Small Talk: North Sea oil groups count the cost of the fuel duty giveaway

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The Independent Online

The Chancellor may have pleased motorists with the 1p cut to fuel duty last Wednesday and plans to put off the upcoming 4p rise this week. But he irked the oil industry, which cried foul after he unveiled plans to make it pay for reliefs elsewhere.

In particular, he turned on companies in the North Sea, saying that as they stand to make fatter profits when oil prices are higher, they should pay more in tax. Of course, they will pay less – and motorists will pay more – if the oil price suffers a sustained fall to levels around $75 per barrel.

The specific threshold remains open to consultation but it is worth noting that prices are currently running far higher and edging ever closer to the $120 per barrel mark as commodity markets look on nervously at the turmoil in the Middle East.

For now, George Osborne has implemented the fair fuel stabiliser by raising the supplementary charge on oil and gas production from 20 per cent to 32 per cent, raising an extra £2bn for the Treasury. But what does that mean for specific companies?

Analysts quickly ran the numbers and according to the Royal Bank of Scotland, Valiant Petroleum and Premier Oil are the most exposed of the operators under its coverage. To begin with, RBS analyst Phil Corbett said that while the trigger price may be subject to consultation, it was likely to be fixed at the $75 per barrel mooted by the Chancellor in his statement.

Following on from that, he said that his bank's oil price forecasts for this year and beyond stand above the $75 mark on an annual basis, suggesting the tax is likely to remain high for some time. This is negative for Valiant, as it derives its entire production from the North Sea's Don fields, though RBS does not expect the company to cough up any cash tax in the UK this year due to "the significant tax loss position it has built up from past activity".

Moreover, if Valiant keeps investing, "this could be pushed out even further".

"Ahead of a detailed modelling exercise and an update on the company's tax loss position at the upcoming results, we estimate... a 5-10 per cent negative impact on our current core net asset value of 445p from the increase in the supplementary charge," Mr Corbett said. "For Premier, under the same assumptions, we estimate a 2-4 per cent negative hit on core NAV."

The analysts Evolution Securities also weighed in, noting that Premier had much in the way of tax losses that it can use to offset the new marginal tax rate above $75 per barrel. They calculate a marginal tax rate of 62 per cent, as the supplementary charge is over and above corporation tax.

The point was highlighted by Premier's chief executive Simon Lockett. "We're sat on $1.1bn of UK corporation tax allowances which means that over the next few years at least, we would not have been paying cash UK taxes at all," he explained.

Other companies exposed to the North Sea include Enquest, which was pressured after the announcement was first made, with Oriel Securities analyst Nick Copeman saying the move had taken 20p a share off his valuation for the stock. Nautical Petroleum and Ithaca Energy were also in focus as investors digested the details.

It is important to note, however, that beyond the short term share price fluctuations, the City does not expect the tax increase to seriously imperil North Sea activity, because conventional oil projects are likely to remain economically viable at current oil prices. That said, Collins Stewart sees a hit to exploration activity – unless the Government and the companies hammer out some incentives.

"The pre-drill value of exploration prospects using an expected monetary value approach will fall more sharply since the expected costs of failure remain unchanged but the expected value of success is significantly impaired," the broker said. "We think this could lead to a sharp reduction in exploration activity, and believe this is one area where incentives could be negotiated."

Investors will no doubt have their fingers crossed.



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