Member Info for Tamovv

Hi guys,

as a non UK resident and on top of that not an expert in the field of taxation at all, I am still struggleing to fully model the EPL cash tax burden on ITH from 2024 going forward.

Phasing is more or less clear now since management provided clear guidance on 2024 cash tax charge solely based on 2023 EPL tax burden.

However, can someone explain the investment allowence to me please?

From gov.uk I got "These changes included a rate increase from 25% to 35%, extending the time that the tax applies to 31 March 2028 and reducing the rate of the investment allowance to 29% for all investment expenditure other than in decarbonisation. The reduction in the rate of the investment allowance maintains the overall cumulative cash value of the relief following the rate increase to 35%, reflecting that it will have more value against a higher levy rate. These changes were legislated for in the Finance Act 2023 and took effect from 1 January 2023."

For 2024 my model guides to about 1,16 bUSD EBITDAX and 180 mUSD and 700 mUSD DD&A. Thus, the "taxable profit" for the EPL shall be 1.160 - 700 mUSD = 460 mUSD (financing costs cannot be deducted for EPL). Thereof 35% are roughly 160 mUSD 2024 EPL tax (before investment allowence).

Management guides for 365 mUSD producing asset capex and 210 mUSD Rosebank Capex, all excluding exploration, decommissioning etc. which could not be offset against EPL. So total 2024 producing asset capex suitable for the EPL investment allowence to be approx. 575 mUSD (midpoint guidance). Thereof 29% investment allowence are roughly 166 mUSD (to be deducted from the 160 mUSD 2024 EPL tax charge I estimated above).

Thus, 2024 net EPL payable in 2025 should be (close to) zero, or am I missing / misinterpreting something?

Londoner, (perhaps Stevo if you are reading here as well) please help.

If so, in 2025 we should be experiencing a huge boost in CFFO (after tax) bringing us back close to 400 mUSD dividend (at 30% CFFO)...

Thanks! Interesting.

EV/EBITDA of 1,6 is what we´ve found on in the HBR area of this board as well. However, comparing ITH to HBR, ITH should be valued on a higher EV/EBITDA because of the massive carried forward tax losses shielding against EPL an thus higher capacity for shareholder returns.

So in my opinion EV/FCF 2024-2028+ is the only way to properly value ITH by taking the positive effect of the tax asset into account.

Asartara,

Many thanks for your follow-up. I have spent some time on my model during the long weekend and will issue an more extensive post later on.

Just to answer to your question below:

170 mUSD is my 2024 dividend forecast given the low production guidance (probably lower than people expected here, correct me if I´m wrong Tornado/londoner)

from 2025 production will increase again as per official management guidance (2025/26 positively impacted by Captain EOR II, 2026/ latest 2027 from Rosebank start of production)

Especially 2025 could benefit from a) increased production & b) lower 2024 EPL payable in 2025 (because of two reasons, lower production higher opex thus lower tax and Rosebank investment spent to additionaly shield against EPL) so 1 bUSD CFFO (after tax) and 300 mUSD 2025 dividend accordingly is not an unrealistic target in my opinion.

For more details I am glad to provide some insights on the work I´ve done as per separate post later today/tomorrow.

All these assumptions are related to standalone Ithaca prior deal, potential effects from ENI uk not considered yet.

Bought this morning for 132,80 GBP (no investment advice!)

Will spend some work on my model over the prolonged weekend. Hopyfully others will join me supporting with some insights around UK taxation.

For me it currently seems like ITH carried forward tax losses could be sufficient to shield against corporation tax until March 2029 when the EPL hopefully ends. This combined with ramp-up of Rosebank investment (somewhat shielding against EPL) should lead to low nine digit cash tax charges and thus about 1 bUSD CFFO (after tax) / 300 mUSD annual dividend (given current production schedule and commodity prices, no hedging). All figures very very roughly from a very high level to make quick use of new information from yesterday. ENI not considered, all oldco standalone ITH as reported on yesterday.

So this year could mark the CFFO-bottom for ITH, similar situation to HBR -> burden from EPL 2023 tax charge combined with reduced own production given cancelled UK investments, but improvements from 2025 onwards (probable labour regime change obv. also not considered).

If 9% 2024 dividend yield marks the bottom for ITH this cycle, it seems very attractive to me.

Londoner7, thanks, I was rushing into my next morning appointment and only took a quick shot here.

I not only mixed up CAPEX with OPEX guidance, but also forgot to include the hedging effect and my sales assumptions was based on Brent price only, rather than applying a proper 2/3 1/3 oil vs. gas split.

Thus, this is me revised calculation:

Production (midpoint): 58 kboe/d

Sales (midpoint prod. at 85 USD/boe): 1.545 mUSD before hedging

Hedging (acc. to schedule against 85 USD/boe Brent and 0,70 GBP/therm) +115 mUSD

Total Sales (after hedging): 1.660 mUSD

OPEX (midpoint): 565 mUSD

Cash Tax (midpoint): 350 mUSD

Lease&Finance: 180 mUSD (my estimate)

CFFO 2024 (midpoint): 565mUSD

thereof 30%: 170 mUSD (which would result in a rather significant cut compared to 400 mUSD for 2023)

170 mUSD equals an about 9% forward dividend yield

However, I really linked the presentation which provided a lot of detail on various topics and some comments made during the conference call. Will comment on those as per separate post here.

PS: The 30% of CFFO (after tax) have been confirmed on slide 32, but we already expected them to apply the higher end of that range to satisfy investors given all the headwinds...

Hi Stumpy,

I don´t agree unfortunately, they didn´t say anything precise about 2024 dividend, but reaffirmed their 15-30% CFFO (after tax) guidance.

Given their new guidance:

Production (midpoint): 58 kboe/d

Sales (midpoint prod. at 85 USD/boe): 1,775 bUSD (compared to 2,3 bUSD in 2023)

OPEX (midpoint): 360 mUSD

Cash Tax (midpoint): 350 mUSD

Lease&Finance: 180 mUSD (my estimate)

CFFO 2024 (midpoint): 885 mUSD

thereof 30%: 265,5 mUSD (slightly better than my previous estimate despite the cut in production 2024)

Can´t tell how the market will react this morning. From an operational standpoint I am disappointed of the very weak 2024 production guidance in combination with Captain EOR II delays (Tornado, Londoner, etc. were hoping for contribution to H2-2024 production if I recall correctly).

On the other hand, the cambo development extension is some kind of stress relief, anything else would have been a desaster.

M&A to me looks "fairly balanced", not as good as the one HBR announced in December at a first sight. I have mixed feelings, maybe the stock market will like the reduction of Deleks ownership of the enlarged company and having Eni onboard as "counterpart". On the other hand, shareholders will not vote, Delek can decide on their own given their 90% ownership as far as I understood the press release (normally quite obvious, of course they can decide on their own as a 90% shareholder...). But maybe certain shareholders who don´t like the proposed transaction can´t do anything but sell this morning.

Looking forward to your thoughts Londoner/Tornado, will be listening to the call this morning.

Hi guys,

Happy to see some activity here going on!

@asartara as stuGGTTH already pointed at, their initial plans (made prior to the EPL desaster) even stipulate a 5% dividend increase to 420 mUSD for 2024. This would result in more than 20% dividend yield. So I assume the market believes the dividend will be cut - I unfortunately Mr. market might be right this time ;) Please find one of my posts below, where I tried to come up with an early guess for 2024 CFFO (and thus the dividend).

As it can be seen in the prospectus and as it was repeated several times by management during past conference calls, ITH plans to distribute 15-30% of CFFO (cash flow from operations after tax) to shareholders, mostly dividend but theoretically also as buybacks. Unless something unexpected will be announced (i.e. M&A activity), I expect them to use the top end of the distribution range given the current low level of leverage well within their 1,5x EBITDAX threshold.

Actual January 2024 production seemed a little bit weak to me, on the other hand brent sits quite strong at 85 USD/boe or even higher with Russias decision today, so I just slightly reduce my CFFO estimate towards 850 mUSD resulting in a potential dividend of 200-240 mUSD (up to a 50% cut). Given the current yield of 22% I expect markets to expect a about 50% cut as well aiming for 9-11% target dividend yield.

In my opinion any positive news regarding the sale of Cambo project shares, CEO presentation, (positive M&A), or production above my 65 kboe/d guestimate resulting in higher CFFO und thus dividend could boost the shareprice on Wednesday. I´m not too experienced to have any concrete idea in mind why they decided to postpone the data release on short notice. However brent moved very nicely recently, hopefully they put some nice hedges in place as they have proven in the past.

Talk to you on Wednesday folks, I am sure we will at least get a 2024 production FC and hedging schedule so we can update our models, any dividend guidance would be a bonus in my opinion (potentially seeing them just reconfirming the 15-30% CFFO policy and calling for being patient to see how 2024 develops from an operational standpoint).

Thanks for your swift reply (and the congratulations on my timing...lets this how this develops this week since the EPL extension has just been announced, ITH suffered a little bit today, hopefully thats it!).

I noted Pierce but dismissed it due to the small extent of ITHs share, shell´s like 93%.

I was aware of Captain Phase 2, but not of the exact timing, didn´t remember it´s so close from startup - thanks! Any indication on expected production boost? Just spent 15-20 mins on Google but didn´t find any indication on its desired effect.

However, looking very much forward to Q4 results and guidance end of this month, so we call can finetune and adjust our models.

Hi Tornado,

Many thanks - very useful!

I am rather disappointed how this compares against my "simple 2024 guidance" of 65 kboe/d, taken from comments made during the last conference call.

How do you interpret this January production? Given Q1 used to be a very strong quarter for ITH and scheduled maintenance still to come in Q3, this draws a cloudy picture of 2024 in my humber opinion. Of course January only represents one third of Q1, but anayways... Are there any problems known on re-ramp-ups for February/March planned, so that we can expect Q1 to finish better than the January run-rate?

Net debt at the end of 2024 should now look like

4,9 bUSD WD.bonds + 0,5 bUSD HBR.bonds + 2,15 bUSD cash.consideration – 0,4 bUSD harbour cash (= HBR net debt of 0,1 bUSD instead of 0 as guided) – 0,3 WD.FCF (H2-2023) – 1,0 bUSD WD.FCF.2024 – 0,5 bUSD (correction for market value of the WD bonds) = 5,3 bUSD

EV 13,3 bUSD – 5,3 bUSD net debt leads to rock solid 8,0 bUSD equity value of 3,75 GBP per share

I do mostly agree to all of your comments regarding the rather high purchasing price of WD and also agree to your comments regarding Londoners “before and after analysis”, however as you see, by trying to model the combined entity on 31st Dec. 2024, I get to comfortable results for old HRB shareholders after being much more careful about EUR/USD currency effects and taking 2024 hedging into account. Even if we adjust 2024 EBITDAX for valuation purposes due to it´s one-off nature it´s tough to get to an unsatisfying result from old hbr shareholders perspective (you mentioned +0,7 bUSD revenue, so even after deducting 1,2 bUSD EV I am again at 3,15 GBP, which is pretty close to what I presented on yesterday). Don´t want to downplay things or draw an overtly optimistic picture here, because I do agree to a lot of statements you´ve made, but still the math seems to support what HBRs management is about to do.

Hi Stevo,

Sorry for not being more precise with the currencies. But to defend myself, management did rarely say Euro or Dollar, mostly "billion" but since the report is in EUR, I expect them to have meant EUR. Allow me to correct myself at follows:

WD 2024 cash tax burden:

H1: 1b EUR (high level of confidence, because it´s based on 2023 actuals)

H2: 0,9b EUR (didn´t consider the hedging yet, adapted your EBITDAX, referring to CFOs comments in the WD Q4 call. He explained H2 would be less than 1b EUR given current commodity prices - this should also include the hedging schedule he´s obviously aware of).

However, I struggle to agree to your WD.2024 FCF calculation:

For my conservative EBITDAX of 4,0 bEUR you deducted 1,7 bEUR tax, 1,4 bEUR capex+explo and 0,2 bEUR int = 0,5 bEUR, but the mathematically correct result is 0,7 bEUR isn´t it (typo, or did rounding play heavily against WD)?

Applying the same math for your 4,7 bEUR EBITDAX estimate I get to 2024 FCF of 1,2 bEUR using 0,9 bEUR for H2 tax instead of 0,7 as before - emphasizing again on the CFO saying it H2 cash tax should be below 1 bEUR given the current commodity prices (and hedges I assume he should have taken into account). So this math kinda confirms my rather positive view on WD.2024.FCF (midpoint guidance for CAPEX+EXPO 2024 is 1,3 bEUR rather than your 1,4 bEUR). So using midpoint Capex guidance would bring us to 1,3 bEUR following your other assumptions, which is an incredible 1,4 bUSD (don´t believe in this myself in comparison to 2023, but as described I used your formula with some slightly tweaked variables – please challenge!). Since you mentioned 1,0 bUSD 2024 FCF for WD by yourself as top point guidance I will use this number, which I believe is reasonably conservative.

Further incorporating your 2024 WD EBITDAX of 5,1 bUSD and Londoners 2024 HBR EBITDAX estimate of 2,7 bUSD we are looking at a combined business of 7,8 bUSD EBITDAX in 2024. WD management declined to guide for 2025 leaving this for HBR as the new owner, so we have to use 2024 for multiple comparison until 2025 guidance becomes available. I feel still confident in assigning a 1,7x on EBITDAX, bringing us to about 13,3 bUSD EV at year end for the combined entity.

Corrrection: So NewCo net debt at 31st Dec. 2024 could look like: 4,9 mUSD old WD bonds + 0,5 bUSD old Harbour bonds + 0,4 bUSD bridge facility = 5,8 bUSD face value (or about 5,3 bUSD market value)

Addition:

Just finished listening to the WD Q4 investor calls Q&A session. Management was asked for 2024 tax guidance and CFO replied H1-24 would be a billion and H2-24 lower than that given current commodity prices. Having assumed conservative 4,0 bUSD EBITDAX in my model, I adapted 1,7 bUSD as the 2024 cash tax for the WD part. So WD 2024.FCF still remains in a magnitude of 0,9x1,0 bUSD, bringing the total deal contribution from operations to like 1,2-1,3 bUSD (approx. 60% of the 2,15 bUSD cash component of the deal).

@Stevo/Londoner, HBR still has this 500 mUSD bond maturing in 2026. Am I still correct when saying net debt was 200 mUSD only at 31st Dec. 2023 and 2024.FCF should bring this down to zero? So technically the bond will still be in existance but similar cash in hands? So rather than paying down this bond, it will remain in play, but these 500 mUSD will partly pay the cash part of the deal, resulting in less bridge facility utilization.

So NewCo net debt at 31st Dec. 2024 could look like: 4,9 mUSD old WD bonds + 0,5 bUSD old Harbour bonds + 0,9 bUSD bridge facility = 6,3 bUSD face value (or about 5,8 bUSD market value)

Questions (to improve my model):

- The 2,15 bUSD cash consideration will be payed from “Interim cash flows from target

portfolio up to completion” + bridge facility. HBRs 2nd half 2023 cash has been spent to bring net debt. Down to 0,2 bUSD, HBR standalone FCF.24 is forecasted to be 0,2 BUSD, so lets assume OldCo.Harbour to be at zero net debt at the end of 2024. Thus only WD CF to help funding the cash component of the deal: Alex was questioned about the first nine month 2023 negative FCF of WD and replied H1-23 was the major cause for this based on deferred tax payments from high price 2022 environment. WD Q2-23 free CF (before financing CF) was -522 mUSD, Q1 +164 mUSD -> H1-23 -358 mUSD, brings H2-23 FCF to +331 mUSD in HBRs favor. WD 2024 operational guidance is very similar to 2023 in terms of production and Capex/Exploration. Total 2023 cash tax outflow was 2.325 mUSD, whereof Q2 tax payments were 1.033 mUSD. Q1-23 cash payments were not disclosed in the Q1 report, but I assume approx.. 600 mUSD (Q1-23 EBITDAX 1.142 mUSD, CF from operations 397 mUSD). If true, 2024 cash payments could be in a magnitude of 2x H2-23 cash tax payments, thus 1,4 bUSD only (seems to good to be true, please feel free to correct me!).

- WD 2024.FCF based on 4 bUSD EBITDAX, 1,315 CAPEX guidance and the 1,4 bUSD cash tax burden (see my last point) looks significantly improved in my model (please challenge!)

- Net debt of the HBR-WD.NewCo at 31.12.24 for me could stand at 4,9 bUSD bond face value + approx. 1,0 bUSD bridge facility or less (please challenge!)

Hi Stevo,

I have to admit, I was shocked by the analysis you´ve presented and tried to challenge some of your assumptions, because I couldn´t believe the deal being that bad (especially considering Alex, the HBR CFO, to be a former AKER BP CFO, so despite the unfavorable pressure situation from HBRs perspective, he should know how to play Norwegian assets). There is no free of charge transcript available, but I remembered a pretty extensive Q&A session of the deal announcement call, so I listened to the webcast again before writing this post. The following are my key findings:

- AKER BP production profile to drop from 457 to 425 (2024) and presumably close to 400 kboe/d in 2026 (see Q4 presentation page 44)

- Therefore, calculating the EV/LTM EBITDAX and using this as forward multiple should be only valid when comparing against peers with similar production development profile

- My rough model (quickly built) forecasts AKER BP 2024 EBITDAX of 11,1 bUSD

- I will use avg. 30 day average share prices (going backwards from the HBR/WD deal announcement) to calculate EV / Market Caps. for comparisons

- I agree to Londoner´s comment regarding the market value of the 4,9 bUSD WD bonds, but also somewhat agree to your proposal of 4,4 bUSD MV, so in order to avoid blowing up this very extensive post any further than necessary, let’s use 4,4 bUSD for now

- When comparing the WD asset price against HBR, we should consider the effective date of the deal (please see my question below, WD cash tax FC 2024 seems to be very important!)

Conclusion:

- 2024 EBITDAX multiple of 1,7 to be applied (based on AKER BP 12/2023 status quo)

- HBR.WD NTM EBITDAX of 6,9 bUSD (2,9 bUSD HBR + 4,0 WD) leads to an EV of 11,7 bUSD

- HBR.WD 31.12.24 might stand at nominal 5,9 bUSD net debt or market value 5,4 bUSD (-0,5 bUSD discount as proposed by Stevo)

- HBR.WD 31.12.24 equity value might settle at 6,3 bUSD (resulting in 3,73 USD share price / 2,95 GBP after dilution)

- My impression is, that I am not too far off with this calculation and the recent drop in HBR share price was caused by recent gas price movements and corresponding negative impact of 2024 FCF generation. After the very positive deal announcement call analysts might have assumed the cash part of the deal to be nearly fully funded by FCF from 1st July, but now fears a higher bridge facility utilization and corresponding higher net debt an completion.

- Looking at the UK.Gas price from 1st Feb. 70 pence/thm (HBR at 3,00) against todays 59 pence/thm I feel further supported in my hypothesis (Aker.BP dropped from 285 to 260 NOK in the same period, so HBRs specific development isn´t much worse)

- Synergies like optimized labor cost profile (or indirect synergies like they are in principal ready to process a next transaction shortly after closing) not considered, so the 300-310 pence range after deal announcement seemed fairly priced to me

Thanks @Stevo12, one of the best posts I´ve ever read here so far. Highly appreciate. Very interesting view. Was approaching the deal from a totally different perspective, but now fully agree to your statements below.

What´s your opinion/reasoning on the recent drop in HBRs share price?

a) gas price drop since end of December and corresponding impact on HBRs 65% gas production

b) perception that there is a chance (risk) the deal won´t be approved (i.e. German government block)

c) market came to the conclusion that the deal isn´t that great as inititally perceived

Timing as per peterlowen´s link.

Amound per share should be 134 mUSD / 1.010 m shares = approx. 0,1325 USD per share

Londoner, many thanks for your swift and comprehensive reply, very useful to me! It also makes me feel less like an idiot seeing others stuggling with posts here suddenly got cut-off because the use of "special-characters" ;)

I adapted your EPL estimate in my model, but was surprised by your low CT estimate first. I just checked the Q3 transcript again to provide the following quote by Iain Lewis: "So again, those total corporate tax payments are around $90 million for the full year, and we expect that to reduce next year. And therefore, we're in the low single-digit percentages in terms of our corporate tax position going forward."

I understood that 2023s 90 mUSD are about to reduce and will become a low single-digit percentage of profit before tax. So given my recent 1,4 bUSD EBIDTAX FC, profit before tax should be about 0,4 bUSD, low single digit can be indeed mean 10-20 mUSD, so I support your calculation (forever whats worth, I am far from an expert in UK taxation).

However, I updated my hedging model and lowered my assumptions for 2024 UK-Gas prices. At current 60 pence/thm my model forecasts a hedging gain of 170 mUSD, but only 1,3 bUSD EBITDAX now.

Does anyone has an estimate for 2024 financing costs? At 30th Sept. last year they stood at 142 mUSD, so close to 200 mUSD annual run-rate. However, currently there is no utilization of the RBL, so just 9% interest on the 625 mUSD senior bond. Thats 56 mUSD only and seems too low to me. I am certainly missing some leasing costs, so would appreciate any comment on this.

For the moment my CFFO (after tax) FC looks like:

EBITDAX 1,3 bUSD (at 80 USD oil, 60 pence gas, 65 kboe/d, hedging as per 30th Sept. overview, 20,5 USD/boe OPEX)

Financing 130 mUSD (just doubled my 56 mUSD interest of the 625m bond)

Tax (EPL+CT) 270 USD

CFFO 0,9 bUSD (what about decom. cash expenses? Do I miss these?)

Londoner, sorry for confusing you with my Rosebank Capex question. CFFO is before Capex, this is clear to me. I was just wondering whether high Rosebank Capex in 2024 could be potentially used to cancel EPL in the very same period, but its not possible.

Somehow need to challenge my own statement unfortunately. They didn´t explicitly mention to have spent the 97 mUSD on Rosebank during Q4 only. Thus, it´s possible that their 2023 CFFO was lower than my 1,2 bUSD estimate and the positive impact of the investment allowence could have been (partly) included in the 280 mUSD current EPL tax at 30.09.23 already.

Looking forward to any comments here regarding 2023 EPL burden payable in 2024.

Fully agree! Can´t wait to see their updated Hedge book end of March. Hope they logged-in some additional 80-82s $ for oil.