Enquest PLC (AIM:ENQ) said that the UK windfall tax has changed the investment landscape as it reported a swing to losses for the past year due to deferred tax liabilities but generated US$0.5bn of cash.
The UK oil and gas company reported average net production of 47,000 barrels of oil equivalent per day (boe/d), generating US$1.84bn of revenue.
It generated US$519mln of free cash flow, which allowed it to reduce net debt levels to US$717mln at its December year-end, with further deleveraging in the new financial year. Cash and available facilities amounted to US$348.9mln at year-end.
With its tax charge rising to US$322.5mln from US$53.7mln, a statutory loss after tax of US$41.2mln was reported, from a post-tax profit of US$377mln a year earlier. The loss was also driven by the recognition of a non-cash deferred tax liability associated with the UK Energy Profits Levy, aka the windfall tax.
Average production in the first quarter of 2023 production was 47,800 boe/d, which is above the full-year guidance range of 42,000-46,000 boe/d, ahead of planned maintenance shutdowns at its Kraken, Magnus and GKA sites later this year.
EnQuest reduced its reserve-based lending (RBL) drawdown by US$118m to US$282m in recent months to ensure the company remains ahead of the accelerated amortisation requirements following the revisions made to the windfall tax.
Management said the windfall tax has "implications for EnQuest's capital allocation strategy as it limits the cash available for further deleveraging, capital investment and shareholder returns.
"However, the group is optimising its capital expenditures in respect of available investment allowances and is confident of further deleveraging through 2023, with shareholder returns to follow in the future."
It retained a "significant tax loss position which provides it with a strategic advantage in the UK North Sea, enhancing the relative value of assets in EnQuest's hands when compared to other tax paying participants", with this "relative value advantage" having increased and the group "confident it will be able to continue its track record of value-accretive acquisitions as other North Sea participants look to exit the basin"
Analysts at Jefferies said net profit was short of expectations "in part" due to the windfall tax provisions but the company "impacted further on its Magnus asset accounting".
"Cash performance continues to be strong even with increased taxation with leverage approaching the target of 0.5x."
The pursuit of accretive M&A, the analysts suggested, is a strategy "being common to all UK E&P's".