Most oil producers in the North Sea are sitting on accumulated tax losses and past incentives which are expected to insulate the biggest producers from the worst of any so-called windfall tax.
Assuming there really is going to be a tax on North Sea oil companies, who’s actually going to pay it?
Shell PLC (LSE:SHEL, NYSE:SHEL) and BP PLC (LSE:BP.) likely won’t pay much, not according to analysts at Citigroup, who point out that they are already ‘tax negative’ in the UK because of their spending on the decommissioning of aged-out infrastructure.
At the same time Citi analysts described speculated proposals to link taxation to the development of renewable energy as ‘moot’, given that both Shell and BP are “already heavily incentivised to build quickly.”
Jefferies, meanwhile, says Harbour Energy (LSE:HBR), the UK’s largest independent producer, will also be sheltered from the brunt of the tax.
Similarly, 50,000 barrel per day producer Enquest Plc (AIM:ENQ) will be the least affected according to Jefferies whilst Serica Energy Plc (AIM:SQZ) said to be the most exposed.
“While we cannot predict what policy decisions the Government may make and how political and media considerations may factor into those, for illustrative purposes, a hypothetical 10% increase in the UK marginal rate to UK independent E&P producers on 2022 production would, in our view, have the greatest impact to Serica Energy's 2022 net income and free cashflow of approximately 15%,” Jefferies analyst Mark Wilson said in a note.
“At the opposite end of the scale, EnQuest's tax losses and investment allowances would see it incur little to no incremental UK cash tax exposure. We estimate Harbour Energy (LSE:HBR)'s exposure as sitting between the two.”
Soaring profits
Internationally, Shell generated close to US$55bn across operations in all territories through 2021 and with crude oil prices higher in the first half of 2022 the cash pile will rise further – albeit bumper dividends, a massive share buyback programme and investment in new ‘energy transition’ businesses will take a chunk of that.
BP made US$30.78bn of earnings (adjusted EBITDA) across the globe in 2021 which boiled down to around US$7.5bn of profit attributable to shareholders. It too is fiercely buying back shares, paying dividends and investing in ‘transition’.
Domestically, however, their British operational footprints are much small in comparison, nonetheless, in recent statement amidst loudening calls for a windfall tax BP said it expected to pay £1bn in UK taxes, it also pledged to invest some US$18bn over the longer term into both its petroleum and transitional energy businesses.
Harbour Energy, which produces some 215,000 barrels of oil equivalent per day (most of which is in the UK), is rapidly repaying debt thanks to higher oil prices.
The company is an amalgam of Premier Oil and Chrysaor, combined in 2021, and comprises a number of quite recent oil developments, which have in previous years accumulated tax losses that offset.
First quarter results earlier in May revealed that Harbour expected to generate US$1.5bn to US$1.7bn of free cash, after taxes and dividends, this year. In the first three months of 2022, Harbour repaid some US$600mln of debt, bringing its remaining bill to around US$1.7bn and it told investors it was aiming to be debt free next year.
Enquest produced close to 45,500 boepd last year, generating US$756mln of cash flow and US$742mln of earnings (adjusted EBITDA), though its tax charge was only US$53.7mln, and, it continues to carry some US$3.01bn of UK North Sea corporate tax losses.
Serica, which is the smallest of the names mentioned by brokers today, made a gross profit of £386.8mln on production of 22,200 barrels of oil per day in 2021, with cash flow from operations tallied at £157.6mln.
It forecast higher volumes and is seeing higher prices in 2022, with the company guiding 27,100 to 33,600 boepd for the year.
According to Jefferies, Serica could potentially be dealt with a 15% hit depending on how the windfall tax would be implemented.