Shares in North Sea giant soar as it hails impact of new tax breaks

·5-min read
Serica Energy has extensive North Sea interests
Serica Energy has extensive North Sea interests

By Scott Wright

SHARES in Serica Energy soared after the company underlined the tax savings it expects to make from its planned investments in the North Sea under incentives brought in alongside the UK Government’s new windfall tax.

North Sea-focused Serica declared that its plans to invest around £60 million in the light well intervention campaign on the Bruce field and North Eigg well this year will be eligible for new tax incentives introduced when the Energy Profits Levy was unveiled by Chancellor Rishi Sunak on May 26.

The company said the tax breaks would offset a “large element” of the new levy that would otherwise be payable on its profits this year.

Mr Sunak introduced the Energy Profits Levy, a 25 per cent surcharge on the “extraordinary” profits oil and gas companies have been making on the back of surging commodity prices, after facing mounting pressure to help people deal with surging inflation.

It followed calls led by the Labour Party for a one-off windfall tax on energy companies to fund support for consumers who are dealing with enormous hikes in domestic fuel bills following the increase in the energy price cap in April. The cap is expected to increase again in the autumn.

The Energy Profits Levy is an additional 25% tax on profits on top of the existing 40% headline rate of tax paid by the oil and gas sector. It was introduced alongside a new investment allowance to help ensure oil and gas companies continue to reinvest their profits in UK extraction. The new investment allowance rate is 80%, and means that for every £1 companies invest they will make an overall tax saving of 91p.

Serica noted that it had seen a “significant fall” in its share price in the run-up to and particularly after the announcement introducing the Energy Profits Levy on May 26. While declaring that “fiscal instability is unwelcome in an industry with long lead times for capital expenditure”, it highlighted that the new levy was part of a packaging that encourages companies to reinvest profits.

As a result, Serica said that for every £1 it spends on its ongoing investment programme this year, which includes the LWIV and North Eigg production well, it will make an overall tax saving of 91.25p. It also raised the prospect of investing in further North Sea projects.

The company said: “Our planned 2022 expenditure on the North Eigg well and the LWIV campaign is around £60 million which we expect to be eligible towards this tax saving. This will offset a large element of the Energy Profits Levy that would otherwise be payable on Serica’s profits this year.

“Moreover, we are evaluating additional candidate projects designed to increase the productivity of the Bruce hub. Our strong cash balances with no borrowings, 100% of cash flows from our shares of the BKR (Brice, Keith and Rhum) assets and now enhanced investment incentives puts Serica in a strong position to continue to prosper as it adapts its strategy to changing circumstances.”

Serica outlined to investors yesterday the boost to its cash generation from strong oil and gas prices. By the end of May, it said cash and deposits had risen to £246 million with a further £150m lodged as security. That gave a combined total of £396m. Serica said it still has no debt and limited decommissioning liabilities.

The company said operational performance continued to be strong in May, and averaged in excess of 28,000 barrels of oil equivalent per day. It said production was benefiting from investments such as the R3 well and Columbus development, which took place when gas prices were much lower.

Chief executive Mitch Flegg said: “Our established strategy of investing in our portfolio to enhance production and create greater value means that Serica is well placed to take advantage of the investment incentives included in the levy. We have built a strong cash position and balance sheet and this, combined with strong cash flows and being a current taxpayer, gives us the leverage and resources to do so.

“Although Serica has financial strength, our industry operates within unusually long investment horizons against a backdrop of often highly volatile commodity markets and business cycles.

“We therefore encourage policy makers to consider the importance of fiscal stability in enabling government and industry to meet the mutually set objectives of sustaining investment in the UKCS (UK Continental Shelf) at a level capable of ensuring security of oil and gas supply in volatile markets and delivering energy transition targets. Serica will maintain its focus on delivering vital hydrocarbons to the UK and doing so in an environmentally sensitive manner, whilst continuing to build value for stakeholders.”

Shares in Serica closed the day 5% higher 264p, having surged by more than 10% earlier in the day.

Meanwhile, Longboat Energy suffered a setback after the Cambozola exploration offshore Norway was found to be dry.

The company, which is led by the former management team of Faroe Petroleum, said the well would now be plugged and abandoned.

Chief executive Helge Hammer said: “Naturally, we are disappointed that the Cambozola well was not a success but we look forward to continuing our fully-funded, gas-focused exploration programme with the large Oswig and Copernicus wells both anticipated to spud during the summer.”

Shares in Longboat closed down 14% at 49p.

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