Headlines
• Oil Market Commentary: The lowering of the tax rate is a positive for industry, but is not a linear 10% benefit. We will assess the impact of the changes to the UK Oil & Gas tax regime, especially the changes to the SPT on our coverage universe over the next day or so.
• Gulf Keystone (LON:GKP – 11p) – Progress Made, But Headwinds Remain: There is little doubt that these results will provide food for thought for both those pro and anti the Company, but we believe that the past 2 years have been marked by transition, and while we believe that 2016 will be no different, we can now see a time when this will close, most likely 2017/18. However, this is also dependent on the Company having regular access to the revenues it generates, and the current security situation not deteriorating any further.
In Brief:
Hurricane Energy (LON:HUR – 12p) – Stobie Brings More Than Financial Control
MX Oil (LON:MXO – 0.78p) – Solid First Step, But no Fiesta… Yet
Oil Market Commentary - UK Tax Changes
Yesterday, the UK's Chancellor reduced the Supplementary Profits Tax ("SPT") on UK oil production by 10 percentage points to 10%, which will provide a fillip to all UK based production. While the improvement will not be a linear 10%, as there is cumulative production threshold that must be exceeded before the tax is liable, it is none the less a solid step forwards. We believe that there should be further reform of the oil and gas taxation regime to reflect the risks that are taken to develop smaller and more complex fields, with some fields being lifted out of the SPT regime all together.
Furthermore, we believe that the UK oil industry is approaching a point of inflection whereby it could face being ignored for international oil and gas investment altogether. With that looming, we think that the country would benefit from a complicated tax/royalty system, to a simplified PSC type arrangement whereby risks and rewards are better shared, especially at the more mature end of a field’s life. While there is clearly much further to go in tackling the arcane and complex UK oil and gas taxation regime, today's news is at least a step in the right direction, but it only lessens the burden, not the cost of managing it; this is the next phase of growth that we would hope to see to really believe that the UK is serious about attracting investment and creating jobs, not just paying it lip service.
Additionally, given the marginal benefits of some infrastructure, we are starting to believe that the UK government should establish a national oil company, independent from the government, but whose purpose is to invest on behalf of the UK Government in worldwide projects, to generate revenues for the UK, and take on marginal investment that which isn't economically compelling to private industry, but critical to the UK, to ensure that the UK's strategic infrastructure is maintained operational.
The lowering of the tax rate is a positive for industry, but is not a linear 10% benefit. We will assess the impact of the changes to the UK Oil & Gas tax regime, especially the changes to the SPT on our coverage universe over the next day or so.
News Items
Gulf Keystone (LON:GKP – 11p) – Progress Made, But Headwinds Remain
today's news should provide some comfort for the Company bulls that there is an end in sight for the turbulence that has dogged the Company over the last few years, but the key issue is now one of getting paid for the investment and revenues that it generates.
We believe that while today's figures don't make for happy reading, the team is now starting to see progress and movement in the payments backlog. The one concern that we have regarding the balance sheet, however, is the current liability payables. While we acknowledge that the level of these payables is a reflection of the payments due to the Company in the ordinary course of business (but for Kurdistan specific reasons haven't been remitted), we are nonetheless keen to understand this item in greater detail and more specifically, what it means for the cash flow.
There is little doubt that these results will provide food for thought for both those pro and anti the Company, but we believe that the past 2 years have been marked by transition, and while we believe that 2016 will be no different, we can now see a time when this will close, most likely 2017/18. However, this is also dependent on the Company having regular access to the revenues it generates, and the current security situation not deteriorating any further.
In Brief
• Hurricane Energy (LON:HUR – 12p) – Stobie Brings More Than Financial Control: Today’s news of the appointment of Alistair Stobie as CFO of Hurricane Energy to our mind significantly strengthens not only the Board of the Company, but provides it with a capacity to operate beyond its assets. By this we mean that the Company now has, in the appointment of Stobie, an ability to attract, execute and manage multiple assets in multiple jurisdictions. While we don’t wish to decry the abilities of the Company previously, we know Stobie to be able to successfully operate Oil and Gas businesses across many jurisdictions, in difficult environments. We believe that what was previously a “one trick pony” now looks as if it could leverage off of its considerable technical expertise outside of its asset base, potentially globally.
• MX Oil (LON:MXO – 0.78p) – Solid First Step, But no Fiesta… Yet: The securing of the Mexican assets appears at first glance to be a solid step forwards for the Company, and while the area has been prolific in the past, there is little detail on the assets that they have secured. Nevertheless, on the basis that the best place to find oil is where it is produced already, we believe that this asset will yield further reserves and potential as the team integrate all of the data with the seismic.