be howling with joy. Unless I am missing something the only solution is to separate the overseas assets, trade out the U.K. existing fields with no new investment and keep the 10-15% of profits left after the tax for dividends (€200-300m). Then file for bankruptcy once decommissioning costs become due.

Onedb
Are you happy for harbour not to invest in the U.K. with the government paying back (by reducing WT) over £1 for every £1 invested. I agree with you that WT is very poorly designed and should have a sliding scale linked to oil and gas price (like Norway).

However commercially it would be madness not to leverage the investment incentive and to get the government to effectively fund close to or possibly more than 100% of investment costs. Of course we should also have a more geographically balanced portfolio.

I think most of us would accepted where there is a genuine and material windfall gain over which the company has no control, then paying a little more in tax is a socially acceptable outcome. However what really frustrates me is that firstly the financial institutes on the other side of the hedges who are making extraordinary gains and paying no additional tax and the renewable industry is making huge gains and paying no additional tax. Secondly it is a poorly designed tax as it firstly does not establish the “normal” oil and gas price and does not flex the tax rate to the oil/gas price. Norway has had such a flexible tax rate for many years with the rate going up as oil prices increase and companies receiving payments if oil prices fall too low.

The current rebate of tax for investment in new production also seems ridiculously generous. If U.K. tax man is willing to fund 91% of all development costs ( could be higher after autumn statement), why would companies not go a spending spree of an amount equivalent to WT payments even if you are taxed 70% of the profit later on- you still keep 30% for an almost zero cost investment.

Not due to be paid until October

Just be clear the cases I was referring to were under SCC rules.

CEF Energia and Greentech